2007 Economic Crisis Review
Abstract
This article is an academic review of the economic crisis that struck in 2007 whereby the world economy experienced deep and long prolonged recession with the crisis being considered as the worst to be experienced since the Great Depression . This article largely lies its basis on the U.S experience during that period with the effects, which resulted from the crisis in the overseas markets outlined. Also, the article brings an understanding of some of the conceptual underpinnings of the issues lying at the heart of the economic crisis. The underlying causes of the economic crisis were attributed to excessive risk taking which resulted from prolonged periods of economic stability. According to Foster & Magdoff, 2009 the major casualties of the crisis were the banking industries and insurance companies and companies that relied majorly on credit were also affected immensely. The crisis had a worldwide effect due to economic globalization thus many investors in other countries who were exposed U.S financial markets were affected because of the negatively impacted institutions. Taken as a whole the articles reviewed here attributes several hypotheses about the crisis highlighting several causes that led to the crisis which almost plunged the entire world into recession with practical implications that came up as a result of the crisis and the remedies applied.
2007 Economic Crisis Review
Introduction
The global financial crisis that arose from the bursting of the housing bubble that was experienced in the U.S metamorphosed to be the worst recession experienced in the world. The crisis largely struck as a surprise to the majority of the policy makers, investors, and academicians with most of them confidently agreed that the crisis could have hardly been predicted . Despite this, the warning signs were evidently visible with the large economy countries having their economy financed by other countries mainly which participated in the oil exportation. To avoid repeat occurrences, and to terminate the worsened condition, advanced and developing countries reacted by injecting massive monetary aid to the financial markets, and slashing of interest rates to nationalize banks. Because of the immediate response undertaken, a catastrophic depression that was to affect many countries was avoided .
Vast telltale signs that could have raised the alarm about the impending crisis characterized the pre-crisis period. These signs were clearly ignored by the majority of the investors and academicians who blatantly made profuse claims attributing them to the new era. It was evident of an existence of general euphoria with the conditions that were affecting the global economy thus the causes of the crisis have become a major concern amongst policy makers. Therefore, a Large focus is made on the role of market failure in the arising of the crisis.
The crisis, which started to be experienced in the summer of 2007, was attributed to result from the initial prolonged period of economic stability in the region . The initial stability was characterized by a series of lesser economic shocks with interest rates, which were low, and a steady growth in the countries’ economies. Additionally, low rates of inflation were experienced which resulted from high rates of imports hence these conditions largely led to reduced risks and encouragement of high leverage on the financial markets .
Further studies show that the causes of the crisis can be traced to problems in the housing market . This is attributed to the condition whereby borrowers majorly subprime borrowers borrowed to buy homes. This was perceived from the good intentions by the government with its urge to extend homeownership to a larger portion of the society. The author displays how automated underwriting system, led to an easier and faster method for loan approvals for the borrowers hence leading to a great reduction in the cost of loan processing. This practice, in the end, led to many subprime borrowers falling victims to the mortgage brokers and the lending institutions, which offered them loans that they eventually could not afford to repay . Also, other borrowers participated in the mortgage fraud by giving incorrect details concerning their financial capabilities and intentions they had for the mortgaged properties they wanted to acquire.
The economic crisis is also perceived to have been resulted from the failures of the methods used for the risk management and analysis . With the recent years having financial analysis being more sophisticated and much more mathematical, the complicated nature of these techniques could not capture the true risks resulting from mortgage-backed Securities. Analytical errors that arose led to the overstating of the majority of the mortgage-backed securities with this flaws being subjected by the credit rating agencies who failed to take required responsibility of their failed risk assessment .
Studies also show that the problem of regulation is also hailed as one of the major causes of the economic crisis with deregulation being the major cause of the problem . This is seen whereby the regulators failed in maintaining their role of enforcing the existing set regulations. Therefore, it is acknowledged that poorly designed regulation with weak regulatory enforcement measures played a role in the crisis that struck the economy . With this regard, the structure of housing regulation, which encouraged a widespread homeownership greatly, influenced many people and institution to partake on the risks. Apart from the debacle implicated by failure in set regulations, other socio-economic institutions attributed to the rise of the crisis because of their failure to perform as required. These institutions include large financial firms that had serious problems in corporate governance, which included management conflicts .
Remedies to the crisis
Some of the measures undertaken to aid the already worsened situation included: Mortgage lenders and financial institutions that offered money-lending services had to come up with a way to ensure that there are no systemic defaults by borrowers. This was to be achieved by ensuring that each borrower was in a capability to cover the interest and pay the accrued amount from the borrowed money. As a result of poor accountability by the rating agencies, a proposal to increase completion between the rating agencies and a reduction of the conflict of interests within the firms was implemented. Also, securitization of loans to have large amounts of asset-backed securities to curb the defaulters, thus lending institutions should ensure the borrowers guarantee securities.
Conclusion
The lesson drawn from this review largely relates 2007 crisis to the risks that arose from extended levels of advantage, banks, and other financial institutions who offered lending services and borrowers from mortgages as the major causes of the crisis. It is also evident that because of the crisis economies around the world were greatly affected with millions of cases of job losses hence portraying the impact of the crisis as diverse.
References
Dimsdale, N. H. (2012). The Financial Crisis of 2007–9 and the British Experience. Oxonomics.
Foster, J. B., & Magdoff, F. (2009). The Great Financial Crisis: Causes and Consequences.
Kolb, W. R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Hamilton printing company.
