The economic crisis of 2008

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The Economic Crisis of 2008

Introduction

The financial crash of 2008 was the biggest blow that shook the worldwide financial system in almost 100 years—the global banking systems were pushed to the corner until some of them exited the industry. The pinch of the world financial crisis was properly felt towards the end of September 2008 after Lehman Brother, the world's biggest banking institution, was considered bankrupt. The financial institution was among the giant companies in Britain worth £90bn was wiped out of business in a single, leaving some of its cash machine empty. Then on the same day, the former president of American announced that there would be no bill out. 'Lehman's, one of the oldest, richest, and most powerful investment financial institutions globally, was not too strong to fail. The financial crisis signs started to depict themselves late in 2007 when giant institutions like British bank Northern Rock became unable to fully fund their operations and request emergency funding from the Bank of England. Regardless of the warning signs, only a few investors suspected that the worst crisis in almost eight decades could occur and paralyze the world's giant financial institutions. The crisis was a blow to financial institutions and retired individuals who had saved their funds with the banks.

Causes of the Economic Crisis of 2008

First, the battle among the financial institutions regulating bodies was a major contributor to the great economic recession experienced in 2008. FGIC was the strongest financial regulator in the country with a good track record since its inception (Montes, 2014). When it was the only bank regulating agency overseeing the bank's performance, it never allowed banks to engage in derivative investment with deposits. The chipping in other bank regulators such as the Federal Reserves, loan insurance Corporation, and Securities and Exchange Commission spark wrangles among themselves at the expense of bank oversite and thus poor back performance.

Each oversight agency fought for seniority in regulating the operations of the banking institutions. The greed for power subjected the regulations authority to divert their attention from overseeing the banking industry to self-interest. According to Montes (2014), the regulation agent struggled to ensure its financial police won the debating while discouraging their opponents' opinions. This battle of policymaking left the financial institutions with proper guidelines for their operations and failed.

Second, banks' securitization of loans is another factor that propelled the onset of the economic crisis witnessed in 2008. Initially, banks were mandated by law to retain most of the loans they originated from the public (Calida & Katina, 2015). It was an incentive to the lenders because they could only underwrite loans with a higher repayment chance. With the introduction of securitization, the incentives lenders had was washed away since the originating bank does not hold any securitized loans upon which underwriting quality standards can be monitored. The booming of real estate

The lender issuing the funds were not at risk even if the mortgage defaulted in payment because they passed the loans to the big financial institutions for securitization—securitizations of loans operated without lending standards to attract subprime under-qualified or unqualified for bank loans. The subprime attracted investors in CDOs and MBs because they paid high-interest rates on the borrowed loans (Spahr & Sunderman, 2014). On the same note, building reduced the investor's risk and received a stellar rating from the rating firms. The booming of real estate markets made the situation lucrative to everyone, making them bid up the homes available.

The third, greed and political influence among the financial industry players greatly fueled the 2008 economic crisis. The homeowner wanted to enjoy the supernormal profit from the mortgage by flipping the real estate. On the same note, mortgage originators went to a great extent, both legal and illegal mechanisms, to see loan volumes maximized, which drained their financial reservoirs in the long run (Spahr & Sunderman, 2014). Home appraisers contributed to the vice by paying banks inappropriate sums of money to securitize toxic subprime mortgages. Financial institution regulators, too, contributed to the banking industry's failure by deregulating the lending and borrowing activities to enjoy a larger payback from the private sector.

Politicians encouraged banks to lend money to un-credit worth constituents who never repaid the loans. According to Kern, Marien & Hooghe (2015), since 1980, politicians and bankers have formed an uneasy alliance. The strong bond between the politician and bankers has resulted in an ill outcome to its detriment. Politicians have encouraged banks to merge on the community reinvestment act, which is a disadvantage to the bank because it would offer credit untrustworthy individuals who may never pay back, subjecting the bank into an economic crisis. 

Lastly, the banks' Deregulation by the government of the day facilitated the economic crisis experienced in 2008. Initially, banks were not allowed to engage in risky gambling activities like a derivative investment (Spahr & Sunderman, 2014). However,...