The Financial Crisis 2007-2008

The financial crisis 2007- 2008
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The financial crisis 2007- 2008
Introduction
Financial crises can be dated back to many centuries, and the history has preserved the substantial literature on these old phenomena. However, despite the many evidence of financial crises in the history, the financial crisis of 2007- 2008 was a blow to the world to be regarded the worst crisis ever (Erkens, Hung, & Matos, 2012). In effect, the global financial system was threatened to the level of collapsing in totality as stock prices declined sharply. At the same time, the loans for corporate borrowers were smaller and expensive as banks declined in offering long term and short-term credit facilities as the consumer lending declined to lead to lower investment. General the financial crisis 2007- 2008 forth came with forms destruction in the whole system.
The reasons that led to the crisis
There were various reasons that were the basis for financial crisis 2007- 2008. However, the major reason was associated with the deregulation of the financial industry. The authorities permitted to control the industry failed to do giving the banks an opportunity to engage in subprime fund trading with derivatives. Due to this opportunity that the banks had, they had to demand more mortgages to continue selling the derivatives at the high profits. As a result, interest-only loans were created that prompted more subprime borrowers to afford. Due to the high borrowing and demand for mortgages, there was a surplus supply of houses than the demand leading to the fall in the housing prices (Iannuzzi, & Berardi, 2010).

The owners of homes could no longer sell their homes even though they could not afford payments just because the prices were very low. However, there came a time when the value of the derivatives went down leading to banks not to lend one another creating the financial crisis.
Political factors were as well one of the reasons behind the experienced financial crisis of 2007- 2008 due to the widened inequality in the economic status of the United States (Whitehead, & Williams, 2011). The inequality had been facilitated by the deficiencies in the structure of the educational systems thus the accessibility for various societal segments was unequal. The politicians took the advantage of the housing ownership that was increasing by then, and they made various amendments in the regulating of banks so that they could extend the borrowing and lending of mortgages by the banks (Rattaggi, 2012). Again the demand for housing that had elevated pushed up the house prices something that bubbled the housing prices.
The US government as well also contributed to the financial crisis 0f 2007- 2008 due to the growth of securitization when the government wanted to increase its financial ownership. As a result, the government came up with monetary policy that reduced the standards of lending by the banks. The monetary policies included lowering the short-term interest rates on the households and business loans. Also, the supervision over the bank capital was weak leading to the commercial banks to expand their mortgage lending thus increased housing that ultimately led to the crises.
The beginning of the collapse
The beginning of the collapse was marked by the massive babbling of the housing prices evidence by the run-ups in the price of houses before the beginning of the crisis. It first began with those dealing with mortgages giving the loans to the borrowers even with no clear or favorable terms of lending and borrowing (Adebambo, Brockman, & Yan, 2015). In fact most of these borrowers we just family members that do not qualify for business loans as they could not pay such loans. The subprime loans had interest rates that were friendlier to the borrowers in the early years but increased in the year later. The penalties accorded to these loans in case of default have prepaid the terms that were difficult to be understood by those taking the loans for the first time. To them owning a home was more important than those penalties irrespective of their ability to repay the loans. The mortgage holders could not hold the mortgages for long; they often sold them to the banks and the government just to receive the monthly check from the mortgage holders. The government could later sell the mortgages to the investor. The insurance industry was not left behind in the game by trading in the loan default swaps. The insurance policies became useless, and the insurers assumed any default by the mortgage holders and the losses after that. The insurance long longer continues working to regulate the credit default and became speculation. Everyone benefitted with the rising of the housing prices leading to mortgage holders with less income to borrow more.
The mechanism of the failure
The mechanism of the failure that led to the financial crisis 2007- 2008 involved the shortage of the liquidity. The shock of liquidity that would have led to the failure was prompted by the high demand of the liquidity by the borrowers and the bank depositors (Antoniades, 2016). Therefore the increased habit by the many borrowers to borrow money from the financial institution can be the most appropriate way to relate to the failure of these institutions. Initially, before the crisis and even after the crisis, banks gave loans and have been giving loans, but such a scenario has never happened before. However, after the so many loopholes that gave an opportunity for borrowing, it move seemed to have excited many potential borrowers. Therefore, the massive borrowing from the banks was the main mechanism that was used to bring the financial institutions to their knees.
How the crisis hits the US economy and the rest of the word
The financial crisis 2007- 2008 was a major blow to the US economy and the world at large. The crisis is believed to have cost the US an estimation of 40% to 90% of the output of the year which is equivalent to $6 to $14 trillion. The US also lost its wealth and human capital as well as the present value of the future wealth income of close to $30 trillion. Then it means it will take longer for the US economy to come to the position it was before the crisis occurred. Both the US nd the rest of the world were equally hit by the occurrence of the crisis. The crisis led to the global lowering of the household credit demand since as the house ownership increased leading to lowering of the housing prices. With the low housing prices, household who demanded credit could not make any profits. Thus they could no longer demand for credits. The credit supply also lowered due to the increased loses that banks had made due to the default in the mortgage payment. Banks incurred a lot of losses as the mortgage holders could not raise funds to repay their loans leading to the reduced credit supply. The world corporate investments reduced because those who invested in the real sector could not do so as the prices of the house went down due to the high borrowing of the credit by household. The unemployment rate increased in the US and across the world economies as the economy could not produce because of the crisis. The banking sector is one of the potential employers and after the crisis, the sector remained unstable for any form of employment and much-lost employment. Not only the banking sector that became incapacitated to employ but also the real sector. Generally, the economy of the world became unbearable after the financial crisis.
The financial rescue plans adopted in the United States.
At the beginning of August, the governments of many countries including that of the US undertook various rescue plans to recover the condition to normal (Dontis-Charitos, Jory, Ngo, & Nowman, 2013). Some of the rescue plans undertook by the US government include the expanding of the original role that the central bank used to have as being the lender of the last resort when it comes to providing liquidity of short-term (Cecchetti, 2008). The move was to ensure that the lowest and the highest level of the interest rate lays with the central bank (Morelli, Pittaluga, & Seghezza, 2015). The other plan by the government was to the provision of the liquidity directly to the borrowers as well as the investors in key credit markets. The plan insured both the borrowers and the investors remained relevant in the market and could make the profit required (Manconi, Massa, & Yasuda, 2012). The other plan involved the expansion of the open market operations to allow credits market to function at the same time reducing the pressure on the interest rates of long-term loans (Lo, 2009. Lastly, the government put measures to address the counterparty risks to reduce any risks the credit market could encounter.
The beginning of the recovery
The financial crisis ran up to June 2009 at the same time when the financial sector started recovering from the crisis. The beginning of the recovery was marked with the US markets becoming stable, and that was the time President Barrack Obama declared that the money lost in the banks has finally been recovered. The stock markets around the world as well started to regain from the initial position during the crisis (Moffatt, & Campbell, 2011). The banks could now lend at the regulated interest rate by the central banks; the insurance company started carrying out their function. The real sector investors also went back to their business at the time the crisis faded away. The financial stocks that had led the markets to their knees started to bring them back to their initial position (Kassim, 2012). Many people working in the banking sector, housing and other sectors in the economy found their ways back to employment reducing the rate of unemployment. However, even with the recovery, the banking and financial markets have not undergone any serious change to evade the worry from stakeholders.
Your opinion about the crisis
In my opinion, the most of the cause of the financial crisis 2007 2008 were avoidable, and someone in authority slept on work. Suppose serious measures were put in place to ensure that all the financial regulations are implemented by the relevant financial institutions then what happened could not have happened. In fact, events leading to the crisis most of them happened because of the negligence of the stake holders. It is a shame that even with the many economists, such a crisis would get the world by surprise and even amidst the crisis, less was done to get the world back on its feet. Though, the world finally recovered back; it took longer for this recovery to be realized. Two years is such a long period.

References
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Antoniades, A. (2016). Liquidity Risk and the Credit Crunch of 2007–2008: Evidence from Micro-Level Data on Mortgage Loan Applications. Journal Of Financial & Quantitative Analysis, 51(6), 1795-1822. doi:10.1017/S0022109016000740
Cecchetti, S. G. (2008). Crisis and responses: the Federal Reserve and the financial crisis of 2007-2008 (No. w14134). National Bureau of Economic Research.Dontis-Charitos, P., Jory, S. R., Ngo, T. N., & Nowman, K. B. (2013). A multi-country analysis of the 2007–2009 financial crisis: empirical results from discrete and continuous time models. Applied Financial Economics, 23(11), 929-950.
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Manconi, A., Massa, M., & Yasuda, A. (2012). The role of institutional investors in propagating the crisis of 2007–2008. Journal of Financial Economics, 104(3), 491-518.
Moffatt, P., & Campbell, A. (2011). Emerging changes to the United Kingdom’s financial-sector safety net following the banking crisis of 2007-2008. Banking and Financial Services Policy Report, 30(7), 10.Morelli, P., Pittaluga, G., & Seghezza, E. (2015). The role of the Federal Reserve as an international lender of last resort during the 2007-2008 financial crisis. International Economics & Economic Policy, 12(1), 93-106. doi:10.1007/s10368-014-0290-y
Rattaggi, M. L. (2012). Financial Risk Models in the Light of the Banking Crisis 2007–2008. Journal of Critical Realism, 11(4), 462-486.
Whitehead, C., & Williams, P. (2011). Causes and consequences? Exploring the shape and direction of the housing system in the UK post the financial crisis. Housing Studies, 26(7-8), 1157-1169.