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The regulatory intervention that took place in the US post 2008 crisis - Assignment Example

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Table of Contents Abstract 2 Introduction 3 Causes of the 2008 Crisis 4 Dodd – Frank Act 5 Advance Warning System 6 Too Big to Fail Bailout 7 Dichotomy: Big Brother versus Invisible Hand 8 International Perspective: G20 10 Japan 10 Germany 11 Recommendations and Lessons Learned 12 Conclusion 13 References 14 Abstract Consequences of the 2008 crisis were enormous…
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The regulatory intervention that took place in the US post 2008 crisis
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Download file to see previous pages There is a dichotomy between investor protection on one hand, and the need to have a government that does not interfere too much with the economy. The President Obama ended the era of investor protection enacted by President Roosevelt. As a result, uncertainty in the markets is created. Moreover, international companies bear the brunt of their presence in the United States. However, this act focuses more on systemic risk than its equivalents in other countries, such as Japan and Germany. As a result, the United States complies more rigidly with some of the G20 recommendations than other countries. Introduction Until 2007, the world experienced low inflation levels, high growth and an increase in international trade and movements of capital.1 Then in 2007, the housing markets started to collapse, as lenders began to default on their mortgages. However, soon defaults spread across other parts of the financial industry and in 2008, the United States entered a crisis whose consequences are still felt today. The crisis spread globally, as many foreign banks invested in the American financial industry. 2 Consequences of the crisis were enormous. ...
f the causes of the crisis being in the housing market and the ability of the housing market collapse to spread to other markets, and eventually affect the real economy as well. In short, due to such interconnectedness, there are multiple explanations of causes of the crisis: over borrowing and securitization of mortgages, inadequate financial regulatory structure and failure to properly foresee possible problems that might arise from recent financial innovations are main causes of the 2008 crisis. Though the Dodd – Frank Act (Act) was passed to address the 2008 crisis and prevent a future crisis of such a magnitude, the Act creates instability on the markets, and fails to address properly the international nature of the crisis, which will be further elaborated on in the paper. Causes of the 2008 Crisis As Reinhart and Rogoff put it, there was a lull in defaults, globally and domestically, before the 2008 crisis took place.4 However, the two authors note that the last lull was the deepest in the last two centuries of the American history. 5 The regulators created a weak regulatory system. Between 1990 and 2006, housing prices increased to an average of four times the yearly income of an average family two or three times previously.6 High housing prices led to high demand for construction workers, remodelling and real estate services. Moreover, the repeal of the Glass-Steagall Act in 1999 enabled banks to engage in investment banking, while banks could also act as insurers. Mortgage – backed securities were invented and sold freely. 7 In 2000, the Commodity Futures Modernization Act deregulated the derivatives market, which was used by banks to increase liquidity. 8 Risky homeowners were encouraged by the Clinton administration to acquire expensive homes, despite ...Download file to see next pagesRead More
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