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Basic Financial Crisis Paper

971 words - 4 pages

On Crisis and Resolution

It is my belief that the 2008 financial crisis was caused by a number of issues, most prominently subprime lending and borrowing in an over zealous pursuit of profits, a lack of preventative action, deceptive investment banking, and finally an inconvenient rise in interest rates. I am also confident that the crisis could have been averted through more stringent monitoring of the asset-backed security and consumer lending markets. Furthermore, a similar crisis can be prevented through new government regulatory measures.
It can be argued that one of the initial causes of the crisis is rooted in the Federal Reserve’s decision to lower interest rates following the ...view middle of the document...

My understanding of economics leads me to believe that the keystone crumbled when the Federal Reserve raised interest rates to the 2007 high-mark. This created a rapid domino effect that began by pushing housing prices down. This fall compiled foreclosures on top of an already unprecedented number of defaults, ultimately creating the mortgage crisis. The mortgage crisis then led to mistrust among large institutions and lack of lending that resulted in the liquidity crisis and finally economic recession.
We are now on the slow road to recovery, making it ever more crucial to develop and agree upon preventative measures. Regardless of what the Senate, House, or anyone for that matter has proposed as a solution, I feel there are a few core reforms that are absolutely imperative and create a proactive solution rather than a reactive one. Firstly, the Federal Reserve must be granted the power to monitor banks that are federally insured more closely. This would be to prevent predatory lending to sub-prime consumers, and ultimately another mortgage crisis.
Furthermore, I feel it necessary to make the asset-backed security and mortgage markets more transparent. It should, at the very least, be required that firms report on all “Special Investment Vehicles,” despite their nature of remaining off the balance sheet. This will diminish any covers from being placed over securities, therefore preventing deceptive trading practices under the veil of special investment vehicles.
As yet another preventative measure, I would like to see regulatory monitoring of risk-laden investments held by the country’s largest institutions. What this means is that firms that are large enough to bring other institutions down with them in the event of catastrophe, otherwise deemed “too big to fail,” should have a limit placed on the amount of capital they can have tied up in high-risk investments. In my opinion, the best way to handle such a regulation would be for the...

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