In the course of the 2007 to 2009 financial crunch, the United States of America underwent through and emerged from the vilest economic crunch ever since the downfall of the stock market in 1929 (Banking Law Committee, 2009). Following this event, American households, local and state governments, businesses, pension funds and many other investors went through losses of trillions of dollars in savings and wealth. What followed was a rise in the rate of unemployment that the U. S. and the world as a whole is still grappling with to date. The subsequent confidence loss in the monetary establishments of the country caused an undermining of the stability of leading banks in the financial sector, and as a result, the entire monetary system collapsed. This led to short-term interests rates to reach nearly zero making credit banks to freeze since they were not making any profits and therefore business could not be conducted. In this paper, the causes that led to this global financial crisis and consequences are discussed, particularly the fact that weak financial policies were the major contributors to the collapse of the monetary system which ultimately led to the financial crisis.
The implications of the financial crisis were unprecedented and led to damages of the major economies of other countries around the world and in due course, the global financial system. The U.S. government, through painstaking gains, supported its financial institutions in an intense and deliberate effort to augment credit markets and bring the economy back to life. The Board of Executive committee at the Department of Treasury, the Federal Reserve, among other government agencies all played their role in exercising absolute legal powers in response the ongoing crisis but were unable to prop up the economy to the way it was before the crisis hit. Finally, they understood that for the economy to reach earlier levels, it would take years if not months. Several years after this financial pandemonium, debate still rages on, and there is little to no solid consensus over the cause of the crisis and the eventual fall of the economy at large. According to the Federal Reserve Chairman Ben Bernanke in March 2009, the fundamental causes of the crisis remained highly disputed (Banking Law Committee, 2009). The then Treasury Secretary Geithner reiterated Bernanke’s remarks by reaffirming that the reasons for the crisis were many and quite varied (Banking Law Committee, 2009). Following the crisis, policymakers and members of the Congress gathered information about the causes of the crash and the inquiry commission that ensued was required to scrutinize the reasons, both global and domestic, of the monetary crisis in America. In this delegation, numerous congressional hearings were held on various aspects and the causes of the financial crisis. Overall, the causes of this financial slump were determined through investigative and scientific means.
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The first major cause was the complicated interactions of the government’s social and economic policies, which led to the instability exhibited in all capital institutions during the economic downturn. According to the then Treasury Secretary Timothy Geithner, the crisis had no single cause, but the policies that governed financial bodies were fraught with anomalies. He also added that the nation had borrowed too much money and this subsequently led to an overburdening of the system through irresponsible risks (Banking Law Committee, 2009). As such, the crisis resulted from numerous aspects, but the issue of policies remained to be the key perpetrator of the financial system’s collapse. Commensurately, a continuum of causes interrelating through various relations evolved to act together with the system in different ways over time. While diverse factors played a role, some to date are considered as being the root causes while others as factors that aggravated the state of affairs. On occasions, malleable policies were flowing and ebbing resulting in effects that were cascading, and eventually, the engulfing of otherwise strong institutions. These complex interactions are by far the most declarative statements of the financial crisis that ensued in the American economy. Financial experts blamed the mortgages on subprime lending that permeated the financial institutions at that time (Acharya et al., 2009). Through such lending, there were low-interest rates on the policies of the government leading to a subsidy in the housing markets and exotic mortgages thereby resulting in an upsurge of “unfettered” monetary proceeds. Such policies in mortgages led to a weakening of the financial system and ultimately to its failure.
The regulatory gaps that existed within economic policies of institutions, practices, and products were not entirely subject to the scrutiny of the federal oversight, and this led to a proliferation of unscrupulous credit facilitators. Here, the issue of policy becomes apparent as the underlying policies were not strong enough to solidify the regulatory gaps. Among these were mortgage originators who did not represent any bank and who played a central role in both their federal and state levels of the mortgages lending market while at the same time not being fundamentally regulated. According to a report indicating the number of mortgage brokers within the United States, their increase was exponential to 53,000 in 2006 from 7,000 in 1987 (Barth et al., 2009). Also, the shares of mortgage origination, which is the procedure by which a mortgagor applies for new loans and a lender accepts and consequently processes the application, increased to 68 percent in 2003 from 20 percent in 1987 and eventually declining to 58 percent in 2006. Non-bank originators who primarily facilitated subprime lending only compounded such influx of originators. The Government’s Accountability Office exposited in 2006, all except from four of the twenty-five subprime originators and various kinds of non-prime loans were lenders not from a recognized banking institution and accounted for close to 81 percent of the total origination by dollar capacity (U.S. Gov’t Accountability Office, 2009). This showed the extent of how much abusing practices had pervaded the financial system leaving abysmal gaps in the integrity of the entire structure. In 1994, as authorized by Congress, the Centralized Reserve did not employ specific measures to regulate the abusive tendencies of practices by nonbank originators of mortgages. Such practices were designed to evade deceptively or unfairly the requirements of the legislature dubbed the Home Owner Equity Protection Act or acted in association with the reissuing of mortgages often through refinancing were deemed to be related to the obnoxious practices of lending caused the financial decay that eventually led to the crisis experienced in 2007 to 2009.
Policies within the banking sector were not acutely safeguarded against unforeseen occurrences such as risks, and this resulted in financial pandemonium. An exacerbation to the crisis was the banking supervision deficiencies that was evident and only became known via the banking agencies internal reviews, the Government Accountability Office’s omission department, Congress and the inspector general of investigations. Following the crisis, banks needed acute and adequate supervision in addition to accountability, and this feature continues until now in order to keep the banks in check and control monetary gain, subsequently preventing selfish gain at the expense of the economy. In part, these deficiencies in the banking sector were caused by an increased innovation and development cycle within the covered market, and this outpaced the process of risk management especially in corporate financial institutions. As such the financial products innovated absconded the comprehension of regulators leading to unregulated banking platforms, which supervisors admitted that they could not precisely predict the risks involved in the transactions other services rendered ("Causes of the 2007-2009 financial crisis", 2017). As most bank directors would agree, their shock was in the severe development of the crisis, since its complicated interaction of causative agents indubitably barred their ability to anticipate the impending crunch adequately before time expired. In due course, through risk mismanagement, banks faced highly inconsistent standards of capital. This contributed to their weakness and permitted banking establishments to function with fewer funds than required to cushion against incurred losses. Ultimately, poor policies made banking institutions lose their credibility, and eventually, the banks collapsed.
In any financial system, the policy of having a requirement of an all-inclusive systemic risk oversight proves essential in governing the activities of financial institutions and ensuring that all parties are kept in check regarding proper practices, which eventually provides stability of the system. Failure to effect such a policy results in dire consequences such as the inability to properly forecast and effect early prevention strategies. At that time, the American fiscal system lacked an assimilated focus. Preceding the crisis, supervisors of the federal bank paid close attention to the number of probable systemic threats involved. They were short of an assimilated emphasis that would have aided them to systematically identify thereby act on reducing the emerging threats that eventually ascertained to be catastrophic resulting in the entire system collapse (Jagannathan, Kapoor & Schaumburg, 2013). Such misappropriation of focus and the subsequent unreliability and accountability stemming from poor policy planning and enactment on the part of both the financial institutions and the government led to an outright failure. Instead of focusing on all these issues at once and formulating an all-inclusive policy to deal with the problem, the oversight issued supervisory guidance in lieu of strict regulations on numerous issues including those that eventually led to the eventual collapse of the fiscal system. Such guidance included matters such as the utilizing derivatives and further multifaceted monetary apparatuses, subprime lending, intricate transactions, business opportunity planning and risk concentrations among other misappropriations. The Gramm-Leach-Bliley Act of 1999 rendered no “umbrella” supervision of financial holdings but restricted the focus and examination authority of the federal government to include only the holding company and its subsidiary. This made the Federal Reserve a partial systemic overseer making it inadequate in performing its mandated task (Jagannathan, Kapoor & Schaumburg, 2013).
The financial crisis of 2007 to 2009 was generally due to problems with the financial system itself, specifically, the policies that governed them. This goes a long way to show that the banking systems need continual evolution and upgrades in response to forces of stiff competition, changing financial wants, and the dynamic changes of public policies. In itself, the fiscal crisis has garnered transformational impact that has changed the system and continues to upgrade it to date, making it stronger in the process.
References
Acharya, V., Philippon, T., Richardson, M., & Roubini, N. (2009). The Financial Crisis of 2007-2009: Causes and Remedies (pp. 90-110). New York: University Salomon Center and Wiley Periodicals, Inc.
Banking Law Committee. (2009). THE FINANCIAL CRISIS OF 2007-2009 CAUSES AND CONTRIBUTING CIRCUMSTANCES (pp. 1-39). Banking Law Committee’s Task Force on Regulatory Reform.
Barth, J., Li, T., Lu, W., Phumiwasana, T., & Yago, G. (2009). The Rise and Fall of the U.S. Mortgage and Credit Markets. A Comprehensive Analysis of the Meltdown (pp. 16-22). Milken Institute.
Causes of the 2007-2009 financial crisis . (2017). Global Economist .
Jagannathan, R., Kapoor, M., & Schaumburg, E. (2013). Causes of the great recession of 2007–2009: The financial crisis was the symptom, not the disease! Journal of Financial Intermediation , 22 (1), 4-29.
United States Government Accountability Office. (2009). A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System (p. 23). Washington D.C.
