The Recent and Current Global Financial Crisis – Essay Example

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Eventually supply overtook demand while banks and financiers overtook market safeguards in favor of speculative profit. The US housing bubble that occurred in 1983 with the savings-and-loan debacle was amplified to multiple effects in 2008, producing the financial crisis that spread to the UK and the world. The 2011 US Congressional Financial Crisis Inquiry Commission Report identified "widespread failures in financial regulation and supervision" producing instability that undermined world markets (p. xviii). Deregulation McClendon (2010) explains how in 1980 the Depository Institutions Deregulation and Monetary Control act freed banks from usury ceilings held by US states, enabling them to charge conventional high interest rates to appropriate populations for home mortgage loans.

This act also raised the deposit insurance limits up to $100,000. The ceiling had previously been $40,000. The Alternative Mortgage Transaction Parity Act of 1982 soon followed and allowed banks to make adjustable rate and interest-only mortgages outside of state restrictions. Both of these measures were intended to help banks and savings and loans institutions spread more liquidity into appropriate markets. The US Garn-St. Germain Depository Institutions Act of 1982 enabled savings and loans banks to enter the lending market with low loan-to-value ratios (McClendon, 2010).

The result was that the savings and loans industry collapsed from speculation and little oversight. Thousands of Americans lost their life savings, and thousands of savings and loans executives went to jail. President Reagan appointed Alan Greenspan as chairman of the Federal Reserve Bank. Greenspan had been Charles Keating's lawyer and Keating had been prosecuted and had went to jail as one of the main savings and loans executive speculators. Greenspan had argued that his client had "a sound business plan" and that there had been "no foreseeable risk" (Dillon and Cannon, 2010). Risk-taking "The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public" (FICI, p.

xvii). But there had been plenty of risk. Niinimäki (2007) provides a discussion to demonstrate that banking crises "are connected with fluctuations in real estate markets". He analyzes how the fluctuation of collateral value may present moral hazards.

Only when collateral value is known and certain may bank return volatility be alleviated.

Bibliography

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Barth, J.R., Brumbaugh, R.D., and Wilcox, J.A. (2000). The repeal of Glass-Steagall and the advent of broad banking, Journal of Economic Perspectives, 14(3), 191-204.

Berlin, Mitchell. (2000). Why don't banks take stock? Business Review. Federal Reserve Bank of Philadelphia.

Crotty, J. (2009). Structural causes of the global financial crisis: A critical assessment of the 'new financial architecture'. Cambridge Journal of Economics, 33(4), 563-580.

Dillon, P. and Cannon, C.M. (2010). Circle of greed: The spectacular rise and fall of America's most feared and loathed lawyer. New York: Broadway Books. 291

Financial Crisis Inquiry Commission (FCIC). (2011). The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. (Pursuant to Public Law 111-21). Washington, DC.

International Monetary Fund (IMF). (2009). Initial Lessons of the Crisis for the Global

Architecture and the IMF. IMF Research Department, Washington, DC.

Levine, Ross. (2010). The governance of financial regulation: Reform lessons from the recent crisis. BIS Working Papers, No. 329. Accessed at http://ssrn.com/abstract=1717806

Longstaff, Francis A. (2008). The Subprime Credit Crisis and Contagion In Financial Markets. 2008. Journal of Financial Economics, In Press, Accepted Manuscript, Available online 25 January 2010

Norton, A.B. (2005). Reaching the glass usury ceiling: Why state ceilings and federal preemption force low-income bnorrowers into subprime mortgage loans. University of Baltimore Law Review. 35, 1-36.

O'Brien, J. (2005). The politics of enforcement: Eliot Spitzer, state-federal relations, and the redesign of financial regulation, Publius, 35(3), 449-466.

McClendon, J.K. (2010). The perfect storm: How mortgage-backed securities, federal deregulation, and corporate greed provide a wake-up call for reforming executive compensation. University of Pennsylvania Journal of Business Law, 12, 131-179.

Moshirian, F. (2011). The global financial crisis and the evolution of markets, institutions and regulation, Journal of Banking & Finance, 5(3), 502-511

Niinimäki, J.-P. (2009). Does collateral fuel moral hazard in banking? Journal of Banking & Finance, 33(3), 514-521

Sorkin, A.R. (2010). Too big to fail. London: Penguin.

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