Question

What were the reasons for the global financial crisis in 2008? How did it develop?

Answer 1

Financial crisis caused the total collapse of Lehman Brothers as well as the near-collapse of several U.S. and global financial institutions. This economic crisis was thwarted by the subsequent bailout of big business and banks by national governments. The crisis played a significant role in bankrupting essential businesses and causing a downturn in economic activity leading to global recession. In many parts of the United States, housing markets suffered, resulting in evictions, foreclosures and hard times for many Americans.Senate Financial Crisis Report (2011). In the months following the financial crisis, monetary reforms were enacted by the U.S. Congress to prevent the possibility of another failure of financial collapse. In July 2010, the Dodd–Frank regulatory reforms were enacted in the U.S. to lessen the chance of a recurrence (Paletta, D.; Lucchetti, A., 2010.)Causes of the 2007 to 2009 RecessionUnlike previous bust and boom cycles of the past, this disaster was caused as a result of toxic “complex financial products, faulty credit-rating agencies, and failure of the regulators, as well as the market itself to restrict the excesses of Wall Street” (Senate Financial Crisis Report, 2011). Senator Levin, who chaired the Senate Levin-Coburn Report noted that “The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit-ratings agencies, which had conflicts of interest” (Senate Financial Crisis Report, 2011).As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (RMBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased.