Introduction To the Recent Financial Crisis
Introduction
The purpose concerning this long student essay is to review the worldwide
economic confrontation that occurred in late 2007. The monetary
catastrophe has been described as the ultimate extreme financial crunch
that the experience has encountered since the inflation of 1930. The slide
saw many associations fail and close as they required the commercial
volume in the second place operating within the business-related
environment.
The inaction rate rose intensely as few parties chose to cut back their traders
so as to wait in trade. The interest rates on mortgages and bank loans
further increased due to the fiscal disaster that saw many people unable to
repay their mortgages and bank loans. This led to banks in the United States
repossessing some of the families whose loans had defaulted.
The commercial emergency also saw the drop of major stock markets around
the globe, including the New York Stock Exchange, the Japan Stock
Exchange, and the decline of European bills and the British Pound. The
commercial situation has been considered by most economists as a potential
calamity comparable to the Great Depression, as it led to the collapse of
major financial organizations in the U.S. and the decline of money that was
expected to flow through the U.S. currency.
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The confrontation also saw monetary assurances provoked by many
governments around the world, resulting in a decline in business-related
progress and investments. Several causes of the commercial impasse have
been presented by economic specialists and analysts alike, some of which
will be outlined and emphasized in the following section.
Reasons for the Recent Financial Crisis in the U.S.
The economic confrontation of 2007 was prompted by a liquidity approach
within the investment structure of the United States, which could be traced
back to the slump in the stock markets in 2000. The worldwide economy,
during that period, started to decline moderately into a slump, and the
United States Federal Reserve and U.S. major banks responded by drastically
lowering interest rates to limit the amount of business-related damage.
The depressed interest rates offered by major banks led to an increase in the
number of families borrowing mortgages to buy new homes in the U.S. These
depressed interest rates also encouraged existing homeowners to refinance
their mortgages at much lower rates (International Labor Office, 2009).
Financial changes were developed that encouraged brokers to secure
commissions based on the number of homeowners they connected to
lenders. However, these financial innovations failed to address how or
whether new home buyers would be able to repay their mortgages.
The usual form of contract and loan repayment was that banks financed
home loans through the customer’s deposits, establishing a limit on the
amount they could commit to lending. However, new economic changes in
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the industry saw trade models used to extend the resources needed to
accommodate mortgages and housing loans.
The Development of Mortgage-Backed Securities
Mortgage lenders began to advertise the home loans they secured from
borrowers to financial banks. These banks, in turn, converted the mortgages
into debt-supported bonds (MBS) that were marketed to investors who were
looking for flexible merchandise at depressed interest rates. The Mortgage-
Backed Bonds enabled financial organizations to invest in the U.S. housing
market (Davies, 2010).
The debt-supported bonds continued to grow within the housing and financial
sectors throughout 2006, as more families began to apply for home loans,
mortgage loans, and credit card loans. Financial lending and borrowing
organizations, including banks in America, reported immense profits in 2006
due to the increased lending and borrowing activities.
As credit, debt, and the housing market in the United States continued to
evolve efficiently, the types of mortgages being presented to new home
buyers began to deteriorate. Homeowners who had been paying mortgages
to banks and lenders began to face an overburden due to this deterioration.
The first sign that the housing market in America was facing a decline came
with a warning from a European bank in early 2007 that had written
significant losses from its investment in an American sub-prime lender. Four
months later, two hedge funds that belonged to an investment bank
collapsed due to their exposure to the housing market. Another European
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bank stopped allowing stock or bond fund withdrawals in August 2007,
causing panic among Europeans.
The Start of the Economic Confrontation
Such events marked the beginning of the economic confrontation. Major
financial organizations that had heavily invested in the housing market
started recording substantial losses on their loans. Falling home prices
worsened, with some homes worth less than their mortgage loans. This
decline in prices led banks and lending organizations to reconsider their
involvement with mortgage loans and properties (International Monetary
Fund, 2010).
The collapse of the housing market led to a sharp fall in the value of debt-
backed bonds, resulting in severe damage to major financial organizations
worldwide. The decline in credit quality and the growing failure of most
banks in America triggered global stock market declines, leading to massive
asset losses on bonds. Global economies began to experience a slow
contraction as credit ventures decreased drastically, a position that began
the decline of worldwide business.
Financial specialists worldwide maintained that credit instruments had failed
to properly account for the financial risks associated with debt-backed bonds
and collateralized credit fees. Major governments were also criticized for
failing to regulate their fiscal policies in response to the growing mortgage
and credit industries (Steverman & Bogoslaw, 2008).
Impact of the Crisis on Financial Markets and Institutions
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A key contributing factor to the global recession was the extensive use of
leverage by many financial institutions, which feared not being able to grow
their profits without it. The larger financial institutions that dominate the
monetary market include the investment sector, the insurance industry, and
financial brokers such as debt lenders. New York’s Wall Street is considered
the center of activity in the global commercial market.
Most major stock markets worldwide are heavily influenced by changes in
the New York Stock Exchange. Wall Street has experienced significant growth
over the last two decades, with banks and commercial organizations based in
Wall Street becoming dominant financial players in the United States and
globally (ILO, 2009).
References
Coates, J.C. & Scharfstein, D.S., (2009).EThe bailout is robbing the banks, The
New York Times. Web.
Davies, H., (2010).EThe financial crisis: who is to blame?ECambridge. UK:
Polity Press.
International Labour Organization (ILO) (2009).EImpact of the financial crisis
on finance sector workers.EGeneva: International Labour Organization.
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