Analyzing The Financial Crisis Of 2007 – Could It Have Been Avoided?
The 2007-2008 financial crisis is the worst economic disaster in human history after the Great Depression 1929. It was largely precipitated by the massive boom in subprime mortgages lending that created the largest mortgages loans. Subprime mortgages loans are those loans given to human buyers who are unlikely to face difficulties in giving loans back. According to many economists, the rapid expansion of the credits followed by a severe credit tightening frequently provides the early sign of the financial crisis that in the case 2007-2008 crisis however missed by the major renowned economists and policymakers.
From the 1970s onwards, US and UK banks have started to expand their business model via the selling of their own credit risks. At the same time, various financial products developed and emerged ensuring a speculative income for trades and methods to spreading the risks connected with the financial trades. In particularly the 2007-2008 crisis, many insurers face difficulties including America Giant, AIG and other institutions due to credit defaults(Thakor, 2015). The purpose of the article is in two folds- first analyzing the financial crisis and second providing a convenient tool that assists in negotiating the answer to how the financial crisis could be avoided.
The Disastrous effect of the 2009 global financial crisis arises due to massive loans, false acquisition, capital infusion, tainted asset purchase, instant conversion of investment banks to commercial banks, TARP funds and receivership.
What causes the Financial crisis? This may have multiple causes which may occur if an organization overvalued the assets can be exaggerated with the irrational behaviour of the investor. For instance, a lower sell-off can be resulted in lower assets prices, encouraging the investor to dump the assets and making huge savings withdrawals impact banks images.
A financial crisis may arise due to failure of the bank system, uncontrolled human behaviour, regulatory absence or large risked incentives etc. If these causes are not analyzed as soon as possible, it would cause an economy to go into the great depression. Even when measures are taken to avert the crisis, this can still deepen the cause.
Major Financial Crisis From Great Depression to Great Recession
The financial crisis is not common in human history. It may happen as long as the currency is discovered. Some of the well known financial crises recorded in history with the helpare-
The Great Depression 1932-
In September, almost 6,50000 were unemployed wiping out thousands of investors. Nearly $30 billion Us dollars were lost in a single day. It was the longest and most severe financial crisis experienced to date. Although it has originated in the United States, the great depression caused a drastic decline in output, unemployment, acute deflation in the countries. The fundamental aspect of the great depression in the United States was a reduction in spending, leading decline in manufacturing noticed an unintended rise in inventory. By 1939, 15 million Americans were unemployed, almost 20000 companies went bankrupt because of which the majority of American banks get failed.
Depression In Europe–
|September 1928||650000 people were unemployed|
|September 1929||1320000 were unemployed|
|September 1930||3000000 were unemployed|
|September 1931||4,350000 were unemployed|
|September 1932||5102000 unemployed|
|September 1933||6100000 were unemployed|
Early in 1928, United States has maintained a significant account surplus with Germany whilst Germany facing an Account deficit. Borrowing in the German private and public sector occurred in the foreign currencies through dollar-denominated bonds and credit from the United States. In this regard, monetary contraction in the united states culminated in the depression in Germany. According to, The Reichsbank foreign reserve of gold and foreign exchanged declined sharply
The Suez Crisis-
In July 1956, the whole world faces another global challenge comes in the form of the Suez Crisis. Suez crisis or the international crisis in the middle east precipitated in 1956 provoked by Americans and Britishers not to finance Egypt’s construction of Aswan high dam in response to the growing ties of the Soviet Union and Czechoslovak. This nationwide canal is a waterway that controlled two-third of oil supporting Europe. It leads to France current account deterioration by $1 US billion in 1956 from US $ 409 million surpluses to US $ 700 million deficit(Wustle, 2018.).
The International Debt Crisis–
The international debt crisis began in the year 1982 when Mexico could not repay the loan taken from the 20 countries, Later Poland informed its debates it was unable to repay the loan also pushed some other countries including Hungarian to push for rescheduling the terms of repayment. At the same moment, the money contraction in the US leads to the sustained appreciation of the US dollar. In the year 1970, developing countries were freely borrowing money from the creditors at very lower interest. The majority of the commercial banks believed money lending to developing countries will be a highly profitable activity. However, the outcomes that appeared were not in favour as such Latin America Argentina, Brazil, Chile, Ecuador, Peru and Uruguay were encountering debt-servicing problems. There were multiple debt problems arouse within the market where each one originated singly impacting differentially(Rich,.2020). The systematic crisis was gradually subsidized by 1983 however the debt services remained difficult.
The East Asian Crisis-
In 1997, a major crisis engulfed the whole east Asian economies which were witnessing a great development moment at that time. The South-East Asian currency collapsed began in Thailand. According to investors and, creditors believed the crisis started from Thailand reflected high business investment as it was backed up by the high government surplus and high saving rates. This happened because the Baht( currency of Thailand) could not be sustained against Dollar. As a result, many investors of Korea and Indonesia got worried and foreign investors started selling the baht. Sooner currency could not be sustained and it eventually gets collapsed. Later 1977 economic crisis of Indonesia brough to the end of 30 years of uninterrupted economic growth and was among the worst country highly influenced by the East Asian Crisis.
The Russian Crisis–
The underlying Russian crisis of 1988 emerged due to the collapse of Russian stock, bond, markets as a result of a default on domestic debt and fear of a ruble devaluation. The whole Russian economy contracts by 5.3%. In fact, since the formation of the Russian federation in 1991, GDP per capita attain the lowest position( Srinivas,2015).
In the mid-1990, Russia was disintegrated from the Post Soviet period into a market economy. There was massive social dislocation, living standard fall and inflation exceed by 300 per cent. It has been opined by, the source of the inflation attributed to not lack of fiscal discipline.
The government tried to control the inflation via keeping the exchanging rate ruble vis a via with USA dollar within the preannounced manner.
On August 17th, 1998, the government has made a set of emergencies to prevent further escalation crisis-
A significant devaluation of the ruble widening by 5.27-7.13 to 6.00-9.50 ruble to the US Dollar. Further in September 1998, The Russian Central bank decided to remove the currency corridor thus making the ruble a free-flowing currency(Financial express, 2020). Get to know more about international financial crisis fromteam of SourceEssay.
The Great Recession-
Lasting from December 2007 to June 2009, the great recession was the longest ever after world war II. Real GDP fell to 4.3 per cent from its fourth-quarter 2007. The unemployment rate which was 5 per cent in December rose to 9.5% in June in 2007 which further escalated to 10% in October 2009. The crisis leads to increased home mortgage foreclosure worldwide causing the loss of millions of deaths. However, it can be considered as the longest financial crisis after the great depression in the 1930s(History.com. 2020).
International Monetary fund or IMF described a global recession as a sharp decline in the GDP per capital that is supported by many economic factors for instance industrial production, oil, trade, consumption and unemployment resided for at least two consecutive years. To know more about IMF, takefrom SourceEssay anytime
The first prominent problem arose in 2007 when Freddie Mac announced, it would no longer be in a state to purchase high-risk home mortgages and a new century Financial corporation, leading lenders to the risk borrowers filed bankruptcy. Early signs were that ABX indexes tracking credits risks reflected higher defaults than expected. At the same moment, the large scale of withdraw from the short term funds in the shadow of the banking system declined drastically throughout the course. The government tried to control the inflation via keeping the exchanging rate ruble vis a via with USA dollar within the preannounced manner.
On August 17th, 1998, the government has made a set of emergencies to prevent further escalation of crisis-
A significant devaluation of the ruble widening by 5.27-7.13 to 6.00-9.50 ruble to the US Dollar. Further in September 1998, The Russian Central bank decided to remove the currency corridor thus making the ruble a free-flowing currency.
2007 Financial Crisis Events-
In 2006, the subprime Mortgage signalled the Great Recession
February 2007, The early shockwaves Freddie Mac(a home mortgage company) announced, it would no longer purchase risks mortgages and risk-related mortgages
August 2007, France Larges Bank Paribas halted the redemption of one of its three funds. Bank said It had not valued collateralized debt obligation instruments
September 2007- United Kingdom chancellor and Exchequer authorized the Bank of England support liquidity for Northern Rock. This credit crunches hot drastically and after the two failed the financial system still facing weakness. The FOMC voted to reduce it’s targeted mentioned in US reserve policy by 50 points
October 2007, Federal Reserve Governor Randell Kroszner observed collateralized obligation debt were enough complex making it difficult for the investor to determine the value. Similar existing home sales fell to 1.2% to a rate of 4.97 million. Housing inventor uplifted to 1.9% to 4.45 million.
November 2007- Henry Paulson, treasury secretary convinced three major banks, JP Morgan, chase and bank of America to fund millions of capital. Blackrock managed the superfund for buying portfolio, hedge funds and liquidity assuring mortgage-backed securities lost values earlier
December 2007, Just lowering the federal funds is not enough to save commercial banks, banks were still offended to lend capital to each other. Term Auction Facility was created to keep the liquidity supplying short term credits to the banks along with subprime mortgage
In the same month, the foreclosure rate got doubled which was 97% higher than in December 2006. The centre of responsible lending forecasted the foreclosure rate would increase by 1-2 million because 450000subprime mortgage reset each quarter. Home prices fell to 6.8% to $20800
Financial Crisis 2008 Timeline-
January 2008, the US federal reserve drops short terms interest by 3% indicating the forth time opt of Fed Feb 2008, President George Bush signed the Economic Stimulus Act law 2008
March 2008. After losing millions of capital and billion of Subprime mortgage investments, and 85 years old Brokerage firm Bear Sterns get collapsed and is purchased by JPMorgan Chase.
July 2008- IndyMac specialises in the Sub Prime Mortgage including countryside financial and its assets are seized by the US government.
September 2008- The US Treasury took over the management of the Freddie Mac and Federal National Mortgage Association. At the same moment Lehman Brothers a vulnerable brokerage firm announced bankruptcy one of the largest cases of Bankruptcy in the History of the US involving $619 million in debts (Financial express, 2020).
October 2008- The Trouble Assets Relief program was signed by president bush. The Dow suffers its largest weekly loss of 1874 points.
In November 2008, The US government announced the Bail plan for the city group in the response to curb the sufficient loss from the mortgage(Boyle and Amadeo, 2020).
December 2008- The federal reserve reduces the short term interest rate by 0% attempting to boost loans for the real estate sales and capital firms.
June 2009- The NEBR said, the great recession is finally over. However, its impact is still feel by the homes borrowers Get to know more about financial crisis fromteam of SourceEssay.
Can Financial Crisis 2008-2009 be Avoided?
There are two things that have been explored that might help in preventing this financial crisis.
The first one would be the regulation of mortgage brokers who are responsible for the principal cause of bad loans, hedge funds. The second problem that has been experienced was the credibility problem(Boyleand Amadeo, 2021).
The financial crisis also led by financial innovation outstripped the human intellect. The potential impact of the MBS could not understand by the one who created them. It might be also prevented with the creation of the new financial products modulate the financial stability. Temporary reducing the impact of the financial crisis could be sustained by the imposition of dividend restriction providing capital support by the capital diluting the effect of shareholders.
In this article, we have tried to summarize the historicalevents resulting from the failure of the banking system, bad loans, lack of discipline, unawareness of rules and regulation and inability to produce new financial products. It was found in this article the great recession was largely precipitated by the massive boom in subprime mortgages lending that created the largest mortgages loans which can be prevented if authorities regulate mortgage brokers who are responsible for the principal cause of bad loans, hedge funds and keeping an eye on the credibility problem.
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