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The Reagan Administration-1980-2008 Financial Crisis

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From 2007 to 2008 global economies suffered from the worst financial crisis since the depression. The crisis had a lot of consequences – it led to the failure of major businesses, unemployment reaching the highest level in 15 years, and a tens of millions of families losing their homes due to foreclosures. Furthermore, the crisis doubled the financial debt of the United States. We watched the documentary The Inside Job in class. The documentary that is narrated by Matt Damon, reveals the systematic corruption that lead to the crisis, as well as the effects of it. Here is a timeline of the main events that caused the financial crisis: The Reagan administration – 1980’s The election of Ronald Reagan in the beginning of the 1980’s lead off …show more content…

A derivative is a financial instrument created to manage risk. The instrument was created as a result of the oil shock, high inflation and huge drop in the U.S stock market in the 1970s. Economists and bankers claimed that they made the market more stable, but in reality, they had the opposite effect, and made the market unstable. With the use of derivatives, bankers could gamble on everything from the weather to the bankruptcy of a business. But derivatives only ensure against financial risk, when they are used properly. By the late 1990s, derivatives were a 15 trillion-dollar unregulated market. An overuse of the tools was dominant in the period from 2003-2007. In this period, the use of the instrument exacerbated risk rather than controlled it, as investors wanted to maximize their profits and returns, and ended up using the instrument erroneously. CDOs (collateralized debt obligations) are complex derivatives. They are investment products that bundle together different types of loans. In the new financial system lenders sold mortgages to investment banks, that gathered different mortgages and loans. The investment banks then sold the CDOs to investors. This meant that when homeowners paid their loans, the money went to investors all over the world. But CDOs were poorly constructed, and riskier loans were made by lenders. The investment banks didn’t care either, as they solely focused on maximizing their profits. Investors even paid rating agencies to evaluate their CDOs, which meant that they, falsely, were marked as “safe” investments. This system was a ticking time bomb, and it contributed highly to the instability that dominated the market in the years up to the financial

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