The Financial Crisis : Rescue Efforts

The financial collapse of 2008 devastated many families and caused many people to lose their jobs and homes. It became the worst financial crisis since the Great Depression of the 1930s. The financial collapse began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas (Encyclopedia Britannica 1). The Securitization Food Chain is what sent the mortgage business into a downward spiral causing thousands to foreclose on their home and many even needing to file bankruptcy. When giving out high mortgage loans to middle or lower class families they are being set up to have future financial issues when their payment rate increases. The Securitization Food Chain had a major influence on the Financial Crisis.

Additionally, when America’s economy was melting in 2008, the Federal Reserve played a big role to stabilize it. Besides the Great Depression during the years 1929 through 1939 the worst economic time for the United States, 2008 was unmistakable one of the worst years of America’s economy history. When this economic recession was taking place, the Fed had to take action to avoid another depression and to stop a fall from the financial system. With the help of the Federal Reserve J.P. Morgan Chase and Co.’s they planned to help Bear Stearns (an investment bank) with financial assistance to help the government to buyout AIG, a well-known insurance company. This helped to produce a strategy targeting to stabilize the credit market and also the short-term interest rate from 45% to almost 0 from the benchmark (Coste). Thanks to the Federal Reserve and their well design plan to avoid another recession they prevented the economy of the world or better known as Macroeconomic system from falling and getting it

In 2007, the financial crisis began. It was the most intense period of global financial strains since the Great Depression. It had led to a prolonged global economic downturn. The Federal Reserve took exceptional actions in response to the financial crisis to help stabilize the United

Because of this downfall of the housing market, the U.S. economy fell along with other markets across the country. Homeowners had mortgages higher than what their homes were valued at, the decline in housing prices caused many people to default on their mortgages which caused the values of mortgage backed securities and CDO’s to collapse, leaving banks and their financial institutions holding those securities with a lower value of

A few years later the market took a turn for the worse, where interest rates were on the rise, and homes were losing their value quickly. Now borrowers that were in these interest only ARM’s needed to refinance these loans because the rates were going up, to a point where the homeowner was not be able to afford the payment. The Federal Reserve tried to stimulate the economy by lowering interest rates during the recession in early 2001, from over 6% in 2000, to a rate just above 1.25% in 2002. These low rates encouraged many Americans to apply for loans for homes that a few years ago they would have not been able to. To encourage the homeownership boom, the Bush administration urged Fannie Mae and Freddie Mac to allot more money for low-income borrowers so they could buy their own homes. This resulted in the subprime mortgage

The Great Recession was an economic behemoth the likes the United States had never seen before since the Great Depression. In fact, the Great Recession of 2007-2009 was an unmitigated disaster for the US and world economy, its effects still lasting to this day. The Great Recession was spurred by an influx in subprime mortgages and loans. Normally, banks lend money to those they know are capable of paying it back with interest; however, in the early 2000s, banks took advantage of the unregulated sector of subprime loans, creating a substantial housing bubble at the cost of considerable profit. Soon millions of low-income and middle-class Americans were buying homes for much more than their normal income could pay for, but with ever increasing

In the years of 2007-2008, the world economy faced the most severe global financial crisis. The collapse of the sub-prime mortgage market was considered to be the trigger for the Global Financial Crisis. In the United States, low interest rates and financial deregulation created credit conditions where it was easier for the American people to buy homes with subprime loans. It increased the housing demand and raised the house prices in the market, which resulted in a housing bubble. Fannie Mae and Freddie Mac are two private corporations that are referred to as government-sponsored enterprises. They offered a mass of mortgage-backed securities (MBS) to the high-risk borrowers. Rising house prices created home equity for the borrowers, allowing

The fall of the housing market that begins the recession in 2008 was in large part due to the fact that people wanted large and expensive homes. These were homes that they could not afford. Real-estate agents and their loan officers help manipulate the numbers for these unfortunate individual to get bank loans from banks who would later foreclose on these homes. As the job market begin to decline and massive layoffs resulted all across the country. Many individuals became delinquent on more than one or more house payments after losing their employment. Mortgage companies Lenders Country wide and Fannie Mac and others found themselves holding a massive amount of risky home loans that could have ultimately collapsed the world banking system.

Consumer concern over a declining housing market, political gridlock in Washington, high energy and healthcare costs, and budget worries collectively have resulted in an economic meltdown in need of a recovery. After 9/11, central banks around the world cut interest rates so low that investors borrowed disproportionate amounts of money leading to reduced liquidity and a buildup of foreign exchange outside the United States. While at the same time, Americans overindulged in consumption without saving any money. Homeowners extracted value from their homes to subsidize mortgagees with government support coming to late. According to United States Department of Commerce (2013) with the national unemployment rate at 7.4 percent, not counting those that have stopped even looking for work, wages paid to workers were the smallest share of Gross Domestic Product (GDP) since the 1950s. In December of 2008, a full recession hit our country and the Federal Open Market Committee answered the call

In 2008 the United States experienced the worst financial crisis since the Great Depression in the 1930s, primarily because of the bursting of the U.S. housing bubble and increasing default rates on subprime mortgages which caused the price of house to increase once a high amount of loans were given out by banks to potential homeowners. Securitization played a big role in this because of how risky the regulations are and the giant corporate companies that are truly fluctuating and controlling the market. At the peak of the financial crisis new specialized mortgage lenders and securitizers came along unrestricted by government regulations which resulted in an extreme number of foreclosures and the stock market to plummet.

Leading central banks around the world assisted in regaining the financial system and bringing the economy back to good terms at the peak of the financial crisis. Together they helped stop the financial system from upturning, and with tremendous effort, helped reestablish financial and economic stability. The United States’ central bank is known as the Federal Reserve, and they are accountable for making sure the country’s financial system functions effortlessly. During the crisis of 2007-2009 the Federal Reserve was passive and did not take the lengths necessary to help stop or slow down the upcoming crisis. Throughout this paper I will discuss what steps were taken and what steps should have been taken to help the United States during this time of financial instability.

The 2008 financial crisis led to numerous mortgage foreclosure rates (Angelides et al, 2011). Many mortgage companies filed for bankruptcy and this because many of them were running under drastic losses. Financial institutions were unable to lend money because they were operating under losses and this slowed down the economic activities. This unease led central banks to take relevant action to provide funds in order to encourage lending and also to reestablish faith in the commercial paper markets ( United States. Financial Crisis Inquiry Commission , 2010). Not only did the central banks help in relieving the crisis, the federal government was involved in helping the financial institutions by assuming major additional financial commitments. Federal government funded financial institutions dealing with mortgage purchasing and repackaging, Fannie Mae and Freddie Mac were declared bankrupt. Alongside the two government funded institutions that were declared bankrupt, several other main investment banks, insurance companies, and commercial banks tied to the real-estate lending were

UK government was very swift in its response the financial crisis. Various measures were taken to address the economic anomaly that came with the crisis. These range from various monetary policies to fiscal policies. Some of these policies are discussed below:

The United States saw a recession starting in September of 2008. However, the event was not without warning. As early as 2006, there were signs of a drop in the housing market. The October new home permits were over a 25% less than the previous year. Prices were falling in 2006 and there were mortgage issues arising because of it. Come 2007, individuals became aware of banks having a problem with liquidity and were accepting subprime mortgages as collateral. At the end of the year, though, it seemed as if the Dow Jones Industrial Average, which would later trigger the recession, was almost near its peak. So, naturally, everyone ignored it.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.