2007-2008 Financial Crisis

Topics: Subprime mortgage crisis, Bank, Collateralized debt obligation Pages: 4 (1317 words) Published: February 8, 2013
The Global Financial Crisis of 2007-2008

The Global Financial Crisis 2007-2008
Economists and scholars spend years dissecting financial markets and evaluating the causes of booms and busts. Throughout United States history there have been multiple economic booms that were underestimated and followed by recessions. In the situation of the 2007-2008 global financial crisis many culprits have been identified as causes, such as loose monetary policy, credit booms, deregulation, over complexity, and greed. Since the economic boom was solely dependent on weak policies and misconceptions, this leads me to believe prevention was possible with adequate regulatory policy, risk assessment and clarifications for commercial banks. Monetary Policy

The Federal Reserve uses monetary policy to control the supply of money in order to determine interest rates and manipulate currency values. Markets commonly favor lower interest rates because people are able to pay less for capital. When the capital costs decline, banks and other entities are able to build up leverage for financing activities. When banks become highly leveraged they begin to take on more credit and liquidity risks without providing addition collateral. This is sometimes in reckless proportions that drive institution into possible closure and the need for bailouts (Investopedia, 2012). At the turn of the century during the infamous “dot-com bubble”, the stock market was flooded with new investors trying to take part in the newest financial craze. These investments were overestimated and premature, and as the stock market crashed high interest rates nearly crippled the economy. The Federal Reserve reacted by lowering the interest rates in order to stabilize the economy and aid in its recovery. In response, consumers, bankers and other investors took advantage of the cheaper borrowing costs and flooded the economy with capital (businessinsider, 2012). Aside from the United States, many countries’ economies...
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