Elisheva Adler Professor Slavina Principles of Finance 23 May 2017 Financial Crisis of 2008 The financial crisis of 2008 is dubbed the worst we have faced since the Great Depression of the 1930’s. Sadly, the Financial Crisis Inquiry Commission maintains that it was avoidable, and that there were many red flags which weren’t understood properly or simply ignored. Nearer the time of the collapse, it was at the very least obvious that housing prices were rapidly rising and that people were taking on mortgages they couldn’t afford – or, conversely, that banks were taking on too much risk. But apparently, bankers, investors, buyers, and even policy makers turned a blind eye to the festering issues, hoping they would mend on their own, and eventually …show more content…
There were also lower interest rates and buyers were allowed more credit, which encourage many buyers to invest in equity. But then the economy took a downward turn. Those who had access to mortgages they couldn’t afford began to default on their loans. The federal reserve offered short term loans to banks to provide for their losses, but it was too late for companies like Bear Stearns. Prices of mortgage-backed securities continued to fall. When the Lehman Brothers, a major investment company, failed, investors hastily withdrew $300 billion worth of MMF’s (mutual monetary funds). This was a major threat to the liquidity of the housing market. If so much money was withdrawn from banks simultaneously, banks had no means available to liquefy future assets or to provide any credit. Therefore, the government was forced to take over major mortgage lenders and aided many large companies on the verge of collapse. It also provided unlimited insurance for MMF’s to get people to invest in them. At this point, the crisis had already spread to Europe, due to the interdependency of globalized markets. Back in America, the unemployment rate had risen to a high of 10% in 2009 and the country was in …show more content…
Although I am, by no means, an expert in the field, I’d like to share my ideas, based on my research, on how to prevent such a crisis from recurring. In February 2017, Trump requested a revision of the Dodd-Frank Act, claiming that it prevents banks from lending to small businesses, and that our economy has enough capital to cover any crisis and so no longer needs these stricter regulations. I believe that we should not ease the Dodd-Frank Act. Granted, our economy may have improved since the crisis, but we’re “better off safe than sorry.” To that end, the Dodd-Frank Act is a wise safety measure that shouldn’t be tampered with. I’d also suggest that more effort be put into researching the interactions between different economic principles which weren’t well understood leading up to the crisis and that large investment companies should periodically consult experts, even when the economy is calm. It wouldn’t hurt to become a more aware buyer or consumer or investor, either; and I feel that my research for this paper has helped with that by improving my understanding of our economy, for which I am grateful. Bibliography Board of Governors of Federal Reserve System. https://www.federalreserve.gov/newsevents/speech/fischer20160210a.htm. 10 February 2016. Speech. 17 May 2017. CNBC. http://www.cnbc.com/back-from-the-brink-timeline/. n.d. Timeline. 7 May 2017. FCIC. The Financial Crisis Inquiry Report. New York: Public