How has the United States attempted to reform its financial sector to avoid a repeat of...

How has the United States attempted to reform its financial sector to avoid a repeat of the financial crisis of 2008 and how likely is it that these will succeed in doing so?

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Expert Solution

Economy-watchers were ignorant of how the blend of financial reform, derivatives, and the subprime mortgage industry had created uncertainty in the economy as a whole. Deregulation- The Glass-Steagall Act of 1933 was replaced in 1999 by the Gramm-Leach-Bliley Act, also known as the Financial Services Deregulation Act. The repeal enabled banks to use reserves to lend in derivatives. Credit default swaps and other derivatives were removed from oversight under the Commodity Futures Deregulation Act the following year.

Loans to people who were not eligible were made by unregulated mortgage brokers.

The derivatives were so lucrative that more loans were required by banks to back them up. Banks pushed exotic loans to lue buyers, such as interest-only loans

These loans were picked up by several first-time buyers to get smaller monthly payments. As interest rates stabilised to a higher pace, the debt could not be paid by these borrowers. Then house costs dropped and they were unable to sell their houses at a profit. They defaulted as a result.

Rahul Sunny answered 1 year ago

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