Revision #1

Introduction

The inside job was a 2010 documentary film by Charles Ferguson that clearly demonstrated the 2008 crisis. On the other hand, it comprehensively narrated and revealed its causes, key players as well as its consequences. It goes ahead to explain the systemic corruption by key financial players in the finance industry and effects of such corruption in United States of America. Furthermore it reveals that changes in financial as well as other policies and banking practices contributed to the growth of the crisis casing most Americans to lose their savings, their jobs and hard earned homes.

Answer One: The Unintended Consequences of Financial Innovation

It has been ascertained that changes in the policy framework governing the financial industry and the banking practices heavily contributed to the financial crisis. The development of complex trade policies such as the derivatives market allowed for large increases in risk taking that circumvented older regulations that were intended to control systemic risk. These derivatives increased instability since their adoption is resulted in large losses because of the use of borrowing. Investors suffered the risk of losing large amounts of investments or savings if the price of the underlying moved against them significantly. Secondly the collapse of the house boom in 2004 caused by the application of collateralized debt obligations and the global economic meltdown resulted in unimaginable imbalance of the ratio of money borrowed by investment banks and its own assets. This caused the value of securities related to real estate to crash down and damage financial institutions internationally as the market for collateralized debt obligations collapsed.. It is these financial innovations such as securitization that prioritize short-term over long-term value creation that triggered the 2008 financial crisis.

Answer two: The unintended consequences of regulation

The deliberate shift from a system of regulation to deregulation of the financial industry encouraged unusual business practices which had adverse effects. Great pressure was exerted by the financial industry on the government to thwart efforts of regulating the industry. The government and central bank which have the responsibility of upholding financial stability through proper regulation of the financial markets and its institutions were split which led to insufficient responsibility. This exposed the industry to greater and more complicated risks since the supervisory and regulatory structure failed to keep up with the evolution of the financial markets.

Answer three: Explain how the financial crisis of 2008 occurred—who is to blame?

The global financial crisis began in the early 2000s and finally climaxed in 2008 and since then its devastating impact still lingers, worldwide. It began when; the financial sector which had consolidated into a few giant firms introduced the use of high risk derivatives. It is during this period that the subprime mortgage market was unraveled in U.S.A which resulted in a sharp increase of default rates of such mortgages which ultimately increased house prices. Investment banks bundled mortgages with other loans and debts into collateralized debt obligations most which were backed by subprime mortgages, which they sold to investors leading to predatory lending. Moreover, many home owners were given loans they could never repay. During this boom, the ratio of money borrowed by an investment bank versus its assets reached an exceptional point. In 2007 the market for CDOs (collateralized debt obligations) collapsed and investment banks were left big loans, CDOs and real estate they could not unload. Based on the foregoing, it’s clear the rise of the financial crisis was due to the concerted efforts of many players. These were key political players, financial institutions, the governments, financial regulators, academicians and professors who served as consultants and financial advisers among others

Summary and Conclusions

Despite efforts to restore stability and equilibrium to the financial sector in the U.S the underlying system has not changed. Furthermore the top key players were not dealt with accordingly rather they were set free to enjoy their billions of money received from the global economic meltdown.

  References

Gerald P. Dwye. (2011)Financial Innovation and the Financial Crisis of 2007-2008. Federal Reserve Bank of Atlanta. University of Carlos III, Madrid and CAMA

Demyanyk, Yulia, and Otto Van Hemert. 2011. Understanding the Subprime Mortgage crisis. Review of Financial Studies24 (6), 1848-1880

Turner, A. 2009. “The financial crisis and the future of regulation”, the

Economist’s Inaugural City Lecture, Financial Services Authority website,

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