The 2007 to 2011 Financial Crisis Causes, Effects and Lessons

Abstract This Nursing Dissertation provides a small trial of the bestow causes and property of the 2007 financial discarding-point, as well-behaved-mannered-behaved-behaved as an aggravateview of lessons versed from it. I particularize that need to truly methodize and administer financial institutions set the measure for the discarding-point, suitableness the US residential hypothecation howl and bust triggered it. A trustworthiness congelate, bankruptcies, and hundreds of billions in synod extricate ensued, terminationing in a open economic downturn. The bestow of the discarding-point should be seen as an opening to alter the financial scheme as a complete. Introduction The financial discarding-point that instituted in 2007 is the termination of multifarious, interconnected, and synchronous developments[1]. As such, I convergence my resolution on the United States[2] and two unlike trodden causes: (1) void of truth bank decision – which destabilized the financial scheme – and (2) the pre-turning-point existent lands howl and bust. Whereas the foregoing conditioned the discarding-point, the dying was its catalyst. In this small essay, I debate merely the most relevant and bestow property of the discarding-point – those that emerged betwixt 2007 and 2012 – and debate the conclusions that can be drawn conformably. 1. Decision destabilized the financial scheme Regulation of US banks by the Fed, SEC, and FDIC,[3] as well-behaved-mannered-behaved-behaved as other regulatory agencies, contributed significantly to the erosion of financial scheme arrestation (Barth, Caprio and Levine, 2012, p.86). For specimen, in 1996, the Fed legitimized the use of Trustworthiness Omission Swaps (CDS) as waste-hedging instruments (Levine 2010, p. 202, Appendix 1) and as a termination abundant banks open prodigious charybdiss (Figure 1) – AIG held aggravate $500 billion in 2007 – suitableness others were conducive to lessen their principal reserves by up to half in percentage conditions (Barth, Caprio and Levine, 2012, p.92). Figure 1: CDS trade quantity Q1 2001 to Q2 2007, trillion US$ (International Securities and Derivatives Association cited in Baily, Litan and Johnson, 2008) Another specimen is the SEC’s use of the “NRSRO” cognomination,[4] which led to a grave misalignment of trustworthiness rating agencies’ employment excitations and terminationed in inflationary conditions of cannonade-grade ratings for intrepid securities. This aid deteriorated the viability of banks’ neutralize sheets (see Appendix 2). 1.1 Residential hypothecation howl and bust Simultaneously, the US residential existent lands vision (inspired by the conviction that housing prices would merely go up) fueled extravagant issuance of residence hypothecations (Figure 2). In discard, crude lending experiences, specially in sub-prime hypothecation lending, bolstered housing prices by forward arrogation, suitableness filling institutions’ neutralize sheets delay obscure waste (Barth 2009, p.92). The attractiveness of hypothecations as “fail-safe” cannonades prompted abundant banks to transfer their employment copy from “originate-to-hold” to “originate-to-sell”; instead of buying hypothecations as an cannonade that generated a consistent coin posterity, banks securitized and sold them (Barth 2009, p.22). This effectively removed any excitation to excite and administer waste. However, this “out-of-sight-out-of-mind” mentality did not recital for the event that banks that securitized hypothecations and invested in hypothecation-backed securities (MBS) were repeatedly similar. Thus, waste was listless from neutralize sheets, but implicitly bestow in securities supportings (Appendix 3). Figure 2: S&P-Shiller housing prices index (monthly), January 2001 to August 2012 (Standard & Poor’s Financial Services LLC, 2012) The convoluted scheme of securitization faltered when housing prices instituted to discard and hypothecation borrowers omissioned (Figure 3). This dried up the coin posterity of hypothecation-backed securities and made them virtually cheap; banks that relied on them to encounter their obligations encountered calamity. Moreover, multifarious securitization experiences made the quantity of any one institution’s charybdis anyone’s divine. Since, no one could be fixed which banks would speed to see another day, interbank lending froze. In blunt, not merely did financial institutions support cheap property, but they were so unconducive to bridge bluntages in coin (Figure 4).[5] In conjunction, bulk omissions activated billions of dollars in CDS obligations and bankrupted all who were aggravate-exposed. Figure 3: Increase of culpability reproves (percent) of subprime advances betwixt 2003 and 2007 (Arentsen, Mauer, Rosenlund, Zhang and Zhao, 2012, p.39) Figure 4: Increase of the Federal Funds reprove (percent, monthly) indicates interbank lending discarding-point (Federal Reserve Bank of St. Louis, 2012) 2. Financial mitigation and economic downturn The bestow property of the discarding-point are well-behaved-mannered-behaved-behaved known. Banks previously considered untouchconducive filed for delaydrawal (e.g. Lehmann Brothers), suitableness others were extraneous (Merrill Lynch by Bank of America), bailed-out, or enslaved aggravate by the synod (AIG and the GSEs Fannie Mae and Freddie Mac). Soon, the trustworthiness congelate forced the fostering administration as financing cannonades and borrowing became increasingly intricate. For specimen, betwixt 2007 and 2009, almost 8.8 favorite American jobs disappeared, U.S. GDP prostrate by past than five percent from its pre-recession peak (Treasury 2012), and the S&P 500 obsolete about 57 percent of its prize (Lleo and Ziemba, 2011). Perhaps most famously, delayout synodal help, American automobile manufacturers GM and Chrysler would bear grace beggared (Stewart 2012). Yet another bestow consume is the prodigious synod debit that terminationed from extricates and other economic force programs (Barth 2009). The discarding-point stretch internationally (and most damagingly to Europe) owing bulky advance derivatives were sold abroad. This does not indicate that the U.S. is to chide for the discarding-point; entire synod had advance to the similar counsel as Fed, SEC, and FDIC, yet almost all loseed to concede and discourse the schemeic drift (Cox, Faucette and Lickstein, 2010). 4. Lessons Mostly relevantly, the discarding-point unguarded the prodigious need of bank regulators,[6] and prompted a essential restructuring of banking decision (such as the 2010 Dodd-Frank Act). In conjunction, the extravagant multifariousity and behemoth dimension of the financial scheme bear conclude subordinate solemn sifting. An relevant scrutiny has emerged from this trial, which asks, regarding TARP[7], are some financial institutions “too big to lose?” (Greeley 2012). Moreover, the discarding-point has spawned a retrial of the desirability of “laissez-faire” delayin the financial trades – that is, to what quantity can trade forces be relied upon to parry crises (Barth, Caprio and Levine, 2012, p.90)? Conclusion The financial discarding-point that began in 2007 quiet calamitys us today. Suitableness some financial institutions bear mitigationd, those that wait bear had to essentially rethink their role as trustworthiness providers. Governments were left delay dreadful financial commitments, tasked delay deconstructing the intellectual peril of bank bailouts, and delay reigning and supervising the financial scheme past efficiently. History has shown us that financial crises are a cyclical affair. Thus the scrutiny must be, can the cycle be subjugated, or is the direct discarding-point stoppage in the wings? Bibliography Arentsen, E., Mauer, D.C., Rosenlund, B., Zhang, H.H., Zhao, F., 2012. Subprime Hypothecation Defaults and Trustworthiness Omission Swaps. [pdf] University of British Columbia Sauder School of Business. Availconducive at: [Accessed 25 November 2012]. Baily, M.N., Litan, R.E. and Johnson, M.S., 2008. The Origins of the Financial Crisis. [online] Brookings Institution. Availconducive at: [Accessed 25 November 2012]. Bank of International Settlement (BIS), 2012. Detailed tables on semiannual OTC derivatives statistics at end-June 2012. [online] Availconducive at: [Accessed 26 November 2012]. Barth J.R., 2009. The Rise and Fall of the U.S. Hypothecation and Trustworthiness Market. Hoboken, New Jersey: John Wiley & Sons, Inc. Barth, J.R., Caprio, G. and Levine, R., 2012. Guardians of Finance, making regulators is-sue for us. Cambridge, Massachusetts: The MIT Press. Barth, J.R., Caprio, G. and Levine, R., 2012. Rethinking Bank Regulation, tend angels command. New York, New York: Cambridge University Press. Congressional Budget Office, 2012. Report on the Troubled Asset Relief Program—October 2012. [pdf]. Availconducive at: [Accessed 25 November 2012]. Cox, J., Faucette, J. and Lickstein, C.V., 2010. Why Did the Trustworthiness Turning-point Stretch to Global Markets[pdf] The University of Iowa Center for International Finance and Development. Availconducive at: [Accessed 25 November 2012]. Federal Reserve Bank of St. Louis, 2012. Effective Federal Funds Reprove (FEDFUNDS). [online] Availconducive at: [Accessed 26 November 2012]. Greeley, B., 2012. The Price of Too Big Too Fail. Bloomberg Businessweek, [online] Availconducive at: [Accessed 26 November 2012]. Jickling, M., 2009. Causes of the Financial Crisis. [online] Congressional Research Service. Availconducive at: [Accessed 25 November 2012]. Kohn D.L., 2010. The Federal Reserve’s Policy Actions during the Financial Turning-point and Lessons for the Future. [online] Board of Governors of the Federal Reserve System. Availconducive at: [Accessed 25 November 2012]. Levine, R., 2010. An autopsy of the US ?nancial scheme: additament, suicide, or slatternly homicide, Journal of Financial Economic Policy. [online] Availconducive at: [Accessed 25 November 2012]. Lleo, S. and Ziemba, W.T., 2011. Stock Trade Crashes in 2007-2009: Were We Conducive to Predict Them[pdf] Availconducive through Social Sciences Research Netis-sue website [Accessed 25 November 2012]. Pagliari, S. and Young, K.L., 2012. Leveraged Interests: Financial Industry Power and the Role of Private Sector Coalitions. [pdf] Availconducive at: [Accessed 25 November 2012]. Standard & Poor’s Financial Services LLC, 2012. S&P Dow Jones Indices. [online] Availconducive at: [Accessed 25 November 2012]. Stewart, J.B., 2012. When Debating the Auto Bailout, Consider Lehman’s Fate. The New York Times, [online] 9 March. Availconducive at: [Accessed 25 November 2012]. U.S. Department of the Treasury, 2012. The Financial Turning-point Response In Charts [pdf] Availconducive at: [Accessed 26 November 2012]. Appendex Appendix 1 A CDS is a derivative that strengthens the buyer to arrogation amercement from the seller if the subordinatelying asset (such as a Hypothecation Backed Securities or MBS) omissions. Suitableness profitable for hedging purposes and as toll implement for trustworthiness waste (a prominence CDS bonus indicates increasing waste for the subordinatelying asset), it can be misused for visionary investing, as it does not insist-upon the buyer (or the seller) to actually support the subordinatelying asset. Appendix 2 The SEC insist-upond entire posterityr of a new pawn to obtain a waste rating from a NRSRO in classify to enconducive implicit buyers to assess its waste and permit regulators to particularize principal insist-uponments (which were installed on waste-adjusted property). Those trustworthiness rating agencies clear abundance to bear accepted NRSRO cognomination (namely the big three, S&P, Moody’s, and Fitch) reluctantly existentigned their employment copys to determine posterityrs’ needs to escheatment ratings by incentivizing employees to posterity AAA ratings in classify to advance the customer worthiest. As a termination, 56 percent of MBS posterityd betwixt 2005 and 2007 and reproved by S&P were notwithstanding downgraded (Barth 2009, p.156). Appendix 3 A sordid experience in the forerunner to the discarding-point was to bundle hypothecation advances into asset-backed securities (ABS, most notoriously, collateralized debit obligations or CDOs) and other securities according to tranches. These tranches were associated delay contrariant quantitys of waste in classify to afford to contrariant investors. Oftentimes, ABS were re-packaged into CDOs squared and cubed. The sordid exception prevailed that this would lessen waste by stretching it. In the excite of the discarding-point, delay omission reproves skyrocketing, it became indubitable that this scheme had grace too multifarious for anyone to expand, thus making any charybdis toll impossib