Question

In a few sentences, please describe what factors led to the Great Recession. How should Federal regulation of the financial system change (if at all) to avoid a repeat of the Great Recession? (Be sure to consider some of the proposals we discussed in class and their pros and cons)

Answer 1

The Great Recession was a global economic decline that destroyed both the banking and real-estate sectors and the world financial markets. The recession has led to a increase in household mortgage foreclosures worldwide and has caused millions of people to lose their life savings, jobs and homes. It's widely regarded as the longest period of economic downturn since the 1930s Great Depression. Though its consequences were certainly global in nature, the Great Recession was most pronounced in both the U.S .— where it emerged as a result of the subprime mortgage crisis — and Western Europe.

When the subprime mortgage market plummeted, many banks were in deep trouble as a large portion of their assets had taken the form of subprime loans or bonds generated from subprime loans along with lower-risk consumer debt forms. Partly because it was difficult to trace the underlying subprime loans in any given MBS, including for the entity that owned them, banks started to question the solvency of each other, contributing to an interbank credit freeze, which undermined any bank's ability to expand credit even to financially healthy clients, including businesses.

Should have avoided the crisis by two issues. The first should have been mortgage broker oversight, which made the bad loans, and hedge funds, which used too much leverage. The second would have been known early on that this was a matter of legitimacy. The only remedy was to buy bad loans from the Bank. In addition to streamlining the liquidation process, another important aspect of the Dodd-Frank Act is the restructuring and integration of the financial system's numerous prongs: commercial banks, investment banks, insurance firms, securities broker-dealers, etc. Through backing an influx of money with a second provision targeted at creditors, the government will assist when reacting to a crisis.