The Global Financial Crisis: The Roots
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The paper demonstrates how the current financial crisis was caused by governments that made short-term decisions without considering the long-term consequences of those decisions. The paper looks at the savings and loan crisis in the late 1980s which set the tone for government bailouts and resulted in a culture of risk-taking by bank managers. The paper then looks at the government's response to the bursting of the dot-com bubble when the Federal Reserve lowered interest rates, and explains that this caused the growth in subprime mortgages. The paper details the global subprime crisis and discusses the response of the Bush and Obama administrations to this crisis.
From the Paper:"The subprime crisis spread throughout the economy the way it did because the credit crunch spread beyond just the immediately lending institutions. Banks were able to sell the mortgage debt bundled in securities known as mortgage-backed securities (MBSs). These are complex instruments, with the risk of different mortgages spread over the all or some of the MBS. Each MBS was embedded with different levels of risk and then sold (SEC, 2007). The underlying principle was that there would be sufficient diversification to offset the default risk posed by any one mortgage. However, the problem in this case was systemic and widespread. As a result, MBS holders bore much of the risk attributed to subprime mortgages. This spread the damage of subprime defaults around the entire financial system. Bond rating agencies had rated most MBSs as AAA, the highest investment grade. This was due in part to the backing of the issuing banks and to the supposed diversification inherent in the securities."
Sample of Sources Used:
- Knowledge @ Wharton: The Subprime Crisis website. Retrieved May 12, 2009 from http://knowledge.wharton.upenn.edu/special_sections/subprime/
- No author. (2009). Overview. New York Times. Retrieved May 12, 2009 from http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/
- Boeri, Tito & Guiso, Luigi. (2007). Subprime Crisis: Greenspan's Legacy. Vox. Retrieved May 12, 2009 from http://www.voxeu.org/index.php?q=node/488
- Trehan, Veeta. (2007). The Mortgage Market: What Happened? NPR. Retrieved May 12, 2009 from http://www.npr.org/templates/story/story.php?storyId=12561184
- No author. (2007). Mortgage-Backed Securities. Securities Exchange Commission. Retrieved May 12, 2009 from http://www.sec.gov/answers/mortgagesecurities.htm
Cite this Analytical Essay:
The Global Financial Crisis: The Roots (2011, October 27) Retrieved July 20, 2019, from https://www.academon.com/analytical-essay/the-global-financial-crisis-the-roots-148552/
"The Global Financial Crisis: The Roots" 27 October 2011. Web. 20 July. 2019. <https://www.academon.com/analytical-essay/the-global-financial-crisis-the-roots-148552/>