... | |The 2008 Financial Crisis | |A Review and Critique | | | |Nicholas Makris | |12/4/2012 | | | Introduction The 2009 economic crisis was significant for two reasons: the rapid rate at which the free market constraints were dropped, and the lack of any stable resolution by the Left (Mellor, 2009). Tenets pertaining to market domination suffered a lethal crack owing to multiple nations realizing the inessential communization, rather than the actual, of economic arrangement (Mellor, 2009). The core of the problem was complicated, but simplification showed it was the nonstandard arrangement of the monetary system that created a complicated scope of financial tools and entities to...
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...Abstract This paper will examine the 2008 financial crisis. In this paper we will answerer what caused the financial crisis of 2008, and what has happened since then. It will focus on risky behaviour and increased asymmetric information almost always lead to more risky behaviour and eventually a cycle thus causing a contraction in an economy. It would highlight the main causes and effects. Finally there would be an analysis and conclusion with recommendations. Introduction The year is 2008, the greatest ever economic issue is upon us, could even be described as a disaster. The financial crisis is one that changed landscapes literally and figuratively and forced the implementation of laws to avoid such a disaster happening again. With its...
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...2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put unconditional stress...
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...Stephanie King Professor William Badley Eng 1020-058 1 May 2013 The US Economic Crisis In the course of my research I have found that there are vastly different views of the crisis, its causes, and the solutions. The starting point of the financial crisis began when brokers from the firm J.P. Morgan met at the Boca Raton Resort in Florida to discuss ways that they could increase their capital and reduce risks. In so doing enabling them to avoid the federal laws that limited the amount of money they could invest by forcing them to keeping millions of dollars of funds in reserve in case the debts turned bad. They came up with the idea of inventing a device to protect these loans and free up capital. They conceived a kind of insurance where a third party would assume the risk of the debts going sour in exchange for a monthly premium, thereby separating the risks from the loans, and leaving them free to invest larger amounts of capital, and so credit default swops were born. The first negative was that these were agreements between two private entities that were not regulated by the federal government, and soon no entity that was guaranteeing these debts realized how big the market had grown, who was guaranteeing these debts, and how much these debts were worth. These debts created huge profits for investors and investment companies causing a worldwide economic boom. The original idea created by JP Morgan mutated so many times, allowing every other...
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...were many factors that lead to the financial crisis of 2008. In 2001 America was facing the possibility of a recession, in part due to the terrorism attack. Fearing this recession the Federal Reserve decided to cut interest rates drastically with the plan to slowly increase it over time. Banks and other financial institutions saw this as an opportunity to make money and used the low interest rate to capitalize in real estate. Banks began the spiral of offering no money down mortgages with the cheap money interest rates to subprime borrowers, many which had little money and no assets. As the real estate business began to boom the prices of houses increased. Many people felt a false sense of security in the value and asset of owning a home could offset the failing stock market. Banks began to repackage these loans into collateralized debt obligations and sold them out to other financial institutions creating complex chains of debts. As the interest rates increased as planed the risks began to unravel. By 2006 many borrowers were defaulting on mortgages they could no longer afford to sustain and the housing market began to decline. In 2007 feeling the financial effects of the bad loans; many institutions were showing hundreds of millions in losses and expecting more each day as more people defaulted on their loans. It was at that point the public panicked realizing that the economy was spiraling with no hope of recovery. Banks came to a financial halt and many began filing for bankruptcy...
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...The 2008 financial crisis was a massive economic and financial downturn that later became a full on recession. This crisis lead to a near halt in trading and plummeted the GDP of almost all European countries. But how did the booming European economy suffer such terrible loss? While the crisis began in the United States a nationwide recession, especially one in a country thought to be economically sound, can quickly cause panic across the globe, leading to a distrust of banks. This can be absolutely detrimental as the system of banking relies wholeheartedly on trust as money is truly just a piece of paper with a trusted value. Panic can cause the public to rapidly pull their funds from banks and this panic and draining of funds can quickly...
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...Eco 101.01 9:45 AM Class 30 November 2010 Special Topic 5- The Crisis of 2008: Causes and Lessons for the Future 1.) Why did housing prices rise rapidly during 2001-2005 and then fall in the years immediately following? Did regulation and monetary policy play a role in this housing boom and bust cycle? “During the years of 2001-2005 housing prices rose due to the fact that the mortgage default rate and the foreclosure rate was at an all time low” (pg.671). The government was making new standards for housing loans and mortgages, which made them more affordable and easier to get, even if you didn’t actually meet the old standards you could still be eligible for loans and mortgages. Immediately after this housing boom, a bust arisen in the housing prices. The bust was caused because many of the monthly mortgage payments stopped coming in. This was because mortgage loans were made to more people whose chances of repaying them were less than in the past. These mistakes can simply be blamed on misjudgments by the banks and other leaders. When millions of these payments stopped coming in, there was no amount of financial expertise on Wall Street or government help that could save the whole investment structure built on the foundation of those mortgage payments. Government regulation and monetary policy played a significant role in the housing boom and bust cycle because government regulations and interventions are precisely what pushed lending institutions to reduce the standards...
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...nature and the aftermath of the 2008 financial crisis During the periods the 2008 financial crisis, zero equity lending to homebuyers immensely flourished through the development of financial instruments known as Mortgage Backed Securities(MBS). There are many possible explanation how mortgage securitisation in subprime was effectively encouraged. First of all, a major policy set by the Bush Administration to fuel home ownership to lower income groups by providing easier access to loans for borrowers with zero equity lending. In addition, the crisis was triggered by overvalued subprime mortgages based on the idea of continuous increases in housing prices. Hamilton and Schwab (1985) find that house price changes are positively correlated...
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...Financial crisis of 2008 Student’s Name University Affiliation Financial crisis of 2008 The financial crisis of 2008 resulted to the greatest recession. This was after the great depression that had happened in 1929. This happened even after the treasury department and the Federal Reserve aggressively trying to prevent the United States system of banking from collapsing. The first suspicion of what caused the financial crisis was when the housing prices started to drop from 2006. This was a red light that the economy was in trouble. Nevertheless, realtors were relieved at the time. There was hope that the housing market that was overheated would securely go back to a level that is more sustainable. The realtors did not realize is that the number of people who owned homes with credit that was questionable had loans for 100 percent or even more of the value of their homes. What banks had done is that they had resold the mortgages in packages as a part of mortgage backed securities. Primarily, the Federal Reserve was thinking that the damage from the crisis of subprime mortgage will remain secluded to housing. However, prevaricate funds and other financial institutions all over the world had ownership over them. They were in pension funds, corporate assets and mutual funds. Given that the initial mortgages had been cut and sold again in parts, then the actual derivatives became impossible...
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...Financial crisis 2008. What is it? The Great Recession was a period of general economic decline observed in world markets beginning around the end of the first decade of the 21st century. The exact scale and timing of the recession, and whether it has ended, is debated and varied from country to country. In terms of overall impact, the International Monetary Fund concluded that it was the worst global recession since World War II. According to the US National Bureau of Economic Research (the official arbiter of US recessions) the US recession began in December 2007 and ended in June 2009, and thus extended over 19 months. The Great Recession was related to the financial crisis of 2007–08 and U.S. subprime mortgage crisis of 2007–09. Why it happened? Exist four main reasons for financial crisis 2008: 1) Sub-prime mortgages 2) Collateralized debt obligations 3) Frozen credit markets 4) Credit default swamp What led to this? Once upon a time, investors in the United States bought Government bonds, which were very reliable investment, but after unrest in the Government rate reduced to 1% that did not like investors and they refused. But banks were just glad now they could borrow nearly free loans and earn money using financial leverage, and then return the borrowed money. Soon this game banks hooked investment banks by selling them mortgage loans for real estate. Because real estate is always grew up in price, and fast, then won it all. Further, the Bank takes many loans...
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...Time: Monday / 2pm Table of Contents Abstract The Tech Bubble Introduction Lowering of Interest Rates Adjustable Rate Mortgage Securitization Mortgage Backed Securities Collateralized Debt Obligation Credit Default Swap Government Reaction and Policies Emergency TARP Repercussions Basel Disadvantages Future Policy Requirements Controversy Conclusion Reference List Review of the causes of the 2008 Financial Crisis in US. Abstract This paper seeks to summarize a stream of research that has delved into the major causes of the financial crisis in 2008. More precisely, we will be looking at a combination of causes such as the sub-prime mortgage crisis, the mortgage backed security, the collateralized debt obligation as well as how the incidental credit-default swap contributed to the incident. This paper will begin from analyzing the past, when it happened and how it built up and resulted in the financial crisis. The significance of this literature review seeks to give a simplified explanation of the financial crisis of 2008 and will be useful for the people unversed in economics or finance but wish to have a basic understanding of its causes and history. The Tech Bubble During the early 2000, numerous companies and individuals bought new operating systems that were Y2K-ready in fear that the “Y2K” problem would cause computer systems to malfunction. This had allowed technology companies to generate obscene amounts of revenue. At one point,...
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...The Financial crisis was it necessary or just another way to make money ? Banks have been around for years ,and in the coming foreseeable sure that wont change.Money is what drives our economy in every way possible.We buy food with it and shelter and buy far it is the safest way to keep your money.Since we have inflation which means that your money is always becoming less valuable each year.As you can see from the reports(inflation table refer to table 1).Inflation can happen to every product whether it's a normal item like a cell phone or a house.This is the main reason why we keep our money in banks if we just keep our savings on us all the time we would lose money.Banks are the next best thing along with stocks and bonds...
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...The economic and financial crisis from 2008 to 2009 was considered to be the worst financial crisis since the Great Depression. There are many predictors of the economic and financial crisis. One predictor is the decline in investment expenditures. Investment expenditures reflect the level of aggregate demand for capital goods. Another indicator of financial crisis could be weak exports and excessive imports. Loss of competitiveness and external market are reliable predictors to a crisis, business failure, and decrease in loans. There was a rise in home foreclosures. The value of the homes began to decline and homeowners stopped paying their loans. The banks started to take the homes away and sold them elsewhere. Companies thought the prices for homes would continue to increase, however that didn’t happen. From the first quarter of 2006 to the third quarter of 2008, the percentage of mortgages in foreclosure tripled, from 1 percent to 3...
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...The financial crisis we experienced in the U.S. beginning in 2008 was due to years of irresponsible trading of securities and also due to loans being offered to those who couldn’t afford them. An increase in subprime mortgagees really began back in 1999. This marked the early stages in which creditors approved homebuyers with less than perfect credit to buy a home. Fannie Mae was known as one of the banks that pretty much approved any and every one in an effort to allow them to experience the American dream, owning a home. Many of these borrowers were considered high risk and so they were faced with unfavorable terms within their loans. They had variable rates and high interest rates which combined is a recipe for disaster. Later, in 2002,...
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...Almost seven years out of the 2008 Financial crisis, the global economy has begun to show signs of modest stability and growth. In fact, the U.S. and other advanced economies have anticipated abandoning quantitative easing and raising interest rates by the end of 2015 or early 2016. However, as many economies show signs of promise, the second biggest economy in the world, China has begun to falter. What had been the shinning spot in the global economic landscape for the past 30 years, 2015 has proven to be a challenging year for the nation. Over the course of the year, China has experienced plummeting stock markets, interest rate cuts and stagnant growth rates compared to years past. As the world has become more financially intertwined the...
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