“Lending Companies and the downfall of the 2008-2009 Financial Crisis”

| June 14, 2018

“Lending Companies and the downfall
of the 2008-2009 Financial Crisis”
Since the Great
Depression of 1929-30, the economy faced another biggest turmoil or what is
being called as the worst financial crisis in 2008. The indications for the
arrival of such crisis began in January 2008 when there was news of drastic
fall in the profits of the Citigroup banking. It had a great impact over the
New York Stock Exchange at that time. Followed the incidence, there was a
series of declaration of a number of American and European banks. All these
banks and financial institutions declared massive losses in their 2007 end of
the year results.

Later in the
same year, a 158 year old investment bank – Lehman Brothers became bankrupt and
the stock broking firm – Merril Lynch was taken over. Such kind of moves and
incidents further increased the intensity of the recessionary situation. During
the same period, there were some moves by Goldman Sacks and Morgan Stanley to
get more protection from bankruptcy. As a result, the government need to step
in to stop any further losses in the economy and it made dramatic interventions
in the financial markets. In fact, four other investment banks and Wall Street
all started showing downturn in their performance results at that time. US
banking system were in need of billions of Dollars and its effect started
reflecting into the decline of the real economy. Gradually,
the crisis became global in nature and the entire worldonce again headed
towards the period of inevitable recession. That is why, it was called as one
of the worst economic downturn since the WWII. Next few years really became
difficult for the world economies.
The U.S economy faced
the eight month long recession period which was worsened by the terrific attack
of the terrorists on September 11. The basic reason behind the recession was
that there was too much increase in the money supply in the economy because
central bank had reduced the interest rate. It motivated the investors to
borrow high amount for more investment particularly in the real estate sector
in the economy. Increase in money supply in the economy helped in easing out
the credit access which encourages people to take loans particularly home
loans. This leads to rise in the demand for homes and the prices of real estate
had shoot up. Particularly the mortgage lenders offered too much “creative
financing” to lot of risky borrowers who did not had good credit background as
well. They allowed for adjustable rate mortgages which took the loans on unpaid
interest on the principal amount of home loans. They were speculating that the
price of the real estate sector will increase a lot giving them benefit in long
run. But in the long run, people were not able to pay back their loan which
made the banking sector bankrupt. It was one of the main repercussion effects
of subprime mortgage recession in U.S. The whole U.S shook down and there was
drastic fall in the money supply in the country which resulted into the
recessionary situation. The main blame went onto the mortgage brokers and
investment firms which were offering high loans to even high risk people.
Another repercussion which led to the fall in the aggregate demand was the rise
in the interest rate due to non-payment of debts. Critics also targeted
mortgage giants Fannie Mae and Freddie Mac, which encouraged loose lending
standards by buying or guaranteeing hundreds of billions of risky loans. (Bianco, 2008).
My research question is whether the crisis
situation became worse due to monetary policies being implemented by the Fed to
make instant changes in the loanable funds market? What were the effects of the
policy actions over the lending companies which worsen the recessionary
situation?

REFERENCES
Krugman,
P., Obstfeld, M., &Melitz, M. (2013). International economics: Theory and
policy (9th ed). Upper Saddle River, NJ: Prentice Hall.

Ronald R. Cooke, ‘BANKS:
Bleeding Value And Hiding Desperation’, Financial Sense, 24 March
2008,.financialsense.com/editorials/cooke/2008/0324.html”>http://www.financialsense.com/editorials/cooke/2008/0324.html

Shiller R., The Subprime Solution:
How Today’s Global Financial Crisis Happened, and What to Do about It
(Princeton, NJ: Princeton University Press, 2008), pp. 1–9

World
Economic Outlook Update. Rapidly
Weakening Prospects Call for New Policy
Stimulus, IMF,November 6,2008,.imf.org/external/pubs/ft/weo/2008/update/03/index.htm”>http://www.imf.org/external/pubs/ft/weo/2008/update/03/index.htm
World
Economic Outlook, 28 January 2009,.imf.org/external/pubs/ft/survey/so/2009/RES012809A.htm”>http://www.imf.org/external/pubs/ft/survey/so/2009/RES012809A.htm

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