Question

write a three page report and one sources page where did you get the information from on the 2007-2008 Financial Crisis.

The report should answer the quetions below:

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?

Answer 1

1. Financial crisis of 2007-2008:

The financial crisis of 2007 – 2008 is considered to be the worst crisis since the depression of 1930’s.

Reasons for the crisis:

• Due to high risk complex financial products, undisclosed conflicts of interest, failure of regulators, credit rating agencies and market it to rein in the excesses of Wall Street.
• Failure in financial regulation & supervision, failure of corporate governance and risk management at many financial institutions, excessive borrowing, risky investments, lack of transparency etc.
• The glass steagall act removed the division between investment and depository banks in the US.
• Credit rating agencies & investors failed to price the risk related to mortgage related financial products.
• Research also shows the role of interest rate spreads.
• Tradable assets such as mortgage securities to be valued according to current market value rather than historic cost. When the market of such securities collapse, the resulting loss effected the financial institutions holding them even if there are no plans to sell them.

1. Steps taken by FED to prevent financial collapse:

Many of these actions involve substantial purchase of long term securities aimed at putting downward pressure on long term interest rates and easing overall financial conditions.

There are three tools established for this purpose:

• The first is closely linked to central bank’s traditional role as lender of last resort; involve the provisions of short term liquidity to banks and other financial institutions. Because the bank funding markets have a global scope, the Federal Reserve also approved bilateral currency swap agreements with several foreign central banks.
• The second set of tools involves providing liquidity directly to borrowers and investors in key credit markets. The crisis related commercial paper facility funding, money market investor funding facility and term asset backed securities loan facility fall in this category.
• The third consists of where Federal Reserve expanded its open market operations in order to support the functioning of credit markets, put downward pressure on long term interest rates. For example, FOMC decided to increase policy accommodation by purchasing agency guaranteed mortgage backed securities (MBS) at the speed of $40 billion per month to help strong economic recovery and also inflation is at the rate consistent with its dual mandate. In addition it also purchased long term treasury securities at the rate of $45 billion per month.

1. Industries that were hit the hardest:

• Industries that depend more on external finance should be affected more severely by credit crunch that characterizes the financial crisis. These industries were affected more by financial crisis.
• Banking industry was the other one. The banking collapse of 2008 will be felt for years if not for decades to come.

          Research shows that due to collapse of Lehman brothers the world’s financial system was affected very badly. It took huge tax payer financed bail outs to shore up the industry.

GDP remained below its pre crisis peak in many countries especially in Europe where financial crisis became euro crisis.

The casualties in the US include:

1. Entire investment banking industry.
2. Biggest insurance company.
3. The two enterprises chartered by government to facilitate mortgage lending.
4. The mortgage lender.
5. The largest savings and loan and two of the largest commercial banks.
6. The American auto industry which pleaded for federal bailout found itself at the edge of the problem.
7. The high home prices in US finally turned downward spread quickly first to entire financial sector and then to financial markets overseas.

Sources:

The major source of information that was taken for the above report was from Google.

For the effected industries – the information was taken from Britannica.com

For general information on financial crisis – the same was taken from Wikipedia.

For steps taken by FED - https://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm

The information was taken from the above link.