Preview

2007-2008 Financial Crisis

Powerful Essays
Open Document
Open Document
1317 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
2007-2008 Financial Crisis
The Global Financial Crisis of 2007-2008

The Global Financial Crisis 2007-2008 Economists and scholars spend years dissecting financial markets and evaluating the causes of booms and busts. Throughout United States history there have been multiple economic booms that were underestimated and followed by recessions. In the situation of the 2007-2008 global financial crisis many culprits have been identified as causes, such as loose monetary policy, credit booms, deregulation, over complexity, and greed. Since the economic boom was solely dependent on weak policies and misconceptions, this leads me to believe prevention was possible with adequate regulatory policy, risk assessment and clarifications for commercial banks.
Monetary Policy
The Federal Reserve uses monetary policy to control the supply of money in order to determine interest rates and manipulate currency values. Markets commonly favor lower interest rates because people are able to pay less for capital. When the capital costs decline, banks and other entities are able to build up leverage for financing activities. When banks become highly leveraged they begin to take on more credit and liquidity risks without providing addition collateral. This is sometimes in reckless proportions that drive institution into possible closure and the need for bailouts (Investopedia, 2012).
At the turn of the century during the infamous “dot-com bubble”, the stock market was flooded with new investors trying to take part in the newest financial craze. These investments were overestimated and premature, and as the stock market crashed high interest rates nearly crippled the economy. The Federal Reserve reacted by lowering the interest rates in order to stabilize the economy and aid in its recovery. In response, consumers, bankers and other investors took advantage of the cheaper borrowing costs and flooded the economy with capital (businessinsider, 2012). Aside from the United States, many countries’ economies

You May Also Find These Documents Helpful

  • Good Essays

    punctured credit bubbles where money and credit was too easy for too long; the severe credit and…

    • 448 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Monetary policy controls money supply by increasing the discount rate, and also through increasing and decreasing the reserve requirements of lending banks. If the reserve requirements decrease, the banks can lend more money to consumers and businesses. If the reserve requirements increase, banks have to keep more money in with the fed. The interest rates increase, and people have an incentive to save and earn interest from the bank. If the interest rates decrease, then people do not have an incentive to save and they spend their money.…

    • 689 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Housing Market Crisis

    • 2136 Words
    • 6 Pages

    Marshall, J. The financial crisis in the US: key events, causes and responses. [online] HOUSE OF COMMONS LIBRARY. Available at: http://www.voltairenet.org/IMG/pdf/US_Financial_Crisis.pdf…

    • 2136 Words
    • 6 Pages
    Powerful Essays
  • Best Essays

    The most recent financial crisis was an all encompassing meltdown that affected the entire global economy. It is nearly impossible to quantify the distress this crisis put on the American economy and the world has yet to see the long term damage. After any disaster, people are eager to point fingers. This financial meltdown was no different, as critics were quick to blame anything and anyone from Wall Street to fair value accounting. It’s hard to pinpoint exactly what caused the most recent financial crisis, and even time may not tell. Economists are still trying to figure out why the stock market crashed in 1929, and Ben Bernanke recently stated “to understand the Great Depression is the Holy Grail of macroeconomics.” (Bernanke) Most of the discussion aimed at identifying causes of the crisis is focused on the financial structure of our economy. This has led to incongruent conclusions by many financial experts. It may be more important to direct attention to the social mechanisms that could have influenced not only this most recent crisis, but also the stock market crash of 1929 that threw the United States into the Great Depression.…

    • 3019 Words
    • 13 Pages
    Best Essays
  • Powerful Essays

    The financial crisis of 2007–2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank (see desktop Financial recession 2007 -..) Although America 's housing collapse (which peaked in approximately 2005 – 2006) is often cited as having caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such high levels of leverage, and generally a "hypertrophy of the financial sector" (financialization) ( see desktop doc in above citation).…

    • 1730 Words
    • 7 Pages
    Powerful Essays
  • Better Essays

    In 2008, the United States have experienced the most devastating situation of great depression due to financial crisis ever since occurred during the WWII according to NBER – (National Bureau of Economic Research). Successful and big companies such as Bear Stearns, Lehman Brothers etc. retrenched workers by thousands, United States stock market collapsed, liquidity dried up and everybody knew the recession has landed. High unemployment rate, lower demand, less money (including credits) supply, increased mortgage defaults, high gas and food prices, lower GDP – (Gross Domestic Product) and declining economic growth, U.S. Dollar ($) weakening up, High PPI – (Producer Price Index), High CPI – (Consumer Price Index), decreased wages and salaries, high inflation rate, etc. were unravelling the U.S. economy.…

    • 2368 Words
    • 10 Pages
    Better Essays
  • Better Essays

    The Federal Reserve

    • 3909 Words
    • 16 Pages

    The world financial crisis began in 2006 in the United States housing and related mortgage markets. Soon it spread to the entire U.S. economy and then to the rest of the world. In August 2007, the turmoil moved from the securitized U.S. mortgage markets to the interbank lending market, causing it to freeze up. Before long people became concerned about the extent and distribution of the mortgage related losses, market participants lost confidence in one another’s credit-worthiness, and the market that provides U.S. banks and other financial institutions with their liquidity became illiquid as a result. Institutions such as large commercial banks, investment houses, and insurance companies are the base of the U.S. financial system and because of the crisis they lost the ability to borrow short-term from one another. The general macro economy had weakened causing debt deflation, falling asset prices, falling real estate prices, and falling commodity prices; feeding one another into a downward spiral. Finally in September 2008, the breakdown of the international banking system based on the dominance of the major U.S. investment banks, commercial banks and insurance companies amplified the turmoil, sending severe shocks through the world economy. The economic crash international in its reach was characterized by falling employment, income, and output across the globe. The entire U.S. banking and financial system collapsed as a social financial system similar to banking crisis of 1931. From this point forward, what at first appeared as a U.S. “subprime mortgage market crisis” revealed itself to be a world economic crisis of major proportions.…

    • 3909 Words
    • 16 Pages
    Better Essays
  • Good Essays

    The banking and financial market meltdown of 2007-2009 resulted in the downfall of large financial institutions, bailouts for banks by national governments, and global declines in stock markets. A suffering housing market also contributed to the economic recession. While there were many factors that triggered the global market meltdown, this paper will focus on the factors that created the U.S. housing bubble and how the bursting of the U.S. housing bubble sparked the recession.…

    • 623 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Financial Crisis of 2008

    • 358 Words
    • 2 Pages

    Cited: Kumar, Patrick. The 2008-2009 Financial Crisis – Causes and Effects. 29 September 2008. <http://cashmoneylife.com>…

    • 358 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    2008 Recession

    • 1511 Words
    • 7 Pages

    The downfall that many if not all bank and lending institutions faced, catapulted the economy dramatically. The previous lending habits of these institutions show a direct correlation with the credit bubble that occurred from 2001 until 2007. The results of these lending habits were experienced not only in the United States, but worldwide issues began to surface. Though, many believe that the final factor may have been the “bursting” of the U.S housing bubble. The housing “burst” causing many individuals to default on their mortgages. The National Bureau of Economic Research stated that, “while large on an absolute scale, are modest relative to the $8 trillion lost in U.S. stock market wealth between October 2007 and October 2008” ("The National Bureau of Economic Research"). Additionally, In Deciphering the Liquidity and Credit Crunch 2007-2008 (NBER Working Paper No.14612), Markus Brunnermeier describes how those lesser and larger losses were linked and shows how economic mechanisms amplified losses in the mortgage market into broad dislocation and turmoil in the financial market” (Brunnermeier,2009,pp 77-100). Yes, the depression did in fact begin in 2008, however, the actions that occurred in the aforementioned time period were notable confounding influences on the depression of 2008. Other causation factors include the collapse of Lehman Brothers. Yes, this financial institution is based in the United Stated, yet their demise, as The Economist indicated that, “ In September 2008 almost brought down the world’s financial system” ("The Economist", 2013). The saving grace for Lehman Brothers, was that they were to “large” to fail. The monetary and fiscal abilities of the United States tax payers prevented the less than favorable quote “buddy-can-you-spare-a-dime” depression” ("The Economist", 2013). The United States practices further…

    • 1511 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    2008 Crisis

    • 660 Words
    • 3 Pages

    The United States economy is built on credit and combined with the reality that greed played a large part in the events leading up to the Global Financial Crisis (GFC), the United States experienced one of the its worst financial crisis in its history. Easy credit, the housing slump, banks holding risky mortgages and tax regulations all played a significant part in causing the GFC of 2008/09.…

    • 660 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    The Great Recession

    • 665 Words
    • 3 Pages

    If I had to choose on even that will have significance in my life it would have to be “The Great Recession”. The economic turmoil that started in early 2008 by the fall of Bearn Stern the 4th largest Investment Banking firm in the U.S. followed by the collapse of Leman Brothers in September of 2008 has led to the worst recession since the World War II and has been called The Great Recession. Being 31 years old and having witnessed recessions before as well as transformation of our economic system to service sector over the years from manufacturing as well as outsourcing of millions of job, I personally think this recession will have significant impact in our country in respect to our economic policies, political reform, historical implications, diplomatic matters with our trading partners, and also sociological and psychological effects as well.…

    • 665 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    The Great Recession

    • 2033 Words
    • 9 Pages

    When everyone thinks of a recession they think of the great 1930’s depression and the causes of it. However, just recently back in 2008 the United States also felt the effects of a recession that still lingers today. A recession is defined as a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP). With this definition we see that in half a year we could falter into a recession at any time. So what caused the recession of 2008? First we have to look at when it started…

    • 2033 Words
    • 9 Pages
    Better Essays
  • Good Essays

    The Great Recession

    • 2049 Words
    • 9 Pages

    A) The United States of America is the largest and still the most important market in the world. But it did crash a couple of years ago and it’s now trying to recover from this. The Gross Domestic Product (GDP) is usually a quite good indicator of the standards of living of a country. It can be measured in two ways: The total expenditure on goods and services or by the total of income earned by producing goods and services. The actual GDP of the United States is 14 62 trillions of US dollars, that is a growth of 2.7% from last year. But to have a better idea of the standard of living of a country, it is more relevant to take a look at the GDP per Habitat, which is 47, 400$. The GDP growth is 3.1% now so it’s higher than the inflation rate. And if we take a look at the past two years, the GDP growth was always positive so the government were quite successful in this domain.…

    • 2049 Words
    • 9 Pages
    Good Essays
  • Good Essays

    A financial crisis usually involves a substantial disruption in the flow of funds from lenders to borrowers. Also, historically most financial crises in the United States have involved the commercial banking system. In the late nineteenth century U.S. economy spent as much time in recession as it did in expansion. However, after 1950, the U.S. economy experienced a phase of macroeconomic stability from 1950 to 2007. This stability ended with the financial crisis of 2007-2009. The financial crisis of 2007-2009 was the most severe the United States experienced since 1930s. In chapter two of Manias, Panics and Crashes - A History of Financial Crises, Kindleberger and Aliber presented an economic model of a general financial crisis developed by Hyman Minsky. Minsky’s model primarily succeeds in explaining the financial crisis in the United States, Britain and other market economies.…

    • 950 Words
    • 4 Pages
    Good Essays