The Financial Crisis Of 2008

1265 WordsApr 22, 20166 Pages
The financial crisis of 2008 was one of the largest financial meltdown rivaling the Great Depression. In response to this crisis, Dodd Frank was created to regulate and fix the issue that occur. However Dodd Frank itself is a large legislation, consisting of 848 pages, bigger than all the past financial legislation combine. One of the major reason is that the financial crisis of 2008 has several factors that led up to it, whether it be speculative investment, and risky trades made by the company, or that most financial institution during that time period were extreme leverage by debt leading to a lack of liquidity when financial meltdown began. Dodd Frank attempt to tackle these problems, and among the many the Volcker Rule attempt…show more content…
The ban on proprietary trading by commercial bank would probably have done nothing to mitigate the financial crisis, it did however add fuel to the fire. Simply before the crisis many banks were making speculative investment using the depositor money, many of which these trades is not for the customer benefits rather only for profit. Most commercial banks are back by the FDIC, which give the incentive for the traders and bank to think if the trade goes well then the profit is massive, however if the trade goes wrong it back up by the FDIC or the tax payer essentially. Basically banks has to incentive to make these speculative investment. It a form of moral hazard, it a behavior that does not benefit the customers at all, and it raises concerns to what kind of trades or investment would banks make in pursuit of profits. When the time came, the financial meltdown many banks didn’t have enough capital to stay alive, or wouldn’t want to lent capital to others because in fear of never getting pay back. This made the crisis even worst, resulting in a bail out by the government meaning the FDIC and taxpayers are left to pick up the bills for the bad trades made by the banks. Thus the Volcker Rule is a partial repeal of the Glass-Steagall Act in 1999, which removed the barrier between investment banking and commercial banks, which made it easier for the latter to make large scale speculative trades. The rule will disallow shot-term proprietary

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