Question

How would a more controlled access to credit by firms and individuals have reduced the over leveraging of businesses and individuals and decreased the likelihood of the recent economic downturn?

no less than 250 words in length, make at least one reference to your text or other course materials and provide in-text citations. As you reference information from a source, be sure to provide APA citations in text and at the end of your post.

Answer 1

Controlled access to credit has given two important advantages among the others. It has caused banks and financial institution to exercise financial prudence and apply risk analysis before issuing credit to firms and households. It helped in stopping the quantum of subprime lending, a primary reason of financial crisis. It helped banks to keep good quality assets on their balance sheet that creased the value of the banks.
The second benefit was the sensible spending being done by the firms and households. It stopped ugly buying habits and inflation could not rise beyond a limit. So, excessive leverages being not done and financial risks were under the control. It led to the decrease in the risk of facing an economic downturn.

. A more controlled access to credit by individuals and firms would have ensured that the lending standards were high and not lax, and would have ensured that only credit worthy firms and individuals who can be able to repay their loans would have been able to access the credit. Thereby it can be reduce unworthy mortgages and loans that were being taken by people and thus help in preventing the subprime crisis, as there would not have been as many defaults on debts as there was during the subprime crisis in addition a more controlled credit control would have allowed for a more comprehensive risk analysis to be conducted on the underlying assets used for securitization.

Therefore, a more controlled access to credit by firms and individuals would have reduced the leverage that people and firms had, thereby reducing risks of borrowing and mitigating the likelihood of the sub-prime crisis which was among the key causes of the great recession of the late 2000s. The high debt levels have created vulnerability for the United States and opened a door where foreign countries can sell off the U.S. securities that they hold resulting to a dramatic rise in interest rates in the U.S., which would be catastrophic for capital inflows in the company. Such an occurrence can impact the ability of the United States of America to borrow any funds for many years resulting to very wide implications and impacts touching on the sustainability of the U.S. foreign policy in the world