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The Financial Crisis - Research Paper Example

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The Financial Crisis

Although greatly linked to the sub-prime mortgage crisis, the causes of the 2008 recession are complex and multi-varied. This essay discusses the role of government policy, the role of mortgage originators, securitization, and moral hazards. Additionally, it presents an explanation of how the following work as well as what role they played in the crisis: subprime mortgages, mortgage backed securities, credit derivative obligations, credit default swaps; the consequences on U.S. financial markets; and the U.S. government response. Finally, it presents the authors own perspective on the financial crisis. Analysis Perhaps the most overarching consideration in terms of the financial crisis is the role of mortgage originators, securitization, and moral hazards played. Referred to as subprime lending this process is highly complex. Throughout the late 90s and early 00s competition in the housing market greatly increased. As a means of keeping pace with the increasing competitive markets mortgage lenders increasingly increased their borrowing restrictions to individuals with less than stellar credit ratings. This process is intimately connected with government policy as in many situations it was the government that contributed through policy and pressure to loosen up the lending standards. Indeed, some researchers linked the beginning of the housing bubble to 2003 (Krugman 2009). Prior to this period Government Sponsored Enterprises (GSEs) were required to maintain conservative lending practices. As a means of enticing individuals to enter into subprime loans, lending agencies implemented high-pressure tactics, including loan incentives (Krugman 2009). This predatory lending constituted a great contributing factor to the crisis. Additionally, the rising costs of housing prices created an environment were people increasingly believed that their home purchases would continue to rise. The exact originators of this crisis are complex. One of the most frequently cited considerations is that government policies that sought to increase home ownership greatly contributed to the institutional environment that would allow for such practices to occur. Indeed, since as early as the Reagan administration the government has sought policy to increase home ownership (Wright 2010). However, it wasn’t until 1995 that the government became more actively involved in the process. In 1995, Government Sponsored Enterprises, including Fannie Mae and Freddie Mac, began receiving government incentives for purchasing mortgage-backed securities (Wright 2010). These mortgaged backed securities included loans to low-income borrowers. In 1996 this process was further enhanced as the Housing and Urban Development Department (HUD) set a goal for both Fannie Mae and Freddie Mac to purchase at least 42% of mortgage backed securities that contained households with incomes below the median for the specific area (Wright 2010). An important consideration is the notion of the Credit Default Swap. These swaps were largely implemented during the period preceding the economic meltdown. The process is highly complex, as it implements derivatives in the process, contributing to the overarching considerations regarding the difficulty in regulatory processes. Essentially what was occurring was that the institutions ...Show more


The Financial Crisis Introduction While the 20th century was a period of substantial economic growth for the United States, it was not without recessionary periods. In 1929 the Great Depression hitting placing millions of Americans out of works and sending the country into a recession that would be impactful for the following decade…
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The Financial Crisis essay example
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