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Financial Crisis 07-08

Financial Crisis 07-08
"""Financial crises have persisted throughout history, dating back to the establishment of the first empires and colonies. Their appearances are occasionally unexpected. By implementing rules and regulations, crises can be prevented from escalating into more dangerous and severe situations, such as depressions. The global economic crisis of 2007-2008 was primarily the result of a significant reduction in the Great Depression-era financial regulations that were intended to stabilize the economy and prevent future economic disasters. Its origins can be traced to low interest rate policies implemented by the United States government to encourage home ownership, as well as the introduction of numerous risk-taking techniques such as derivatives, which were wagers on the creditworthiness of a specific company. Other nations, including Iceland, Japan, Spain, the United Kingdom, and a great number of others, adopted these strategies, resulting in negative economic outcomes.

The Glass-Steagal Act was reversed by the passage of the Gramm-Leach-Bliley Act in 1999. The Glass-Steagall Act was enacted in 1933 to prevent banks from engaging in hazardous activities such as speculating with depositors' funds and forming partnerships with other businesses. Upon entering a new era of global financial liberalization, this modification to the regulations made it possible for many investment banks to operate extensively. Greed and discontent were the initial stimulants that contributed to the erosion of confidence that profits will remain low. As a consequence of deregulation, derivatives and other products that Warren Buffett refers to as ""weapons of mass destruction"" were rapidly introduced to the market. The most prevalent were credit default swaps and collateralized debt obligations. This led to the development of the securitization process, in which the party making the loan is unaffected by the borrower's failure to repay. This was primarily because mortgages were sold to investment institutions by lenders. The investment banks then bundled these mortgages with other loans, including auto loans, credit card loans, and student loans.

This led to the creation of collateralized debt obligations, or CDOs, which were sold to investors worldwide. Due to the fact that all of these products received the maximum investment rating from rating agencies, many investors viewed them as risk-free investments. As a result of not being liable for defaulting loans, creditors began to make riskier loans. As their primary objective was to maximize profits by selling more CDOs, investment banks disregarded the instability of the loans, which ultimately led to an increase in predatory lending. Credit default swaps constituted an additional type of derivatives. They were insurance for investors who had acquired CDOs. Insurance companies such as AIG were the primary service providers and promised to compensate investors for any losses should the CDOs fail.

On the derivatives market, other speculators can also purchase insurance for a CDO they do not own. This is an important fact to bear in mind. This increased the insurance companies' risk, as they were now responsible for covering the losses of multiple parties. Numerous investment banks began betting against their CDOs, signifying that they would fail. Due to the unregulated nature of the derivatives market, insurance companies were not required to disclose the amount of money set aside to cover potential losses. This exposed AIG and numerous other insurance companies to high levels of risk, which resulted in a disaster. Early in 2007, the situation deteriorated and widespread hysteria began to spread. As credit pressures worsened, economic activity began to deteriorate. The reluctance of lenders to extend additional credit was followed by massive loan defaults and bankruptcies, as many institutions around the globe encountered liquidity problems and were unable to meet their obligations. Numerous nations, notably those in Europe and East Asia, experienced a rapid GDP decline. This was primarily due to a decline in consumer confidence, low product demand, and a global decline in production. As a result of numerous companies' attempts to mitigate the prospect of bankruptcy by laying off large numbers of employees, unemployment skyrocketed. In certain European countries, the unemployment rate has attained an all-time high, surpassing 27%.

In contrast, China, the second largest economy in the world, was significantly impacted by a decline in global trade due to its significant exporting role. The 2007-2008 financial crisis is regarded as one of the most severe and agonizing financial crises to have hit the global economy since the Great Depression. In order to stabilize the economy and prevent future crises, many governments around the globe have taken precautionary regulatory measures and implemented a multitude of new policies. The United States, the epicenter of the 2007-2008 financial crisis, is now pursuing a more regulated strategy with the intent of substantially mitigating the current consequences.""

" - https://www.affordablecebu.com/
 

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"Financial Crisis 07-08" was written by Mary under the Finance / Wealth category. It has been read 109 times and generated 0 comments. The article was created on and updated on 31 May 2023.
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