The Root Causes of the 2008-2009 Economic Crisis is the U.S - Essay Example

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THE ROOT CAUSES OF THE 2008-2009 ECONOMIC CRISIS AND THE POLICIES IMPLEMENTED BY KEY FACTORS RESPONSIBLE FOR RESCUING THE U.S. ECONOMY Name Number Instructor Date Economic crisis Many economists consider the economic crisis of 2008-2009 to be the worst to have ever hit the world since the great depression of the 1930s…
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The Root Causes of the 2008-2009 Economic Crisis is the U.S
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Download file to see previous pages The effects of the crisis led to numerous evictions and foreclosures in the housing sector and prolonged periods of unemployment for many people. The crisis contributed to the failure of many businesses leading to a massive decline in consumer wealth, a loss which was estimated to be worth trillions of dollars (Simkovic, 255). Generally, there was a significant decline in economic activity all over the world as a result of the recession. This paper will look into how many governments strived to put appropriate measures in place to curb mitigate the crisis; particularly, the United States’ government, through the various policy makers and stakeholders, implemented effective measures to deal with the crisis.  The crisis resulted from a complex interplay of liquidity and valuation problems in the banking system of the United States in 2008. The bursting of the housing bubble in the United State’s mortgage sector in 2007 resulted in a crisis in the subprime mortgage market. Consequently, the values of all securities that were tied to real estate pricing in the United States plummeted significantly leading to the damage of the financial institutions, both in the United States and the world at large. The challenges that resulted from the insolvency in the banking industry led to a decline in the availability of credit. This led to decline in investor confidence that impacted negatively on the stock markets around the globe leading to large losses in the stock markets especially in 2009. Economies from all over the world slowed down significantly during this period as international trade declined and credit tightened (Lahart, 140). While there have been many suggested causes of the crisis by the experts, the senate of the United States issued a report on the same. It ruled out the possibility of the crisis being a natural disaster. Instead, it explained the crisis as having resulted from complex and high-risk financial products; conflicts of interest that had remained undisclosed; failure by credit rating agencies and regulators; and the market which was reported to rein in the Wall Street excesses (Lahart, 142). On the other hand, Ross explains that investors and credit rating agencies failed to do accurate pricing of the risk that was involved with the financial products related to the mortgage sector. They also claimed that the government failed to adjust the regulatory practices that would address the financial markets in the twenty first century appropriately. A repeal done in 1999 on the Glass-Steagall Act of 1993 removed the separation that had existed between depository banks and the investment banks in Wall Street. Both the regulatory solutions and the market-based solutions were considered in response to the crisis and were embedded in the various solution packages. According to Gross, many economic analysts agree that the economic crisis was triggered in 2007 in the subprime mortgage sector as a result of banks in the United States giving high-risk loans to economically unstable people most of whom had poor credit histories. Even then, the root causes of the economic crisis are complex. They include an unregulated or poorly regulated banking industry especially in matters of investment and lending, which led to proliferation of speculative people with unstable income into the mortgage market. The proliferation coupled with highly reduced interest rates for a long period of time created space for overextension of ...Download file to see next pagesRead More
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