Question

write 1500 words essay report APA format about the 2007-2008 Financial Crisis. and one page of references.

The report should answer the quetions below at APA format.

What caused the Financial Crisis?

What steps the FED took to prevent a finanical collaspe in the banking system?

What industries were hit the hardest?

How did this effect the consumer?

What are the feds doing different today to avoid a repeat?

Answer 1

2007-2008 Financial Crisis

Abstract

The following report is undertaken to study the reasons and effects on the various industries one of the major financial crisis of 2007-2008. The report provides a detailed account of what were the origins of the crisis and what were its impact on the Stock markets and economy of world’s biggest economy i.e. USA.The time period of crisis was not entirely restricted to the year 2008, rather the various precursors are mapped from the year 2006 and the various effects that lasted till the year of 2009.It starts with the cause of the crisis, which and what led to a big turmoil in the US markets, the world’s largest economy and subsequently to whole of world. Then comes the impact of these crisis on the major industries and how the crisis effected the consumer.

Causes of Financial Crisis

1.1 Bursting of the Housing Bubble

It started with the home loan scheme started by Federal National Mortgage Association (also known as Fannie Mae) in 1999.The aim was to make the home loans more accesible to those with lower credit and savings than lenders which was typically required.The main purpose was to fulfill the dream of having own house for every American.Since these borrowers were considered high-risk, their mortgages had unconventional terms that reflected that risk, such as higher interest rates and variable payments. As the prosperity of the subprime market (mortgage market for borrowers with lower credit ratings) increased, the risk of defaulting also increased with it, posing a potential danger for the economy. As of 2002, government-sponsored mortgage lenders Fannie Mae and Freddie Mac had extended more than $3 trillion worth of mortgage credit. The role of Fannie and Freddie is to repurchase mortgages from the lenders who originated them, and make money when mortgage notes are paid. Thus, ever-increasing mortgage default rates led to a crippling decrease in revenue for these two companies. Initially if the borrowers could not pay the high interest rates they opted to sell their mortgage as the prices of the properties were on the rise, but gradually as the defaulters began to increase the prices of the properties stopped growing. Investors also benefitting from the interest payments and premiums also had their incomes cut-off. Homeowners were defaulting at high rates as all of the creative variations of subprime mortgages were resetting to higher payments while home prices declined. Homeowners were upside down - they owed more on their mortgages than their homes were worth - and could no longer just flip their way out of their homes if they couldn’t make the new, higher payments. Instead, they lost their homes to foreclosure and often filed for bankruptcy in the process. Despite all this the Dow Jones was on the rise, but eventually the turmoil caught up and by December 2007 US started to go into a phase of recession. By early July 2008, the Dow Jones Industrial Average would trade below 11,000 for the first time in over two years. On Sunday September 7, 2008, with the financial markets down nearly 20% from the October 2007 peaks, the government announced its takeover of Fannie Mae and Freddie Mac as a result of losses from heavy exposure to the collapsing subprime mortgage market. One week later, on September 14, major investment firm Lehman Brothers succumbed to its own overexposure to the subprime mortgage market, and announced the largest bankruptcy filing in U.S. history at that time. The next day, markets plummeted, and the Dow closed down 499 points at 10,917. The collapse of Lehman cascaded, resulting in the net asset value of the Reserve Primary Fund falling below $1 per share on September 16, 2008. Investors then were informed that for every $1 invested, they were entitled to only 97 cents. This loss was due to the holding of commercial papers issued by Lehman and was only the second time in history that a money market funds share value has broken the buck. Panic ensued in the money market fund industry, resulting in massive redemption requests. On the same day, Bank of America (NYSE: BAC) announced that it was buying Merrill Lynch, the nation’s largest brokerage company. Additionally AIG (NYSE: AIG), one of the nation’s leading financial companies, had its credit downgraded as a result of having underwritten more credit derivative contracts than it could afford to pay off. On September 18, 2008, talk of a government bailout began, sending the Dow up 410 points. The next day, Treasury Secretary Henry Paulson proposed that a Troubled Asset Relief Program (TARP) of as much as $1 trillion be made available to buy up toxic debt to ward off a complete financial meltdown. Also on this day, the Securities and Exchange Commission (SEC) initiated a temporary ban on short selling the stocks of financial companies, believing this would stabilize the markets. The markets surged on the news and investors sent the Dow up 456 points to an intraday high of 11,483, finally closing up 361 at 11,388. These highs would prove to be of historical importance as the financial markets were about to undergo three weeks of complete turmoil. Summarizing all the above points it can be said that the excess liquidity in the market proved to be very harmful for the economy, making money easily available led to excessive loans and when the interest rates were hiked again the markets in US went into a vicious cycle of recession, defaults and bankruptcy.

1.2 Response of FED

The Federal Reserve has responded to a severe recession by developing programs to bolster the financial system and restore economic growth. The Fed has the tools to unwind these programs when appropriate, maintaining price stability. The following is adapted from a speech delivered by the president and CEO of the Federal Reserve Bank of San Francisco to the Commonwealth Club in San Francisco on June 30, 2009.

The Fed has faced extraordinary challenges over the past two years and these challenges continue as this very painful recession grinds on. I don’t have to tell you how difficult these times have been for the American people. You are reminded of it every time you look at your retirement portfolio or hear about rising foreclosures and plunging home values. Your businesses may be squeezed as customers retreat and credit remains scarce. You may have seen colleagues get pink slips or you yourselves may be struggling to find a job. I’m happy to offer some good news: We’ve seen encouraging signs lately that the economy is poised to turn the corner. But as California’s 11.5% unemployment rate attests, we still find ourselves slogging through the starkest economic landscape most of us have known in our lifetimes.

Now I’d like to talk about the policies we’ve adopted to fight the recession directly. Our policymaking body is called the Federal Open Market Committee, or FOMC. It consists of the presidents of the Fed’s regional banks, like me, plus the governors of the Federal Reserve Board in Washington, including Chairman Ben Bernanke. Traditionally, our main monetary policy tool is the federal funds rate, which is what banks charge each other for overnight loans. We control this rate by pumping cash into the banking system or withdrawing it. This is a powerful tool because the interest banks pay to borrow determines what they charge for loans and ultimately works its way through to the rates businesses and households pay for credit. This December, we cut the federal funds rate essentially to zero—an extraordinary step on its own—and we’ve said repeatedly that low rates would likely be warranted “for an extended period.” As a result, many other interest rates in the economy are at very low levels. Other major central banks have taken similar steps.

Still, given the depth of the crisis we’ve faced, a near-zero federal funds rate hasn’t been enough to turn the economy around. So we’ve developed a variety of alternative ways to stimulate the economy. For example, we’ve become a major buyer of securities issued by the giant mortgage companies Fannie Mae and Freddie Mac, a move that has helped push conforming mortgage interest rates to near-record low levels—a support to the housing sector, which is under tremendous duress. In addition, the FOMC launched a program to purchase large quantities of longer-term Treasury debt, to help bring down corporate bond and other rates that are linked to Treasury yields. In total, the FOMC has committed up to $1.75 trillion—that is, trillion with a “T”—for these asset purchases by the end of this year.

1.3 Industries hit hardest were

1. Office Supplies, Stationery, and Gift Stores
2. Traveler Accommodation
3. Printing and Related Support Activities
4. Furniture Stores
5. Newspaper, Periodical, Book, and Directory Publisher
6. Cement and Concrete Product Manufacturing
7. Other Motor Vehicle Dealers
8. Lumber and Other Construction Materials Wholesalers
9. Home Furnishings Stores
10. Building Material and Supplies Dealers

1.4 Impact on consumers

The global financial crisis has badly shaken the financial stability of consumers, small businesses, large financial institutions, and even national governments," write authors Eesha Sharma and Adam L. Alter (both New York University). "We sought to understand how the experience of financial deprivation might affect various stages of the consumer decision-making process—beginning with how people visually perceive goods and ultimately concluding with their choice and consumption of those goods."

In one study, researchers approached people in a New York City park and asked them how they felt about their financial position compared to their peers and compared to the previous year. In another study, New York University undergraduates were prompted through a writing task to experience either deprivation or privilege; they then completed tasks where they picked out objects from visual arrays. In a third study, the authors found that financially deprived participants not only consumed more M&Ms than people who felt privileged, but they also preferred scarce ones to abundant ones.

"States of deprivation prompt heightened visual sensitivity to and preference for scarce goods that appear to be unavailable to other consumers," the authors explain. "Indeed, the effects only arise when consumers believe that scarce goods have not been obtained by others, and when they are unaware of how their financial state might be influencing their thoughts and feelings."

"These results suggest that consumers ought to be vigilant when shopping in a state of deprivation, since their purchasing decisions might be unduly swayed by the ensuing experience of discomfort," the authors write. "Meanwhile, scarcity marketing might be a useful tool for policy makers who seek to promote adaptive behaviors like healthy eating, physical exercise, and financial saving."

1.5 Measures by FED

The Federal Reserve responded aggressively to the financial crisis that emerged in the summer of 2007, including the implementation of a number of programs designed to support the liquidity of financial institutions and foster improved conditions in financial markets. These programs led to significant changes to the Federal Reserve’s balance sheet.

While these crisis-related special programs have expired or been closed, the Federal Reserve continues to take actions to fulfill its statutory objectives for monetary policy: maximum employment and price stability. Over recent years, many of these actions have involved substantial purchases of longer-term securities aimed at putting downward pressure on longer-term interest rates and easing overall financial conditions.

1.6 REFERENCES

• https://www.federalreserve.gov/newsevents/files/bernanke-lecture-three-20120327.pdf
• https://www.thebalance.com/2008-financial-crisis-3305679
• https://www.slideshare.net/AakarshShukla/project-report-on-2008-financial-crisis?from_action=save
• https://www.frbsf.org/economic-research/publications/economic-letter/2009/july/economic-crisis-federal-reserve/
• https://www.cnbc.com/2012/06/01/Industries-Hit-Hardest-by-the-Recession.html
• https://www.britannica.com/topic/Financial-Crisis-of-2008-The-1484264
• https://phys.org/news/2012-04-global-financial-crisis-affect-consumer.html
• https://www.cbsnews.com/news/how-to-prevent-the-next-financial-crisis/