Question

The US regulators and central bankers were criticized for their part in the global financial crisis 2007-2009. Do you agree? Explain your answer. What were their responses to the crisis?

Answer 1

The main cause of the global financial crisis is the widespread failure in government regulations.The other cause that is often pointed out is excessive risk taking and crisis faced in the subprime lending market(due to loans being sanctioned to owners with poor credit.)The crisis which originated in the US ended up as an international financial crisis.

Deregulation in the banking sector which began with repeal of the Glass-Steagall by the Gramm-Leach-Bliley Act was the tip of the iceberg .This repeal permitted banks to invest deposits in derivative market.In 2002 the Fed had cut interest rates to as low as 1.25% .This in turn resulted in the creation of mortgage backed securities.But in 2004 the rates were revised and by the end of 2005 it was 4.25% and by the end of June 2006 it rose to 5.25%.This started affecting the homeowner's ability to pay their mortgages which in fact started to result in defaults.This thus lead to the bursting of the housing bubble.The deregulations allowed speculations on derivatives which were in turn backed by cheap mortgages issued to customers with poor credit.Since these home loans were related to the hedge funds the stock market too tool a huge hit.

s.The sheer scale of the US banking industry resulted in a threat to financial systems across the world,and to prevent this the government responded with huge bailouts.Most of the companies that were deemed to big to fail required enormous bailout AIG($182 billion ) was one of the many.The treasury department spent $439.6 billion in buying bank and car stocks.

So in conclusion the Global financial crisis of 2007-2009 could have been avoided if the regulators and central bankers had paid more attention to the clues of the upcoming crisis which started showing from 2005 onwards.