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Causes of the US Economic Crisis - 2007 to Present - Term Paper Example

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Name Institution Course Instructor Date Causes of the US Economic Crisis - 2007 to Present Many economists consider the 2007 to date economic crisis as one of the worst economic downturns that US has encountered since the Great Depression. The US financial market suffered recession, financial institutions collapsed, the mortgage market and many other businesses suffered…
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Causes of the US Economic Crisis - 2007 to Present Many economists consider the 2007 to economic crisisas one of the worst economic downturns that US has encountered since the Great Depression. The US financial market suffered recession, financial institutions collapsed, the mortgage market and many other businesses suffered. The Financial Crisis Inquiry Commission’s report on the economic turmoil indicated that the melt down was an artificial problem which emanated from the operations of the financial institutions. The report identified the following causes of the financial crisis. The inaction of the Federal Reserve in stemming the flow toxic mortgages contributed to the crisis. Federal Reserve had the powers to set prudent standards in mortgage lending, but failed to institute the same. The result was a subprime mortgages, which were unsustainable at the long run. The loophole that existed in the subprime mortgage lending exposed financial institutions to risks. Following, the default by mortgage owners, the financial institutions could not use the mortgage securities to recover their debts. The financial crisis inquiry commission observed that subprime lending practices contributed to the economic crisis. The Financial Crisis Inquiry Commission observed that the subprime borrowers contributed to the crisis because of their inability to repay the loans. Financial institutions gave their loans to these subprime borrowers; however, they failed to repay of these loans. The consequence of the credit default was evident through huge loses that financial institutions in the mortgage industry incurred. Critics believe that the Freddie Mac and Fannie Mae perpetrated risky lending practices in the mortgage industry (Financial Crisis Inquiry Commission 227). Their activity included lending against the assets, which could not compensate for the amount lent to the bank customers. The action of Lehman Brothers and other financial institutions relied on over speculation, thereby failing to balance the effect of credit defaults. The result was the inability of these institutions to operate. The commission report identified easy credit conditions as a factor that contributed to the crisis. The influence of the federal reserved lower rates charged by banks, thus creating conditions that promoted borrowing. Other than the above consequence of easy credit condition was the increase in demand for financial assets by foreign institutions, which led to an increase in prices of the financial assets against the bank rates.The report observed that the US financial market received foreign funds, which bought treasury bonds. The result of this flood of foreign currency destabilized the financial market in the US causing the crisis. It is important to note that while the foreign investors craved for assets in the US financial market, US financial institutions took the risks of investing in foreign funds in mortgage. However, the decline in value of mortgage securities led to the instability experienced in the market. The argument in the report stated that fraudulent and weak underwriting system breached banking policies that control money flow in the financial market. Many banks did not investigate the ability of their clients to service their loans or meet the collateral requirement. Critics believe that many banks ventured into speculations without considering the moral practices, which guide the banks (Duncan 56). The banks focused on large profits that they could make from this move making their actions prone to risks. The consequence of their actions was inability to meet the results of the dents leading to fall of these banks. The investigative report also indicated that a fall in housing prices influenced the ability of loaners to service their bank loans. This, in turn, influenced the ability of the banks to operate because of large debts owed. Another banking practice, which contributed to the crisis, was the action of the banks to increase their debt burdens (Norton 875). Banking regulations control rates at which banks offer their loans. Critics observed that many banks readily offered money to consumers who in turn introduced it into the market seeking to trade. The US bank deregulations did not restrict the banking operations; instead, it created a room for the banks to conduct there operation within some operable conditions. However, the banks failed to uphold to the deregulations act that broaden their operation. The result was unscrupulous ventures, which intended to create large profits. For instance, AIG investment suffered the creditors default by its counterparts resulting into big losses (Financial Crisis Inquiry Commission 344). Critics have observed this scenario and argued that credit defaults and speculative action of the AIG exposed it to the financial difficulties (Freedman 26). Speculative practices are uncertain because a small default would lead to a huge lose as observed during the financial crisis. The fall of Lehman Brothers contributed to the financial crisis. Economist observed that the financial stumble of the Lehman Brothers, which began in August 2007 to September 2008, influenced the operations in the stock market (Financial Crisis Inquiry Commission 322). Critics observed that many institutions that had invested with Lehman Brothers incurred huge loses that aggravated the crisis. Works Cited Duncan, Richard. The Dollar Crisis: Causes, Consequences, Cures. New Jersey: John Wiley & Sons, 2011. Print. Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report. Web. 11 May 2012. Freedman, Jeri. The U.S. Economic Crisis. New York: The Rosen Publishing Group, 2010. Print. Norton, B. Mary et al. A People and a Nation: A History of the United States, Volume II: Since 1865. New York: Cengege Learning, 2011. Print. Read More
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