Introduction
The financial crisis is one of the events that have dominated debates in the United States and other parts of the world in the recent past. The crisis, whose origin started within the American banking sector, has had a great impact on the global financial system. Many economies across the world are still dealing with its impacts more than six years after it happened (“Crash Course: The Origins of the Financial Crisis” par. 1). Economic analysts describe the financial crisis as the worst recession to have been experienced in the United States in more than eight decades. This essay will discuss the origins of the financial crisis and some of the measures that the American government should have taken to stop it from happening. One of the major elements of global economies that suffered a lot due to the crisis is a decline in the Gross Domestic Product (GDP). Most of the affected countries are yet to get their economies back to the level they operated on prior to the crisis (“Crash Course: The Origins of the Financial Crisis” par. 2).
Summary of the article
The major origin of the financial crisis was the indecision on the part of financiers with regard to the strategies they were applying in risk management. One of the major contributing financiers was Lehman Brothers, a global bank that failed to apply effective risk management strategies with regard to lending money to its customers who sought to invest in real estate (“Crash Course: The Origins of the Financial Crisis” par. 2). Their lending habits contributed a lot to the bursting of the American housing bubble, as many people started worrying about the possibility of housing prices inflating in the future. This led to very many subprime borrowers applying for mortgages, thus inflating the housing prices further.
The lack of effective moderation with regard to lending regulations by the financial institutions created a culture of complacency that encouraged borrowers to take more risks (“Crash Course: The Origins of the Financial Crisis” par. 3). European banks also took advantage of this loophole that was characterized by low-interest rates and little consideration of the credit history of borrowers. Another factor that economic analysts argue could have contributed to the crisis was the superfluity of savings (“Crash Course: The Origins of the Financial Crisis” par. 5). This meant that very few people were investing their money, a factor that triggered the financiers to lower their interest rates. General poor oversight of financial institutions also led to the financial crisis, as evidenced by the fact that Lehman Brothers filed for bankruptcy (Cooper 60).
Great moderation refers to the act of reducing the volatility rate of fluctuation cycles exhibited by businesses. This strategy was first used during the 1980s as the federal government sought to reduce the predictability of business cycles (Cooper 81). This phenomenon is closely linked to the financial crisis, as many analysts argue that it promoted a culture of complacency among financiers. Policymakers and investors in the American financial industry believed that the macroeconomic sector of the country had stabilized, thus let their guard down with regard to the risk management strategies they used when giving money to borrowers (Desai 136). This led to credit agencies being a major part of the crisis, as they offered very friendly mortgage terms to their customers. As a result, very many people applied and received loans that they could not service (Baily and Johnson, par 2). This was one of the contributing factors to the failure witnessed within several banks. They had given out a lot of money to borrowers who did not have a good credit history, thus leading to a high number of defaulters (Desai 143).
One of the mistakes made by the regulators was their inability to create an environment that promoted trust among different lenders. They also failed to regulate global account imbalances that had huge deficits (Bernanke 19). In addition, the regulators ignored the need to control the capital that came from Asia, where investors had huge savings that they were investing in the United States. This phenomenon led to a decline in the interest rates across various markets, thus attracting more investors from Europe and eventually causing the bubble to burst (Baily and Johnson, par 4). The government ought to have saved Lehman Brothers from going bankrupt because it could have helped in regulating the amount of capital inflow that came from Asia and Europe (Bernanke 31). Although the federal government argued that it did not have any legal backing to do it, the financial institution qualified for a bailout owing to the fact it was narrowly insolvent (Baily and Johnson, par 6).
“The Global Financial Crisis and the New Monetary Consensus” is another source that discusses the causes of the financial crisis. The book authored by Marc Pilkington agrees with all the explanations found in the article with regard to the factors that triggered the financial crisis. In particular, the author emphasizes the mistakes made by regulators in terms of moderating the lending habits of financiers.
Conclusion
The 2007 financial crisis is one of the darkest moments in American history that could have been avoided if the right regulatory measures were put in place. The mistakes made by the regulators impacted the lending behaviors of financiers, thus leading to the financial crisis that resulted in a huge global recession. In addition, the federal government should have made an effort to bail out Lehman Brothers, because their decision to file for bankruptcy creates an unnecessary scare that triggered irresponsible lending by other financial institutions.
Works Cited
Baily, Martin, and Matthew, Johnson. The Origins of the Financial Crisis. 2008. Web.
Bernanke, Ben. The Federal Reserve and the Financial Crisis. California: Princeton University Press, 2013. Print.
Cooper, George. The Origin of the Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy. New York: Harriman House Limited, 2008. Print.
Crash Course: The Origins of the Financial Crisis 2013. Web.
Desai, Padma. From Financial Crisis to Global Recovery. New York: Harper Collins Publishers, 2013. Print.
Pilkington, Marc. The Global Financial Crisis and the New Monetary Consensus. New York: Routledge, 2013. Print.