Identify and discuss the interrelationships among the key factors highlighted in the global financial crisis
“Inside Job” has identified two main themes that have been typically responsible for the financial crisis of 2008. Firstly, extensive deregulation since 1980s has been largely responsible. Secondly, the academia has played a pivotal role in legitimizing deregulation and has hence been indirectly, if not directly, responsible for the one of history’s biggest financial meltdowns.
As far as deregulation is concerned, it affected the global financial system in a very complex and intriguing way largely through derivatives. Derivatives, as the world was unfortunate to discover, were the brainchild of the top executives of Investment Banks to create a massive short-term bubble which implicitly had huge returns for these very same top executives. Since these top executives obviously wanted to go unnoticed, they became very stanch supporters of deregulation and hence, through lobbying and corruption, these top executives got regulation to be finally banned in the year 2000 by the Congress, despite strong opposition by visionaries such as Brooksley Born.
“Inside Job” discusses the use and threat of one application of these complex derivatives through analyzing the real estate and houses market. It is explained that through the new securitization chain, lenders of loans to home owners could sell the mortgages to investment banks. The investment banks, in turn, combined several such mortgages and other loans to create complex derivatives called Collateralized Debt Obligations (CDOs) which can be sold to investors worldwide. Hence, essentially, the loan payments of home owners went to investors worldwide. It is crucial to note that investment banks paid rating agencies to rate these CDOs very highly hence creating an image in the minds of the investors that CDOs were one of the best possible investments. This was potentially extremely dangerous because it...
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