Effect of Regulation/Deregulation - Essay Example

Effect of Regulation/Deregulation on the Recent Financial_Crisis Introduction There is a direct relationship between the government regulation/deregulation with the recent 2008 United States financial crisis. The paper delves on the effect of government regulation/deregulation on the 2008 financial crisis. The paper focuses on the benefits and disadvantages of the government regulation/deregulation on the 2008 financial crisis. Government Regulation/Deregulation and the Financial Crisis Mr.E. Glaeser’s research showed that the 1994 Interstate_Banking and Branching_Act allowed banks and other financial institutions enter into interstate banking transactions (Glaeser 265). Prior to the act, Mr. Glaeser reiterated the banks and other financial intermediaries were prevented from legally entering into any interstate banking agreements. The act significantly allowed the increase of interstate mortgage credit transactions. Likewise, the relaxing of mortgage credit requirements was lessened. With the lessening, more people were able to have their housing mortgage papers approved. As expected the quantity of mortgage credit loan application disapprovals had significantly dropped. As expected, the new regulation’s allowing more mortgage credit transactions led to the rise of housing prices. There was an easing of the mortgage loan requirements from 1998 until 2006. Further, the loosening of mortgage home application requirements encouraged the financially incapable residents to accomplish one of their basic needs, a family home. People who could not afford homes were able to easily received approved home mortgage loan contracts. When the time for home mortgage payments arrived, the majority of the cash-strapped home owners failed to pay their obligations. Consequently, the banks suffered from the non-collection of the monthly home mortgage receivables, forcing many banks to close shop (Russo 12). Furthermore, the financial crisis cropped up in 2007. During 2008, the people felt the effects of the financial crisis. The 2008 financial crisis started silently during 2007. The financial crisis officially roared its debilitating head during 2008. The unfavorable effects of the 2008 financial crisis continue to financially and economically roar until today. One of the effects is the rise in the housing prices (Sexton 617). Similarly, the United States housing mortgage crisis of 2008 can be economically explained. As of 2007, the total United States home loans reached $ 12 trillion. The banks had to absorb the ten percent financial crisis write down of the losses, $1.2 trillion. However, the entire United States banks were forced to absorb $ 0.6 trillion losses. The losses reduced the bank’s allowable cash cover, $1 trillion, by 60 percent. The bank’s absorption of the losses led to the bankruptcy of many banks (Cline 282). The basic needs of a human being include a home. A home protects the person’s family from the harsh environmental elements. The home protects the family from the harmful side effects of the sun’s debilitating ultraviolet rays. The home protects the family from the cold rain and snow situations (Astyk 63). Moreover, the government’s changing its regulations significantly contributes to the cropping up or prevention of any future financial crisis. The governments introduction of more relax mortgage and other related requirements are meant to stimulate the economy. Stimulation includes increasing the speed of the economic wheel. With a faster economic wheel, more transactions are completed. This includes the rise the mortgage loans transactions. The mortgage transactions often include the acquisition of homes or buildings (Jarsulic 173). Additionally, the introduction of government regulation that relaxed mortgage requirements and government’s mortgage lending interest rates led to the 2008 financial crisis. The relaxation allowed banks to increase their high risk investments. Consequently, several banks generated losses from their risks investments (Hirsch 69). After the more relaxed mortgage loan provisions were instituted, the financial crisis of 2008 burst. The housing bubble burst led to homeowners defaulting on their monthly mortgage payments. The defaults triggered bank bankruptcies. After the bubble burst, the government increased the requirements for housing loans. The increased legal restrictions were introduced in order to prevent a further escalation of the effects of the financial crisis. After stricter mortgage loan requirements were instituted were implemented to cure the housing bubble’s effects, it was already too late. Many houses were foreclosed. The people could no longer afford to pay their maturing housing loan amounts (Hirsch 69). To reiterate, the government’s instituting less restrictions on the housing mortgage loan transactions was classified as regulatory stimulus. The government wanted to increase or stimulate the slow United States economy. The government did not expect that the new regulation’s relaxing the housing loan mortgage requirements would lead to the financial crisis of 2008. The government’s shortsightedness focused only the initial effect of the relaxed regulations. The shortsighted effects include an increase in the number of people applying for housing loans. Next, the shortsighted government regulation encouraged banks to approve more housing loan mortgage applications (Glaeser 144). Further, the government came to the rescue of the ailing 2008 United States financial crisis economy. FED Chairperson M. B. Bernanke forgave and forgot many mortgage loans during 2008. Consequently, many people got the idea that their inability to pay their home mortgage loans on time can be resolved by applying for debt forgiveness (Roberts 124). Furthermore, the 2008 financial crisis had several unfavorable effects. First, fund investments many assets dropped by as much as $ 50 trillion value within a one year period alone. The drop included amounts invested in companies listed in the New York and other stock market exchanges. The drop included amounts funneled into the bonds or loan financial market segments. The drop included amounts placed in housing and other mortgage properties. As expected, the drop included cash and cash equivalents placed in other assets. With the drop in the value of the above assets, the owners of the properties had to present a lower realistic value of their properties as collateral protection in their new or future mortgage loan or other loan type applications (Aisen 1). Moreover, the 2008 financial crisis resulted to the affected banks’ difficulty in approving new mortgage and other loan credit applications. The 2008 crisis led to the bankruptcy of Lehman_Brothers bank during September of 2008. The 2008 United States financial crisis affected the financial status of affected banks and other financial intermediaries in other countries, including many European Union nations. Consequently, the financial reports of many companies located in many countries. The global effect of the United States financial crisis of 2008 metamorphosed to the losses in many countries. The estimated global financial loss amounts were estimated to reach US $ 4 trillion (Aisen 1). Starting in 2009, the prior stricter mortgage loan requirements were reinstated. With the stricter loan requirements, the number of mortgage loan approvals significantly dropped. With the drop in the new mortgage and other loan approvals, the banks’ interest revenues from bank loans dropped. With the drop in revenues, many banks were forced into quagmire called bankruptcy. Most bankrupt companies were forced to close_shop; withdraw from the loan business market segment. The financial crisis of 2008 had a profound unfavorable financial crisis effect on the OECD, including European Union countries, financial intermediaries or banks (Aisen 2). Specifically, the United States 2008 financial crisis negatively affected the economies of more than 79 nations. Since the economies of many nations are intertwined, a negative effect in one country will have a rippling effect on the economies of countries having direct or indirect trade relations with the originally affected United States nation. To explain, the business entities and clients within our United States buy products from different countries. The local recipients of the imported items are either used by the recipients or sold to other parties. If the United States companies file for bankruptcy, the companies located in other countries may not easily seek payment of their sold products. Consequently, the sellers in the other countries are forced into bankruptcy since they can no longer collect the amounts from the closed (bankrupt) United States customers. This is the very reason why the 2008 United States financial crisis led a corresponding global financial meltdown (Aisen 3). Further, the 2008 United States financial crisis had some indications. First, the banks located within our United States borders and banks within the many European Union countries needed an emergency investment to prevent further economic deterioration an possibly bankruptcy. The emergency investments were projected to reach as high as $500 billion. Next, the world’s equity market segments suffered from 50 percent decline in their financial asset accounts. The United States Federal Reserve gave a more conservative prediction that the average company’s net worth dropped by an estimated 23 percent during the 2007 to 2008 accounting period. Third, the 2008 United States financial crisis significantly hit the rich pre-retried baby_boomers. The same financial crisis had the worst effect on the individuals who had recently entered in the strange less mobile retirement world (Kirton et al. 100). Furthermore, new government regulation focused on resolving the 2008 financial crisis. The United States government intervention helped reduce the number of casualties of the 2008 United States financial crisis. It is normal and best for the governments to aid the financially distressed companies and individuals affected by the 2008 United States financial crisis. Mr. W. White affirmed that government granted rehabilitation loans to companies that were hit by the same crisis. The government help mostly came in terms of loans. The loans were used to help the bankruptcy-laden companies continue to open their business doors with the hope that the economy will improve within the foreseeable future (Russo 31). In our local United States economy, the government loans focused on rescuing companies that had global economic effects. The government rescue loans were used to improve the economic conditions of many market segments located in the global environment. The government loans were given to AIG, Bank of_America and Citibank. Other prominent United States government loan beneficiaries included Goldman_Sachs & Morgan_Stanley and Freddie_Mac. During 2009 alone, the United States government funneled an estimated $ 790 billion stimulus_measures (Russo 31). During the same year, government regulations included implementing financial easing measures. Our United States government imposed the timely 2009 American_Recovery & Reinvestment_Act to revive the United States economic and bring back to financial life many affected local entities. Another government regulation is the reduction of bank loan interest rates to zero. The low bank loan interest rates allowed companies to use more money to pump up their ailing businesses. Likewise, the government regulation included tax_cuts. The cuts allowed financially beleaguered business entities more funds to sell more products and services to generate more revenues & net profits (Russo 32). Conclusion Summarizing, there is a direct association between the government regulation/deregulation with the recent 2008 United States financial crisis. The relaxation of government regulations/deregulations led to the unexpected 2008 financial crisis. The implementation of rescue-based government regulation/deregulation benefited and advantageously rescued many financially distressed companies. Evidently, the government regulation/deregulation triggered favorable and unfavorable effects on the 2008 financial crisis. Works Cited: Aisen, Ari. Bank Credit During the 2008 Financial Crisis. New York: IMF Press, 2010. Print. Astyk, Sharon. Depletion and Abundance. Gabriola: New Society Press, 2013. Print. Cline, William. Financial Globalization. Washington: Peterson Institute, 2010. Print. Glaeser, Edward. Housing and the Financial Crisis. Chicago: University of Chicago Press, 2013. Print. Hirsch, Paul. Markets on Trial. New York: Emerald Press, 2010. Print. Jarsulic, Marc. Anatomy of a Financial Crisis. New York: Palgrave Macmillan, 2012. Print. Kirton et al., Global Financial Crisis . London: Ashgate Press, 2011. Print. Roberts, Lawrence. The Geat Housing Bubble. Monterey: Monterey Cypress Press, 2008. Print. Russo, Thomas. The 2008 Financial Crisis. New York: T Russo, 2010. Print. Sexton, Robert. Exploring Economics. New York: Cengage Learning, 2015. Print. Read More