The Financial Crises of 2007-2008 in America

This paper attempts to examine the causes and effects of the financial crises caused by the banks who gave out excessive subprime loans to homeowners which many of whom defaulted on these loans and lost many of their possessions. Many fingers pointed
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  Causes or 2007-2008Financial Crises InAmerica Who should that the blame? Roosevelt Nickelberr! "niversit o# $em%his &raduate 'tudent  Causes of 2007/2008 Financial Crisis Introduction In an age where there are supposed checks and balances to insure America’s economic securit! starting in 2007 through 200" the #$%$ and the world econom became entrenched in a financial crisis not seen since &he 'reat (epression$ &he stifling recession was e)perienced globall! but here in the #$%$! it manifested itself in an economic catastrophe! as millions of Americans suffered through e*ictions! foreclosures and protracted +oblessness$ &he ambitious  purpose of this research is to seek answers to the underling causes of this crisis in order to ascertain a criterion of who should be considered at fault in this tra*est of consumer confidence$#nder e)amination will be, the e)pansionar policies of the Federal -eser*e .ank that lead to a climate conduci*e to rampant longterm in*estments that were debt le*eraged beond reasonablemeans! misappropriation of in*estment securities b banks and other financial institutions! uestionable credit ratings of securities! rampant e)pansion of the subprime mortgage market that e*entuall collapsed! and greed fueled risk management policies b financial mangers and C1s$ (ue to these 3throw caution to the wind4 in*estment strategies! after the housing bubble  burst! countless borrowers defaulted on mortgage paments and man primar lending institutions were unable to pa back the principles and interest the were reuired to pa on the 5ortgaged .acked %ecurities the had sold to in*estors! and a debilitating lending crunch ensued$ The Climate of the Global Economy &he health and well being of most of the economies in the world is ine)tricabl linked to the health and well being of economies other than their own$ In laman’s terms! the economies of  2  the ones that are sick will affect the economies in the world that are in good health$ &he first rumblings of trouble came around as a surge of crises flew through the emerging markets in the late 6""0’s, 1ast Asian markets crumbled! -ussia defaulted! and in %outh America! Argentina and .rail realied se*ere financial misfortune$ In reaction to these predicaments! e*ol*ing markets became far more +udicious about making loans from abroad$ &heir organiations! regimes! and families cut back on speculation and reduced consumption$ From net absorbers of monetar wealth from the rest of the world! a number of these countries became net e)porters of monetar wealth$ %ome of these debt ad*erse countries in*ested huge sums of capital in the #$%$ (Diamond & Raghuram, 2005). 1as accessibilit to obtaining credit in the #$%$! dri*en b large influ)es of foreign fundsduring the 6""76""8 period! led to a housing construction boom and enabled debtfinanced consumer spending$ 9enient lending standards and rising real estate prices also contributed to thereal estate bubble$ :arious tpes of loans such as mortgage! credit card and auto loans were eas to get and consumers assumed an unparalleled debt load$ Mortgage Backed Securities and Subprime Lending In order to understand how financial institutions are able to make these longterm in*estment loans while maintaining a reasonable amount of liuidit ;readil a*ailable capital<! acuisition of a few important financial terms should be defined$ #sing an online dictionar for singularit of definition onl! one will find that In*estopedia defines a  Mortgage Backed Security  ;5.%< as 3 a tpe of asset based securit ;in man cases propert or real estate<    that is secured b a mortgage or collection of mortgages$ &he mortgages are sold to a group of indi*iduals ;a go*ernment agenc or in*estment bank< that securities! or packages! the loans together into a securit that in*estors can bu4 ;In*estopedia<$ Securitization is similar to bonds 3  in which secured loans ;mortgages! cars or credit card debt< are packaged together and the cash flows from the principals and interest on paments that are recei*ed b the debtor is used to repa the in*estors who purchased them as collateralied debt obligations$ . selling b these C(s to in*estors! financial institutions do ha*e these loans on their balance sheets and kept man financial institutions reaping siable positi*e cash flows$ 9oan officers and bank managers influenced b the promise of bonuses and incenti*es b bank e)ecuti*es were encouraged to make more subprime loans and take on more risker dept$Also according to the online dictionar!  subprime lending ;also called near-prime ! non- prime ! and  second-chance lending  < is defined as making loans to persons who ma struggle maintaining the repament schedule! sometimes reflecting impediments! such as +oblessness! separation! health emergencies! etc$   'enerall! subprime borrowers were defined as ha*ing FICC-1(I& -A&I=' below >?0! though this number has *aried throughout time$ @hat made these loans so attracti*e to financial institutions are the higher interests rates and unfa*orable terms! such as balloon paments to these borrowers in order to compensate for their higher credit unworthiness$ 5an of these subprime loans were bundled into mortgagebacked securities that ended up defaulted and were a contributing factor to the financial crises under e)amination$ne would e)pect the Federal -eser*e would ha*e enacted some of its fiscal policies to pre*ent this growing financial cancer! so ne)t under scrutin is the Feds role in the crises$ The Federal Reserve—What does it do? .efore embarking upon the role that the Fed had in the financial crunch! an e)amination of what the Fed does that directl affects the econom in the macroeconomic platform or the 4  economic big picture$ &he Federal -eser*e! or the Fed is the principal bank of the #nited %tates$ &he +ob of the Central bank is to! control interest rates! the mone suppl! and super*ise the banking sstem$ &hese manipulations b the Fed are known as its fiscal policies$ &he Central .ank didn’t e)ist until the late 6" th  centur after a series of economic catastrophes nearl destroed the American .anking sstem$ According to %te*en Berlburg! markets and finance reporter at Business Insider, “ It wasnt until 6"07! when the =ew Dork %tock 1)change fell E0 and depositors ran on the bank to recoup their mone! that people warmed to the idea of a central bank and legislation passed4 ;Berlburg! 206G<$&he primar +ob of the Fed is to control economic panics$ &he Fed has the power to print mone! which is both a good and bad thing$ &his power to print man can di*ert a financial disaster or! if o*erused! will not be worth the paper it was printed on because to much currenc in an econom ma cause a state of hperinflation which could dri*e the price of a loaf bread to cost H600$ %till! as initiall intended! the Federal -eser*e e)ists to e)tend credit to banks or other institutions in crisis conditions like a bank run$ %ituations ha*e changed o*er the last centur and! now the Fed’s primar +ob is to set monetary  or  fiscal  polic in order to promote the economic health of the countr$ 5onetar  polic impacts interest rates! which ob*iousl impact the econom .  Fiscal polic is manipulated in man was primaril through, •  Reserve requirement—  &hese are how man funds that banks are reuired to hold in their reser*es$ &he Fed uses this tool to regulate how much banks can loan out$ @hen the reser*e reuirement is high! banks must keep more mone in reser*e so the ha*e less toloan out and *ice *ersa 5

ECU Automative

Apr 12, 2019


Apr 12, 2019
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