The 2008 Financial Crisis

The 2008 Financial Crisis The housing and monetary policies are the key causes of the 2008 economic crisis. Two main mortgage firms, the Fannie Mae and Freddie Mac Corporation eased the credit requirements on loans it purchased from lending institutions. In September 2008, the two giant mortgage companies faced the danger of bankruptcy as they had guaranteed close to half of the total mortgages in the US.Advertising We will write a custom essay sample on The 2008 Financial Crisis specifically for you for only $16.05 $11/page Learn More The Clinton administration came up with the idea of making poor citizens and low-income consumers own homes. As a result, banks were under pressure to lend to minorities and low-income consumers who even had no security for the loans (White par. 1). Notably, some of the borrowers who accessed the sub-prime loans had poor credit ratings, did not make down payments for homes, and had no verifiable assets. So misguided were the housing policies that unqua lified borrowers could access mortgages with the support of the federal government.  After the banks and other lending institutions had loaned the low-income earners, the prices of houses peaked and turned down completely. At this point, borrowers who had inadequate capital compared to their debt started to default the repayment of mortgages (FRONTLINE). Notably, these categories of borrowers were propelled to borrow with the hope of increased prices of houses in the future to repay the mortgages or sell their properties at high prices. This was not to be as prices of essential products went down too. The occurrence led to rise in the number of defaulters on nonprime-mortgages. The increased numbers of toxic mortgages made investment banks lose trillion of dollars. The rest of the Wall Street felt the effect with Federal Reserve Chairman Ben Bernanke making critical moves to salvage the Bear Stearns Investment Bank, which had remained the subject of rumours that it would be fallin g soon. Bear Stearns’s stock had slumped to a low of $57 from $171 thus making it clear that something had to be done to contain the situation. The then Treasury Secretary Henry Paulson had to try out different approaches to rescue the entire financial market from the crisis. At one instance, he persuaded the federal government to provide the Treasury with $700 billion for buying the high-risk mortgage securities. Rumours in the financial market are fears that market players have towards operations of a firm. For instance, market manipulators and short sellers can spread false information about the nature and operations of a company. The financial market deals in monetary issues and some of the institutions include Bear Stearns Bank, AIG Insurance Company, Lehman Brothers and Fannie Mae Corporation.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Bear’s chief executi ve, Alan Schwartz blamed falsehood on the loss of liquidity of $10 billion in one working day (â€Å"Bank Chief Blames Rumours for Bears Collapse† par. 4). This happened as customers, trading partners, and investors fled after listening to rumours and market manipulation from competitors. However, JP Morgan Bank salvaged Bear from collapsing after the Federal Reserve accepted to stand behind the institution with $30 billion of public funds. So intense was the crisis that the failure of Bear almost led to the collapse of the entire financial market. Clearly, from the occurrence of the 2008 financial crisis, rumours can be detrimental especially if they are false. Moral hazard is a situation where a party to a deal becomes dishonest as per the terms and conditions of the deal. In the case of assisting Bear not to go out of business, JP Morgan had a deal with Bear to buy the institution at $2 per share; however, mass outrage from shareholders made the firm raise the price to $10 per share. The initial price of $2 per share was meant to avoid scenarios of rewarding investors in a failed business. The principle prevents a situation where firms, which have been responsible for their downfall, receive financial support from the federal government. On the other hand, systematic risk entails the fall of an entire market. The fall of Bear Sterns followed by the collapse of the giant mortgage firms of Fannie Mae and Freddie Mac Corporation and finally Lehman Brothers Investment Bank, represents a clear example of systematic risk in the entire financial market (Moseley par. 8). Critics argue that moral hazard promotes systematic risk as it can encourage other firms to engage in malpractices with the aim of receiving aid from the Federal Reserve.  The 2008 financial crisis made policy makers alter their opinions on free trade. Firstly, they agreed that the rules of the World Trade Organization (WTO) are inadequate to the current dynamic and global economy. As a re sult, policy makers in both government and private institutions prefer regional free trade agreements as a way of making up for rules that have been missing in the multilateral trade option. With the Doha negotiation in force, multilateral trading system is losing its relevance in the international trade (United Nations). The financial crisis revealed that the state of overdependence on one nation by developing nations is extremely dangerous for the current global, dynamic, and unpredictable economy.Advertising We will write a custom essay sample on The 2008 Financial Crisis specifically for you for only $16.05 $11/page Learn More Bank Chief Blames Rumours for Bears Collapse. Mailguardian. Mail Guardian Online, 6 Apr. 2008. Web. Frontline. Inside The Meltdown. PBS: Public Broadcasting Service. WGBH Educational Foundation, 8 Feb. 2009. Web. Moseley, Fred. The U.S. economic crisis: Causes and solutions. International Socialist Review ISSUE 81 January-Febr uary 2012. International Socialist Organization, 8 Apr. 2009. Web. United Nations. International Trade After the Economic Crisis: Challenges and New Opportunities. United Nations Conference on Trade and Development. UNCTAD, 5 Aug. 2010. Web. White, Lawrence H. Housing Finance and the 2008 Financial Crisis | Downsizing the Federal Government. Downsizing the Federal Government. Cato Institute, 5 Aug. 2009. Web.