Major Causes of the 2008 Stock Market Crash - Essay Example

Lecturer: Topic: Major causes of the 2008 stock market crash Introduction The failures that are associated with the United sBanks on 16th of September 2008 and in particular the Lehman Brothers bank, ended up in a worldwide financial crisis that affected financial institutions throughout the United States and the world. It should be noted that Iceland experienced the worst impact and the value of its currency decreased quickly which almost threatened to plunge the whole country in bankruptcy. The failures that were associated with the banks affected the global stock markets heavily and the United States stock markets lost twenty one percent of its value in that particular week. Even though in numbers this was not as bad as the 22.6 percent loss that had been experienced on Black Monday in 1987, the opinion of the analysts was that this was worse since the losses were felt for the whole week and they did not come from a one-off down day. This was not the end of the experiencing of losses as in the week that started on 6 October; the Dow Jones had no other choice but to close down 5/5 trading sessions and in the process losing a further 18 percent in the same week. Later on, on 24 October the stock exchange indexes all over the globe experienced a drop of ten percent in one day. Major causes of the 2008 stock market financial collapse The prices of oil affected commercial activities in the United States by making things expensive and a lot of this was as a result of the speculation by the analysts in the future markets, but the demands that were legitimate resulted in the boom times and consequently the prices of oil progressively increased. The countries that have emerging markets such as China, Brazil, India as well as Russia created very huge demands for many commodities. The key factor that led to the stock markets crashing in 2008 was the subprime mortgage crisis that was being experienced in the United States since the companies were lending to people with who had bad credit ratings that would result in the people not being able to pay the loans adequately (Farmer 154). The banks in the United States were exposed to these loans, which led to their subsequent collapse since they were lending the money that they themselves had in their own banks. This greatly affected the debt to equity ratio of these banks and many of them ended up needing the help of the government to remain afloat. When many of the shareholders realized that their banks were at risk, they did not want their money invested in the shares of those banks and decided to sell the shares that they had causing a snowball effect at the stock market and this was the beginning of the falls in the stock prices. The major reaction in the United States was to bail out these banks with hundred billions of dollars so that they banks could be in a position where they could be able to lend money again. There was a ban in the shorting of stocks in the financial companies on a temporary basis while the interest rates were considerably reduced so that new businesses could be motivated to start and for the people to start spending money again. According to les Leopold (4), the caused by a blend of financial deregulation as well as too much money being controlled by a few players as a result of the significant changes that had taken place in the tax code. A wall street that was unregulated consequently developed a broad array of financial elements that were intended to take all the excess capital from the people who held it and a lot of it had potential for huge risks and in the end resulted in toxic assets. The key attribute was the capability to develop a huge set of new securities on the sub-prime loans generated a housing bubble and when the costs that were associated with housing became steady, the assets that were based on the ultimately collapsed. This caused the financial markets to freeze and as a result the crash started and these were the same conditions, which involved financial deregulation and a lot of money in the hands of few people experienced in the 1929 crash. Economic power and political influences of the big banks made them "too big to fail" and "too big to jail" The theory that is associated with “too big to fail’ declares that there are particular financial institutions that are very large and at the same time interconnected that if they fail, the economy will be affected significantly meaning they have to be supported by the government in the event that they are facing difficulties. The political power that is held by the large banks as well as the risks that are associated with the major prosecutions has led to the use of the phrase “too big to jail” when speaking about the leaders that are at the helm of the major financial institutions. After the financial crisis had taken place and the stock markets crashed, the view that many of the government official had was the crisis had come up as a result of fraud that was intentional meaning that the fraud was simple. Mortgages characterized by uncertain creditworthiness were progressively used to provide the only guarantee for securities, which were highly leveraged which were promoted as being of a low risk. Officials at the Department of Justice have all agreed that the main cause of the problems that were experienced was fraud. Unfortunately, they go on to justify their lack of prosecution of the high-level executives associated with fraud that is linked to the crisis over several grounds. They argue that providing evidence that the management of the banks and companies intended to commit fraud is a hard task. Although it might not be easy link the top management directly to the fraudulent activities that eventually resulted in the financial crisis, there cannot be any excuse that these people did not know what was going on. The events that lead up to the financial crisis and the crash of the markets went on for almost five years and this makes it obvious that a top level banker must have come across increasing evidence from his own bank as well as other banks that there was an increase in mortgage fraud. If the executive could not look at this and make any enquiries about them, the reason could be the executive did not wish to find out what such inquiries could unearth. Since the executives were not prosecuted because of this, it can be considered to be willful blindness or a conscious disregard, which is well established in the criminal law. The power and the influence of these banks enabled them to get away with defrauding investors and mortgage holders and then be bailed out by the government Majority of the free market advocates have the conviction that the Congress as well as the Federal Reserve should not have taken the task of bailing out the firms that were hit by the financial crisis when the stock markets collapsed. Instead, they should have allowed the market mechanisms to take a natural course. It clearly shows that the government bailouts are more often than not executed for political reasons and considerations and the economic resources that are allocated show that the there is considerably worse performance than the resources that are allocated by means of the considerations which are realistic. According to the international monetary fund, the global financial crisis was supposed to produce USD3.4 trillion in losses that would be experienced by the financial institutions all around the world by the time it reached 2010. The gross domestic product of the world was USD70 trillion in 2007 making the immediate decline that was experienced in the economic output globally to be approximately 5 percent. Five years after the financial Half a decade after the financial system of the United States nearly collapsed, a progressive but slow recovery is associated with the economy that is exhibited by high unemployment, hesitant consumers and sluggish business investment. Majority of the executives at the Wall Street accountable for the disasters and whose firms went under or had to be given huge government support to remain afloat also found themselves being without work. The executives are living lives that are comfortable mainly because they emerged from the disaster with millions of while the major banks that were able to survive the crisis since they were saved by the government after being deemed “too big to fail” continually become bigger and better. In the event that the large banks are faced with trouble of any kind, rules have been put in to place to make sure that they are liquidated in an orderly manner. This means banks are actually safer that they were in the period that preceded the crisis in 2008. To extent, the banks are still involved in the risky business that they were taking part in before the financial crisis that took place in 2008. Work cited Farmer, Roger E. A. ‘How The Economy Works”. 1st ed. Oxford: Oxford University Press, 2010. Print. Leopold, Les. “The Looting Of America”. 1st ed. White River Junction, Vt.: Chelsea Green Pub., 2009. Print. Read More