Trending Now :

Re-Drafting the 2023 IPO Class The Interest-Free Installments Economy FICO Scoring Models: Explained Fed Holds Off on Rate Hike Rise of the Global Middle Class: Opportunities and Challenges Protect Yourself from Financial Scams Money Motivators Mortgage Rate Buydown What Does the Hot Inflation Report Mean for the Housing Market How Do You Build Wealth: Invest in Yourself Times Up for Programmed Money Biggest Financial Crimes: Countrywide Quantitative Tightening, Inflation, & More The Stock Market Is On Sale Investors Need to Netflix and Chill Credit Card Fixed-Interest Loans: Explained Are You Money Smart? Build Your Credit for Free Filing Your Taxes in 2022 Credit Cards that Offer 2% Cashback on All Purchases Navient Ordered to Cancel Student Loans U.S. Mortgage Interest Rates Soaring Two Big Banks Cut Overdraft Fees 2022 IPO DRAFT CLASS: Ranking the Top 10 Prospects Re-Drafting the 2021 IPO Draft All You Need to Know about Buy Now Pay Later companies Credit Card Sign-Up Bonus or SUB The Best Credit Card for the Middle-Class Make An All-cash Offer with No Cash Capitalism Always Ignores Politics All You Need to Know about the Financial crisis of 2007-2008 American Families Face Serious Rent Burden Savings Is An Expense You Can’t Build Generational Wealth If You Are Broke IT’S OFFICIAL: Robinhood is a Meme Stock All You Need to Know About Biden Mortgage Modifications & Payment Reductions Apple Card 2nd Year Anniversary: Should You Get It Now Wells Fargo to Pull Customers Personal Lines of Credit The Rise of Individual Investors The US Housing Market Is Booming. Is a Crash Ahead? Financial Literacy: How to Be Smart with Your Money Non-Fungible Token (NFT):EXPLAINED SKYROCKETED CEO PAY & LONG LINES AT FOOD BANKS Amazon Workers Want to Unionize Another Major City Piloted Universal Basic Income The New Bubble: SPACs SUBMIT YOUR PPP ROUND 2 APPLICATION BEFORE MARCH 31ST Robinhood-GameStop Hearing & Payment for Order Flow Guess Who’s Coming to Main Street Democratic Senators Say No to $15 Minimum Wage BEZOS OUT! President Biden Most Impressive Act Went Unnoticed: CFPB Biden $1.9 Trillion Stimulus Package 2021 IPO DRAFT CLASS: Ranking the Top 10 Prospects $25 Billion Emergency Rental Assistance NO, TESLA IS NOT WORTH MORE THAN TOYOTA, VOLKSWAGEN, HYUNDAI, GM, AND FORD PUT TOGETHER AMAZON TO HAND OUT ITS WORKERS $300 HOLIDAY BONUS Where Does the American Middle-class stand on Student Debt Relief? Joe Biden’s Economic Plan Explained 4 TYPES OF BAD CREDIT REPORTS AND HOW TO FIX THEM What Is the Proper Approach to Not Buy Too Much House? FISCAL STIMULUS PLANS STILL IN ACTION How to Pick Investments for Your 401(k) 10 Simple Ways to Manage Your Money Better All You Need to Know about Reverse Mortgage All You Need to Know about Wholesale Real Estate Credit card Teaser Rates AVERAGE CREDIT CARD INTEREST RATE SURGES TO 20.5 Percent Trump Signs 4 Executive Orders for Coronavirus Economic Relief The Worst American Economy in History WHY CREDIT CARDS MINIMUM PAYMENTS ARE SO LOW? 10 BIGGEST COMPANIES IN AMERICA AND WHO OWNS THEM White House Wants to End the Extra $600-A-Week Unemployment  10 Countries That Penalize Savers FEWER CREDIT CARD BALANCE-TRANSFER OFFERS ARE IN YOUR MAILBOX Private Payrolls and the Unemployment Rate SHOULD YOU BUY INTO THE HOUSING MARKET RESILIENCY? WILL WE GET A SECOND STIMULUS CHECK The Child Tax Credit and Earned Income Tax Credit THE RETURN OF BUSINESS CYCLES Should You Request a Participant Loan or an Early 401(k) Withdrawal? Homebuyers Should Not Worry about Strict Mortgage Borrowing Standards The Potential Unintended Consequences of Mortgage Forbearance All Business Owners Need to Know about the Paycheck Protection Program 10 MILLION UNEMPLOYMENT CLAIMS IN TWO WEEKS HOW WILL THE GLOBAL MIDDLE-CLASS RECOVER FROM A SECOND ECONOMIC RECESSION IN A DECADE? WILL U.S. CONSUMERS CONTINUE TO SPEND? HOW’S YOUR 401(k) PRESIDENT TRUMP SIGNS $2.2 TRILLION CORONAVIRUS STIMULUS BILL MIDDLE-CLASS NIGHTMARE: MORE THAN 3.3 AMERICAN FILED FOR UNEMPLOYMENT CLAIMS IN THE US LAST WEEK. LAWMAKERS AGREED ON $2 TRILLION CORONAVIRUS STIMULUS DEAL CORONAVIRUS STIMULUS PACKAGE FAILED AGAIN IN THE SENATE APRIL 15 (TAX DAY) DELAYED DEMOCRATS AND REPUBLICANS DIFFER ON HOW $2 TRILLION OF YOUR TAX MONEY SHOULD BE SPENT YOU CAN DELAY MORTGAGE PAYMENTS UP TO 1 YEAR, BUT SHOULD YOU? 110 Million American Consumers Could See Their Credit Scores Change The Middle-Class Needs to Support Elizabeth Warren’s Bankruptcy Plan The SECURE Act & Stretch IRA: 5 Key Retirement Changes 5 Best Blue-chip Dividend Stocks for 2020 9 Common Bankruptcy Myths 401(K) BLUNDERS TO AVOID Government Policies Built and Destroyed America’s Middle-Class & JCPenney Elijah E. Cummings, Esteemed Democrat Who Led the Impeachment Inquiry into Trump, Dies at 68 12 Candidates One-stage: Who Championed Middle-Class Policies the Most WeWork: From Roadshow to Bankruptcy Stand with the United Auto Workers Formal impeachment Inquiry into President Donald Trump America Is Still a Middle-Class Country SAUDI OIL ATTACKS: All YOU NEED TO KNOW THE FEDERAL RESERVE ABOLISHED BUSINESS CYCLES AUTO WORKERS GO ON STRIKE Saudi Attacks Send Oil Prices Spiraling REMEMBERING 9/11 What to Expect from the 116th Congress after Their August Recess Should You Accept the Pain of Trump’s Trade War? 45th G7 Summit-President Macron Leads Summit No More Upper-Class Tax Cuts Mr. President! APPLE CARD IS HERE-SHOULD YOU APPLY? THE GIG ECONOMY CREATES A PERMANENT UNDERCLASS 5 REASONS IT’S SO HARD FOR LOW-INCOME INDIVIDUALS TO MOVE UP TO THE MIDDLE CLASS ARE YOU PART OF THE MIDDLE CLASS? USE THIS CALCULATOR TO FIND OUT? WELLS FARGO IS A DANGER TO THE MIDDLE CLASS The Financialization of Everything Is Killing the Middle Class
The financial crisis of 2007-2008
American Middle Class

All You Need to Know about the Financial crisis of 2007-2008

The estimated reading time for this post is 508 seconds

The financial crisis of 2007-2008 has lasting economic impacts.  In the fall of 2008, the US gross domestic product (GDP) fell by 4.3 percent. Two well-researched academic papers proposed a different reason for the Great Recession.

The paper by Professor Baijnath Ramraika and Michael Benatar, titled “Real Estate Prices, Subprime Lending and Financial Crisis: Lessons from U.S. History,” focuses on economic policies that led to this crisis. These authors point out that the sub-prime lending frenzy experienced in the U.S. during 2006 was not something new as it had been going on since the 1930s. The housing finance market always played an essential role in the American economy as significant players such as mortgage companies Fannie Mae and Freddie Mac dominated this market.

After Eisenhower Administration introduced Federal National Mortgage Association (FANNIE MAE) in 1938 to provide incentives for banks to make more home loans and Government National Mortgage Association (GNMA, later called Ginnie Mae) in 1968 to purchase loans from banks so that they would have more funds available for new mortgages, this made it possible for homeowners to get an interest rate lower than the market rates. However, it created a moral hazard problem because of the implicit government guarantee behind these two institutions, which encouraged them to take high risks without worrying too much about penalties even when they are wrong. The authors pointed out that the financial crisis of 2007-2008 was not an accident but a result of bad economic policies over the years.

Signs for the financial crisis of 2007-2008

The term financial crisis of 2007-2008 refers to the collapse of large financial institutions, such as those due to the subprime mortgage crisis. Banks were faced with bad loans from the housing industry in many areas and reacted by tightening their lending practices. This reaction precipitated a credit crunch that ultimately led to a global banking panic which caused a drop in international trade and threw the world economy into a recession. The collapse of Lehman Brothers on September 15, 2008, was only one of many significant firms that have undergone bankruptcy reorganization or been acquired at fire-sale prices because of exposure to bad debts during the subprime mortgage crisis.

“Financial crisis of 2007-2008” is a countable noun phrase, so it is grammatically incorrect to write or say, “The financial crisis is.” To express the meaning of the sentence, one would have to rephrase it as either “There was a financial crisis in 2007-2008” or “2007-2008 saw a financial crisis.”

The financial crisis of 2007-2008 (also known as the global financial crisis and the 2008 financial crisis) is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. It resulted in several bank failures, the collapse of large financial institutions, significant government intervention, increased regulation on several levels, and diminished investor confidence worldwide. The loss of key organizations involved in securitizing debt-such as certain credit rating agencies-helped demand increased accountability for data quality in this industry. Governments took drastic policy measures, including nationalizing whole industries, taking over functions performed by private firms, expanding existing ones, or creating new regulatory bodies; these steps were initially highly unpopular but are increasingly recognized as necessary, though not sufficient in themselves resolve the crisis.

It can be argued that these events could not have occurred in the absence of four significant recent developments in financial markets:

(1) The growth of complex derivatives known as “credit default swaps” (CDS), which derive their value from underlying reference securities upon which they are written;

(2) The rise of securitization resulting in an unprecedented pooling and tranching of liabilities;

(3) The high leverage or gearing ratio between 2000 and 2007, where capital ratios had fallen throughout the developed world; and

(4) The interconnection of financial institutions through complex supply-chain “linkages.” Yet, many participants were unaware of the size of the risks being taken. The combination of the excess money supply from the U.S. Federal Reserve, lax regulation, and failure to present a united front among world leaders caused financial markets in general and CDS markets, in particular, to ignore possible future problems until after the crisis had begun.

The interconnection between major financial institutions was especially significant as nearly all large banks, investment banks, and insurance companies have been brought to the brink of insolvency or bankruptcy due to their inability to resolve a liquidity crisis by liquidating assets at an acceptable price. In other words, even though there had been ample warning signs of impending troubles (from falling housing prices and unfavorable derivatives valuations), most organizations continued with business as usual until they were forced to discontinue their activities.

Events leading to the crisis included a subdued outlook for inflation and a series of deflationary shocks associated with the bursting of the dot-com bubble, 9/11 attacks, as well as dramatic increases in oil prices. The precipitating factor was a high default rate in the United States subprime home mortgage sector-where loans were offered to borrowers without consideration of their ability to repay. This unanticipated development exposed other parts of the shadow banking system to potential losses and triggered a global credit crunch. Global stock markets also posted heavy losses during September and October 2008, while business worldwide slowed significantly. Major trade centers experienced severe import penetration due to declining demand from U.S. consumers who were buying less than before and saving more.

The U.S. Federal Reserve, European Central Bank & Other Central Banks Response

As an attempt to mitigate damage, there was a growing consensus among central bankers for monetary easing. The U.S. Federal Reserve, the European Central Bank, and other central banks provided liquidity to illiquid financial markets. On October 16, 2008, Henry Paulson, Former Secretary of the Treasury, announced significant regulatory changes in the United States to strengthen CDS regulation. Specifically, these included making CDS trading fully transparent and centralized by mandating that all trading be done via electronic platforms. It also required trading partners not to sign “dealer-to-dealer” confidentiality agreements. Furthermore, it demanded that standardized trading protocols are enacted with strict requirements for confirmation, guarantee, and settlement procedures-in addition to requiring standardized terms for CDS documentation (to facilitate comparisons based on standard accounting conventions).

The U.S. federal government was unsuccessful in its attempts to contain the crisis. A “lack of confidence” in U.S. institutions, specifically the Federal Reserve and Congress, along with complex problems within mortgage markets (and not merely low-interest rates) were also factors that led to the intensification of the crisis. At the same time, some commentators attributed the financial collapse to greed or market fundamentalism, and others argued that growing macroeconomic vulnerabilities caused it.

Nevertheless, many national governments took steps to alleviate their countries’ economic problems, including fiscal stimulus packages (designed to spur increased consumer spending), expansionary monetary policies (which reduce interest rates), loan guarantees for small businesses, and other types of rescue financing where necessary. There were also various policy responses to the crisis. Some countries introduced bank rescue packages aimed at buying bad assets, increase financial liquidity and stabilize markets. To fight unemployment, some governments even chose to borrow money (by issuing bonds) to fund infrastructure projects that create new jobs because they recognized that there was a time lag between investments and productivity gains which, if handled correctly, could swamp any adverse effects of fiscal stimulus or monetary easing. Other nations opted for tax cuts to stimulate consumption, while still others decided to implement austerity measures (to save their country’s most prized financial investments).

According to Mark Zandi, this crisis can be attributed mainly to “the bursting of a real estate bubble inflated over the course of more than a decade.” The collapse of the U.S. housing bubble and its effects on financial markets and the real economy were behind, but reinforced by:

Concern over burgeoning deficits and debt levels resulted in a series of federal bailouts for mortgage lenders Fannie Mae and Freddie Mac and Wall Street giants AIG and Citigroup-all of which were at risk due to their involvement with high-risk mortgages that essentially defaulted as house prices fell.

On the one hand, some government officials argued that such assistance would encourage lending; on the other hand, others contended that it was needed since banks had curtailed lending (due to an unwillingness to take on risky loans), leading to a credit crunch (which further worsened economic conditions).

The crisis threatened the existence of some financial institutions. Key components of the U.S. financial system, including commercial banks, investment banks, insurance companies, and mortgage companies, either went bankrupt or were effectively taken over by the federal government because they had all borrowed too much money to be able to pay it back when due-which cannot happen if they are operating within their means (i.e., “solvent”).

The bankruptcy of Lehman Brothers on September 15, 2008, precipitated a crisis (“financial meltdown”) which has come to be widely regarded as the worst financial crisis since the Great Depression; international stock markets crashed in response while world trade was considerably disrupted (causing multi-year lows for worldwide GDP growth).

In the United States of America, there has been a recent economic crisis starting from late 2007 until today (2016). This economic catastrophe is known as the financial crisis of 2007-2008. During the surprising short-term macroeconomic performance, this event seemed incredible at first, but the economy was not as strong as it appeared upon closer inspection. In his article, “Financial Crisis of 2007-2008,” Robert Shiller makes it clear that this crisis is merely a symptom of a much larger problem. The real issue lies in the very foundation our economic system operates: human nature and psychology. This crisis is a failure in humanity, not economics.

According to Shiller, there has been a great deal of research into what leads people to make economically irrational decisions from an outside point of view. From this vast body of work, researchers have developed some basic principles to help understand how humans react during times of stress or uncertainty. (Shiller) This understanding creates a framework for predicting future behavior when there is a high level of uncertainty. Utilizing this framework, Shiller believes it is easy to see why many people fall into economic traps created by themselves and others.

Continue Reading
Stock News / Jan 02, 2024

Re-Drafting the 2023 IPO Class

The estimated reading time for this post is 147 seconds The Initial Public Offering (IPO)...

Stock News / Dec 29, 2023

2024 IPO Draft Class

The estimated reading time for this post is 151 seconds 2024 IPO Draft Class: Ranking...

Stock News / Dec 22, 2023

Build Wealth with Boring Investments

The estimated reading time for this post is 314 seconds Due to their boredom, long-term,...