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Answered) "Lending Companies and the downfall of the 2008-2009 Financial Crisis" OUTLINE Since the Great Depression of 1929-30, the economy faced...


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“Lending Companies and the downfall of the 2008-2009 Financial Crisis”
OUTLINE
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 world once 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. [Kat08].
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?

 


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