The 2007-2008 Financial Crisis: Causes, Impacts and the Need for New Regulations
THE 2007-2008 FINANCIAL CRISIS:
CAUSES, IMPACTS AND THE NEED FOR NEW REGULATIONS
The initial cause of the financial turbulence is attributed to the U.S. sub-prime residential mortgage market. The sustained rise in asset prices, particularly house prices, on the back of excessively accommodative monetary policy and lax lending standards during 2002-2006, increased innovation in the new financial instruments, unusual low interest rates resulted in a large rise in mortgage credit to households; particularly low credit quality households, the greed of investors’ for ever higher returns coupled with very minimal down payments, along with the dependence on major global rating agencies, allowed complex investments products to be sold to an extremely wide range of investors. The repacking of credits with some other financial instruments, the rising complexity of the products, emerging “monoline’ guarantors in the marketplace – that are not being regulated, and the governments came into rescue, sometimes even difficult who’s the one to be blamed for the crisis. These would address the issue of transparency, conflict of interests among the market participants, regulatory and supervisory system, in particular their cooperation.
Development of the Crisis
In order to keep recession away, the Federal Reserve lowered the Federal funds rate 11 times from May 2000 (6.5%) to December 2001(1.75%), and this creating a flood of liquidity in the economy. Cheap money, created a favorable breeding ground for reckless risk taking. It found easy prey in restless financial institutions, and even more restless borrowers who had no income, no job and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new way of hope. There were more home loans, more home buyers, more appreciation in home prices. The Federal continued slashing interest rates, perhaps, by continued low inflation despite lower
CAUSES, IMPACTS AND THE NEED FOR NEW REGULATIONS
The initial cause of the financial turbulence is attributed to the U.S. sub-prime residential mortgage market. The sustained rise in asset prices, particularly house prices, on the back of excessively accommodative monetary policy and lax lending standards during 2002-2006, increased innovation in the new financial instruments, unusual low interest rates resulted in a large rise in mortgage credit to households; particularly low credit quality households, the greed of investors’ for ever higher returns coupled with very minimal down payments, along with the dependence on major global rating agencies, allowed complex investments products to be sold to an extremely wide range of investors. The repacking of credits with some other financial instruments, the rising complexity of the products, emerging “monoline’ guarantors in the marketplace – that are not being regulated, and the governments came into rescue, sometimes even difficult who’s the one to be blamed for the crisis. These would address the issue of transparency, conflict of interests among the market participants, regulatory and supervisory system, in particular their cooperation.
Development of the Crisis
In order to keep recession away, the Federal Reserve lowered the Federal funds rate 11 times from May 2000 (6.5%) to December 2001(1.75%), and this creating a flood of liquidity in the economy. Cheap money, created a favorable breeding ground for reckless risk taking. It found easy prey in restless financial institutions, and even more restless borrowers who had no income, no job and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new way of hope. There were more home loans, more home buyers, more appreciation in home prices. The Federal continued slashing interest rates, perhaps, by continued low inflation despite lower