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The Current Financial Crisis in the US - Case Study Example

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The paper 'The Current Financial Crisis in the US' presents one of the most important chapters in its history as the country is facing one of the severe economic depressions in its history. Since the beginning of the crisis in 2007, there has been much discussion on the actual causes of the crisis…
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The Current Financial Crisis in the US
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Download file to see previous pages What is, however, significant to note that the crisis created a kind of contagion effect on other sectors of the economy also and started to take deeper roots in terms of creating recessionary pressures on the economy?
During the last quarter of 2007, the US officially went into the recession and official response from the US government started to emerge. The US took massive action in terms of supporting the failing institutions and the government injected taxpayers’ money in order to ensure that the whole financial system of the country should not collapse. This also included separate responses from the different actors of the State including The President, Congress, Treasury as well as the Fed Chairman while working in their official capacity.
As discussed above that the original cause of the financial crisis was the bursting of an asset bubble wherein the subprime mortgage portfolio of the banks started to get worse. Over a period of time, banks started the practice of lending to subprime borrowers- borrowers with impaired credit history- in order to earn higher returns. Most of the banks, however, also securitized their mortgage portfolio and subsequently repackaged their loans and sold them in the form of mortgage-based securities. (Cocheo. 2007).
The real issue started to emerge when the subprime borrowers started to default and the banks have to divert their own funds to pay off their obligations on the mortgage-based securities. This mismatching of the cash flows therefore created the credit crunch for other sectors of the economy and slowly started to engulf the whole economy.
The apparent reason may be the subprime mortgages however, underlying this crisis, many critical weaknesses of the regulatory environment of the country. It is generally argued that the overall regulatory environment of the developed countries was so relaxed that the firms took undue advantage and started to adapt the business practices which were risky and put the entire survival of the whole organization and resultantly the overall financial system of the country. The overall extent of the damage which has been done by the pundits in Wall Street, therefore, has made the economy crumbling on its knees and caused havoc in the international markets across the whole world. ...Download file to see next pagesRead More
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