Dodd-Frank Wall Street Reform - Research Paper Example

? The subprime mortgage crisis is a series of happenings which contributed to a greater extent to the financial crisis and recession that happened in the United States of America in the year 2008. Some of the causes of the subprime mortgage crisis are failure of the housing market, a gap in the regulation of institutions of finance, and inadequate measures, which had the capability of efficiently regulating the production and dissemination of new financial products. The market failure that led to the emergence of the Subprime crisis was characterized by a large inflow of foreign money, and a lower interest rate. These conditions made it easier for individuals to obtain credit, leading to an increase in demand of houses. People had to borrow in order to finance their mortgages. From the periods of 1994, to 2004, the ownership of homes amongst residents of United States of America increased from 64%, to 69.4% (Whalen, 2008, 220). Because of an increase in the demand of the houses, the price of these commodities increased by 124%. These made consumers to refinance their homes, and take on second mortgages resulting to a reduction in their disposable income. By the time 2008 reached, the United States mortgage debts in relation to its GDP increased by 26% reaching a figure of 73%. This is from the periods of the 1990s. The easy availability of credit, and an increase in the house prices led to the building boom, and this further increased the prices of the houses, and eventually to their decline in the periods 2006 (Deminyank and Herbert, 2011, 1851 ). Paying back these mortgages became difficult, because of the fall of the home prices, as compared to the prices in which they initially bought the homes. This had an effect of reducing the value of mortgage backed securities, eroding the financial capability of the banks. This failure led to the emergence of the subprime financial crises. Home buyers were engaged more in speculative buying, than deeply analyzing the market conditions in order to buy homes. Most of these buyers were engaged in buying for profits, and this was because of the increases in house prices during the periods of 2000 to 2006. When the house prices began to fall, most of them went to a loss, and desisted from buying (Immerglack, 2011, 250). Another reason for the emergence of the subprime crises is failure by the government to effectively regulate the financial activities of various banking organizations, and their financial products. This was made possible by the 1982 mortgage transactions parity act. This act allowed credit organizations to readjust their mortgage rates, and its aims was to make it possible for as many people as possible to own homes. This act led to an abuse of the mortgage lending procedures, because credit institutions could offer any amount of interest payments to their loan products. In 1999, the Federal government repelled the Glass Steagal Act, which created an environment of risk consciousness in investment banking (Immerglack, 2011, 247). This act had an effect of regulating the creditors during boom periods, making credit organizations to undertake risk measures while carrying out their duties. Its repeal made banking organizations, to lend freely, without establishing measures that would lead to the mitigation of risks. The Securities and Exchange Commission also played a role into the emergence of the subprime mortgage crises. The commission changed the rules of calculating its capital reserves, and this enabled credit organizations to increase the percentage of debts they incurred for purposes of financing their operations (Deminyank and Herbert, 2011, 1850 ). The consequences of this action are that it led to the growth of mortgage securities that supported subprime mortgages. This eventually led to the near collapse of the banking system, because of an increase in their debts ratio, and inability to pay. This led to the enactment of the Dodd Frank financial reform act. This act created changes to the financial regulation of the American finance sector, and its impact was felt on every part of the American financial services’ sector. The following are five major provisions of the act (Feran, 2011, 455): 1. The creation of the financial stability act of 2010 that imposes two offices, the office of the oversight financial stability council, and the financial research office. These offices have the responsibility of monitoring the financial risks of the economy. 2. It has provisions that ensure an orderly liquidation of financial institutions that are faced with serious financial problems. This is by creating an orderly liquidation authority. 3. Regulation of the Financial Sector of the economy through the depository institution regulatory act of 2010, and the Savings and Bank Company act of 2010. This act introduces the Volcker rules, which are aimed at discouraging the development of speculative trading. 4. The next provision is the enactment of the bill that promotes accountability, and transparency at the Wall Street. The bill introduces tougher regulatory measures against financial institutions, and it establishes clearing houses for purposes of trade in derivatives. Financial institutions that regulate trade in derivatives are, the Securities Exchange Commission, and the Commodities Futures Trading Commission. 5. There is also the creation of the anti-predatory and mortgage reform act of 2010, which regulates the methods in which credit organizations can carry out their mortgage procedures. The Dodd Frank reform act helps to correct the market failure characterized by the subprime mortgage crises by establish an act whose main purpose is to monitor the financial risks within the financial market. For instance, the financial stability act of 2010 creates the office of the financial oversight stability council, whose main responsibilities is to enhance the promotion of market discipline amongst the various stakeholders within the industry under consideration, and to restore and maintain the confidence of investors (Santos, 2011, 1923). The council has the responsibility to collect data for purposes of assessing the financial risks of the market, and monitoring on how the market responds to the financial products of credit organizations. This would enable the organization to draft measures that would help in regulating that market, for purposes of preventing its collapse. The reform act also introduces the depository regulation act of 2010, and the Bank and Savings act. From these act, the notion of Volcker rule emerges, which prevents speculative investments, and prevents credit organizations from owning more than 3% of private equity in the hedge fund (Feran, 2011, 459). It also regulates the transactions between financial institutions, with non-financial institutions under the supervision of the Feral Reserve board, and this solves the problems of inefficient government regulation that characterized the emergence of the Subprime Mortgage crisis. This act has managed to address every aspects of regulatory and market failure that led to the emergence of the subprime mortgage crises. It establishes institutions that have the capability of monitoring the market, and regulating the activities of financial institutions. This reform act, proposes the enactment of various laws, and an example is the consumer protection act, which will guide against speculative buying, and ensure that the interests of consumers are met by the financial institutions (Santos, 2011, 1923). One aspect that I would change in the reform act is the clause that allows the Security Exchange Commission to influence the proxy statement of financial companies. This is because these statements are concerned with the internal affairs of the company, and the government must not be allowed to interfere with its affairs, if it is not a shareholder in the mentioned company. In conclusion, the Subprime crises emanated as a result of the failure of the Federal government institutions to regulate the financial market, and enhance measures that would protect consumers from failures of the system. It is on this basis that the Federal government sought to implement the Dodd Frank Wall Street Reform act. This act has provisions that affect nearly all the sectors of the American economy, and it is an effective way of minimizing chances of recession occurring again. The act proposes various laws, that need to be enacted, and an example is the consumer protection act of 2010, which was recently passed by the congress. However, skeptics denote that the reforms do not have the capability of protecting the American economy from future recessions, because it provides for stricter government control of the economy, as opposed to allowing the economy to control itself, and therefore balance the needs of the market, through the demand-supply rule. References Deminyank, Y., & Hemert, O. V. (2011). Understanding the Subprime Mortgage Crisis. The Review of Financial Studies, 24(6), 1848-1880. Feran, E. (2011). The Break-up of the Financial Services Authority. Oxford Journal of Legal Studies, 31(3), 455-480. Immerglack, D. (2011). From risk-limited to risk-loving mortgage markets: origins of the U.S. subprime crisis and prospects for reform . Journal of Housing and the Built Environment, 26(23), 245-262. Santos, J. (2011). Bank Corporate Loan Pricing Following the Subprime Crisis. The Review of Financial Studies, 24(6), 1916-1943. Whalen, C. (2008). The Subprime Crisis—Cause, Effect and Consequences. Journal of Affordable Housing & Community Development Law, 17(3), 219-235. Read More