Analyse The Political And Economic Environment In The Run Up To The Financial Crisis Case Study
Analyse the political and economic environment in the run-up to the financial crisis, including any legislative and regulatory changes which may have been contributory factors.
The 2008 Financial Crisis had been felt around the world as the worst financial crisis since the Great Depression, as select countries experienced the full force of their economies under threat of collapsing. In September 2008 the markets arose in panic as large financial firms realised that they could default and required a sector wide response. Governments used public funds to prevent the failure of so called ‘too big to fail’ institutions, because of their systematic importance to the country. I will be analysing how the development of legislation and regulation, …show more content…
This incentivised Fannie Mae and Freddie Mac, who by 2005 had produced trillions worth of loans, many of which were sub-prime and without down payments of their house. The market assumed houses would continue to rise in value, as minimal lending standards had pushed prices up by increasing the demand for homes. As the industry had observed this deregulation and opportunity in the market, private lenders seized the opportunity and entered the market with the majority of sub-prime mortgages including the factor that they were unregulated.
Following the Great Depression the U.S. Congress passed the Glass-Steagall Act (1993), prohibiting commercial banks involvement in investment banking. During this period nearly 5,000 banks had failed resulting in the intention to stop any unusual occurrence on banks and to restore the public confidence in the U.S. banking system. When the Act was repealed in 1999, the conflict of interest between commercial and investment banking was …show more content…
These business also argued that the property markets in different American cities and countries would rise and fall independently of one another reducing further risk, what they didn’t expect was the country wide house price fall in 2005. This had banks across the globe compiling billion’s worth of debt, bloating credit culture which stretched business product past their limits. Allegedly safe CDOs now turned out to be worthless despite their ratings, becoming difficult to sell to the market.
Included as a main contributed to the crisis insurance corporation AIG had failed to implement sufficient risk management for its own balance sheets. Derivatives had become a uniquely unregulated financial instrument exempt from all oversight and reserve requirements allowing AIG in writing Credit Default Swaps (CDS), which provide transfer exposure and protect the buyer for sellers of the products agreeing to pay off part of the debt if this party defaults on the
The 2008 Financial Crisis had been felt around the world as the worst financial crisis since the Great Depression, as select countries experienced the full force of their economies under threat of collapsing. In September 2008 the markets arose in panic as large financial firms realised that they could default and required a sector wide response. Governments used public funds to prevent the failure of so called ‘too big to fail’ institutions, because of their systematic importance to the country. I will be analysing how the development of legislation and regulation, …show more content…
This incentivised Fannie Mae and Freddie Mac, who by 2005 had produced trillions worth of loans, many of which were sub-prime and without down payments of their house. The market assumed houses would continue to rise in value, as minimal lending standards had pushed prices up by increasing the demand for homes. As the industry had observed this deregulation and opportunity in the market, private lenders seized the opportunity and entered the market with the majority of sub-prime mortgages including the factor that they were unregulated.
Following the Great Depression the U.S. Congress passed the Glass-Steagall Act (1993), prohibiting commercial banks involvement in investment banking. During this period nearly 5,000 banks had failed resulting in the intention to stop any unusual occurrence on banks and to restore the public confidence in the U.S. banking system. When the Act was repealed in 1999, the conflict of interest between commercial and investment banking was …show more content…
These business also argued that the property markets in different American cities and countries would rise and fall independently of one another reducing further risk, what they didn’t expect was the country wide house price fall in 2005. This had banks across the globe compiling billion’s worth of debt, bloating credit culture which stretched business product past their limits. Allegedly safe CDOs now turned out to be worthless despite their ratings, becoming difficult to sell to the market.
Included as a main contributed to the crisis insurance corporation AIG had failed to implement sufficient risk management for its own balance sheets. Derivatives had become a uniquely unregulated financial instrument exempt from all oversight and reserve requirements allowing AIG in writing Credit Default Swaps (CDS), which provide transfer exposure and protect the buyer for sellers of the products agreeing to pay off part of the debt if this party defaults on the