Question

During the summer and fall of 2008, the U.S. financial system and financial systems around the world appeared to be on the verge of collapse. How did we get into this condition? What did we do to get out of it? How can we prevent another such scenario in the future?

Answer 1

The financial crisis during 2008 was basically regulation failure as in 2008 it started with sharp fall in the housing prices and regulatory authorities were unable the access the risk and its intensity in timely manner to take some corrective measures. The regulatory authorities were failed to regulate the subprime market and stabilize the system. The mortgage brokers offered risky mortgage loans to consumers and increased the default risk and these processes were not adequately regulated by the government regulatory authorities. Trading in mortgage backed securities spread risk in financial system and created risk of market failure.

To get out of the crises; the Housing and Economic Recovery Act was passed in 2008 in the US to restore consumers’ confidence in the domestic mortgage industry after the subprime crisis in the country.

We can prevent another such scenario in the future by putting some limit on excessive borrowing and risky investments by regulators and keeping transparency in the system by the financial institutions. Also the more stringent regulation on subprime lending can help to avoid such crises in future.