The Great Recession in 2007-2008 was the second largest financial crisis in U.S. history. In this discussion, I will be analyzing how the financial system contributed to the Great Recession and their response to the crisis, the involvement of the U.S. government, missed opportunities to avoid or shorten the crisis, and my personal opinion on the U.S. economy in the next decade. First a definition and the primary purpose of a financial system is needed.
A financial system is composed of institutions such as banks, insurance companies, mutual funds, and organized markets where stocks and bonds are sold. The primary function of a financial system is to lend assets to individuals or businesses in order to generate investment income. During
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In an article in Money Management Executive, Brent Shearer, summarizes a report prepared by the Tower Group regarding risk. In this article he states that financial institutions should incorporate a multi-faceted approach to risk management and understand the impact of the structured investment vehicles (SIVs), CDOs and subprime mortgages that they were purchasing and selling. These financial institutions should have been diligent in understanding the risk and conveying that risk to investors rather than looking at the potential return/profit only (Shearer, …show more content…
In the aftermath regulations such as the Dodd-Frank Act have been enacted to help identify signs of financial crisis, but regulation cannot eliminate financial crisis. The bull market for stocks continues, but at some point a correction will happen, how will the U.S. economy respond, that is the question that economists will continue to try and answer.
References:
Guynn, R.D., (2010, November 20). Financial panic of 2008 and financial regulatory reform. Retrieved from https://corpgov.law.harvard.edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/ Minshkin, F.S., & Eakins, S.G. (2015). Financial Markets and Institutions (8th ed.). Boston, MA: Pearson.
Shearer, B. (2007). Subprime Crisis Exposes Risk Predicament (cover story). Money Management Executive, 15 (47). 1-12.
Villani, K. (2012). Subprime Crisis Was Government’s Fault. American Banker, 177(F333), 9.
Board of Governors of the Federal Reserve System. (2017).
Retrieved from
Calomiris’s “Financial Factors in the Great Depression”, the subject of interest is the stock market crash preceding the Depression. This is often looked to when attempting to explaining the Great Depression, and for a good reason. The Stock Market crash was an immediate crisis, and happened right before the Great Depression supposedly began; most believe it was the beginning, and it honestly could be looked at that way. Many small, consecutive bank failures occurred following and preceding the stock market crash (62). This theme had Calomiris conclude that the stock market crash was a continuation of the pattern of banking crises that were occurring back then (65).
In the book The Big Short, Michael Lewis outlines all of the events that led up to The Great Recession in 2008. Lewis makes it clear that the recession could have avoided if those in the banking industry were not so greedy. Lewis expresses, “One trillion dollars in losses had been created by American financiers, out of whole cloth, and embedded in the American financial system”. This quote exemplifies how much of a hit the economy took in the end.
In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, acknowledged publicly what economists have long believed. The Federal Reserve’s mistakes contributed to the “worst economic disaster in American history” (Bernanke 2002). Bernanke, like other economic historians, characterized the Great Depression as a disaster because of its length, depth, and consequences. The Depression lasted a decade, beginning in 1929 and ending during World War II. Industrial production plummeted.
However, the Great Recession was one of the toughest challenges the Fed had seen up to this point. The Great Recession was a global economic downturn that lasted roughly from 2007 to 2009. It was caused by a combination of factors such as: deregulation of the financial industry, the stock market plummeting which erased a wide margin of wealth, the utter collapse of the housing market. It was the Fed's job to find a way to fix the economy. The Federal Reserve responded by lowering interest rates to near zero levels, quantitative easing which involves purchasing large amounts of bonds and other securities to attempt to inject liquidity into the market, and established a wide number of lending facilities to provide credit to financial institutions that were struggling during the crisis.
Called the Great Recession, this economic crisis was a difficult one to remedy. The government took to the use of two different types of policies, fiscal and monetary, in order
A Financial Crisis “occurs when one or more financial market or intermediary ceases to function or function only erratically and ineffectively.” (Robert E. Wright and Vincenzo Quadrini 2009) During the Great Depression the Federal Reserve made some mistakes in preventing such an ugly outcome. Firstly, allowing the stock prices to rise so quickly in the 1920’s caused the enormous inflation of the asset bubble in 1928 allowing the greatest recession to occur shortly after.
Xiaoyan Zhu WR 150 L5 04/01/2016 Paper 3 first draft Introduction The most vital lesson the public can learn from previous financial crisis is what caused it. This is always an unforgettable question although the Dodd-Frank Act, known as DFA, has been signed into law. If the right causes cannot be attributed to the financial crisis, it is certain that one after another crisis will come up in the near future. There are several narratives.
Introduction: The financial crises in recent year have shown us the weakness of the regulatory framework among banks and it shows the gap that we could fill to improve bank’s risk management practices. The crises have show us that a resilient banking system is necessary for archiving a sustainable economic growth, we can take Canada for example, while 12 bank in US bankrupted since 1840, no bank in Canada experience the financial difficulty during the financial crises1. This is because of its high capital requirements and leverage ratio restrictions, these regulations have keep Canada’s banking system save from the financial crises and keep it in a sustainable economic development.
Government Regulations The credit crisis of 2008 was caused by lenders providing loans to buyers who could not afford the payments on mortgages when the interest rates rose. The lenders could not pay the investors because the owners were defaulting on their loans. The Government could have mitigated this by having stricter loan qualifications. The lenders would not have been able to lend the money to the buyers who were high risk. Lending to buyers who are high-risk cause issues such as the crisis in 2008.
Opinions vary on what caused the 2008 financial crisis in the U.S. Some trace the origins to the housing bubble that arose earlier in the decade while others point to the deregulation in the financial industry as the driving force. In the end, it was a combination of events and issues, a 'perfect storm' as some have called it, something that was brewing for years and ultimately reached its breaking point. Primary Causes New government policies on homeownership - the stage was set for the financial crisis several years earlier with the adoption of new "government policies" related to homeownership. Rules for getting a mortgage were loosened under political pressure to make homeownership available even more borrowers than usual.
Chapter 1 talk about economic crisis in America, including free-market, Federal, and government. Also, they talk about free-market economy has failed. And they think that the current crisis was caused not by the free market but by the government’s intervention in the market. In addition, the Fed’s policy of intervening in the economy to push interest rates lower than the market. Chapter 2 talk about how government created the housing bubble.
We are in the midst of the greatest financial crisis since the Great Depression. Unemployment has skyrocketed to 9.5% since December 0f 2008 and we have 11.1 million Americans out of work. Our financial institutions are in disarray and are on the brink of collapse. If we do nothing the country will certainly enter into another depression. Below are series of proposals designed to bring the country’s economy back to prosperity.
Financial crises are caused by unprecedented changes in the global economy such as when OPEC countries doubled oil prices in 1979 which caused a severe recession in developed countries and in turn a reduction in demand for commondities from less developed countries. All of this coupled with President Reagan raising interest rates to put a damper on inflation caused by the increased price of oil and banks giving variable interest rate loans given to less developed countries which caused tremendous levels of debt to occur to said countries (pg. 341,342) This is the primary explanation used by banks and states because it puts the blame on the global economy instead of the lender or borrower. (pg. 342) In actuality financial crises are also caused by irresponsible behavior on the part of both the lender and the borrower.
The argument of whether the government should help out wall street is an immense discussion among Americans. Americans are unsure whether the pros of the government helping out businesses outweigh the cons. The main question among this topic is what will help our economy out of the recession the most. This issue has caused an ongoing argument for many years.
Monetary Policies as Remedies for the Great Recession: An Analysis on the Effectiveness, Rationale and Criteria In the year 2008, the burst of housing bubbles began to occur in the North American real estate market along with the Great Recession which swept through most countries around the globe, leading to disastrous impacts on the global economy including dramatic growth of unemployment, collapse of the financial markets, political instability and many other concerning outcomes. These alarming economic downturns drew the attention of economists and government authorities to the implementation of effective remedies for the crisis. Effective and practical solutions were urgently demanded in order to stimulate consumption without significant