Question

In: Finance

what could have been done better in preventing the global meltdown?

what could have been done better in preventing the global meltdown?

Solutions

Expert Solution

Global meltdown refers to the lehman Brother collapse that is the sub-prime crisis. The housing bubble created led to a great impact all over the world. The excessive sale of loans to investors and risky loans backed by similar type of securities could have been avoided.

Two things could have prevented the crisis. The first - regulation of mortgage brokers, who were occupied with bad loans, and hedge funds, excessive use of leverage. The second could have been early recognition of the credibility problem. The only solution with government was buying bad loans.

But the financial crisis was also becauase of financial innovation. Regulation could have eased the fight with downturn by reducing leverage. however, it would not have prevented the creation of more financial products. To an extent, fear and greed always create bubbles.

The Bush administration should have reduced the outsized fiscal deficits, and should have acted to slow an overheated economy. The Federal Reserve should have increased the lending rates to decelerate the credit boom. Regulators should have become more stringent with prudential principles for all the complex financial operations of financial institutions.


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