Financial Crisis of 2008

The 2008 financial crisis is the worst economic catastrophe since the Great Depression of 1929. It happened notwithstanding Federal Reserve and Treasury Department goes through great lengths to prevent it.

It led to the Great Recession. That's when the cover prices fell 31.8 percent, more than the price plummet throughout the Depression. Two years afterward the slump ended, unemployment was still above 9 percent. That's not as well as disheartened workforces who had given up observing for work. 

The first sign that the economy was in distress happened in 2006. That's when covering prices began to fall. At first, realtors celebrated. They thought the excited housing market would reappearance to a more justifiable level.

Realtors didn't comprehend there were too many homeowners with dubious credit. Banks had permissible people to take out loans for 100 percent or more of the value of their new homes. Many liable the Community Reinvestment Act. It broke banks to make investments in subprime areas, but that wasn't the fundamental cause. 

The Gramm-Rudman Act was the real villain. It permitted banks to occupy in trading lucrative derivatives that they sold to investors. These mortgage-backed reservations needed home loans as guarantee. The offshoots fashioned a voracious demand for more and more mortgages. 

Hedge funds and other financial institutions around the world owned the mortgage-backed securities. The securities were also in mutual funds, corporate assets, and pension funds. The banks had chopped up the original mortgages and resold them in tranches. That made the derivatives impossible to price.

Why did stodgy pension funds buy such risky assets? They thought an insurance product called credit default swaps protected them. A traditional assurance company known as the American International Group sold these swaps. When the derivatives lost value, AIG didn't have enough cash flow to honour all the swaps.

The first signs of the financial crisis appeared in 2007. Banks panicked when they grasped, they would have to absorb the losses. They stopped offering to each other. They didn't want other banks giving them worthless mortgages as guarantee. No one wanted to get stuck holding the bag.  As a result, interbank borrowing costs, called Libor, rose. This mistrust within the banking community was the primary cause of the 2008 financial crisis. 

The Federal Reserve began pumping liquidity into the banking system via the Term Auction Facility. But that wasn't sufficient.

How It Could Happen Again

Many legislators blame Fannie and Freddie for the entire crisis. To them, the answer is to close or privatize the two agencies. But if they were shut down, the housing market would collapse. They guarantee 90 percent of all mortgages. Furthermore, securitization, or the bundling and reselling of loans, has spread to more than just housing. 

The government must step in to regulate. Congress approved the Dodd-Frank Wall Street Reform Act to prevent banks from taking on too much risk. It allows the Fed to decrease bank size for those that become too big to fail. 

But it left many of the procedures up to federal regulators to sort out the details. Meanwhile, banks keep getting bigger and are pushing to get rid of even this regulation. The financial crisis of 2008 proved that banks could not regulate themselves. Without government oversight like Dodd-Frank, they could create another global crisis.