High level greed is illustrated by both the real estate industry and the mortgage bankers. They are determined to make quick money and therefore, without any considerations offer loans without evaluating if they could be paid back. This was encouraged by an extensive failure in financial monitoring and regulation. The other cause was fraudulent activities by some Wall Street firms. Firms such as Lehman Brothers and Bear Stearns are implicated in the fraud and this is main reason for the collapse of the former.
Implications of the financial downturn
The effects of the financial crisis were widespread and affected almost all industries in the US. The major casualties included the following:
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banking industry
two biggest commercial banks
largest mortgage lender
insurance companies
Two government chattered enterprises that were involved in mortgage lending
It is estimated that in 2008, 33.8% of the US value was lost. A deep recession enveloped the globe. This recession was the largest in the U.S history since 1930. The crisis had a negative impact on industrialization especially in manufacturing sector. This led to stalling in industrial development. This resulted to exchange rate devaluation due to fall in financial flows and exports. There was so much pressure on the banking sector and this led to reduced bank financing and lending. The foreign trade was greatly hit leading to reduced export of goods and services especially in LICs. Consequently, there was a 3 percent loss on average GNP points in these countries. Finally, the prices of international commodities fell sharply and this was a setback for LDCs which are the leading exporters of primary commodities such as minerals, fuel and raw agricultural materials.
"Middle class, senior citizens and low-income citizens were impacted the most by the housing market crash."
This class of people represents the country’s biggest population with the lowest purchasing power. The resulting inflation during and after the crisis led to hiked prices of essential commodities. In many countries, for instance, the USA, there was massive job loss leading to alarming unemployment rates which doubled between 2007 and 2010. For those who still retained their jobs, the working hours reduced and the net effect was a decline in income for these households. Finally, the wealth and assets of this class of people lay in their homes and not in bonds and stocks. Thus, the crash of the housing market wiped out their wealth by half.
What risks did the crises pose for current and potential investors?
There was a significant shift of investors from domestic equities into fixed income securities. They then adopted ‘risk-budgeting’ from the prior ‘style bucket’ mode of investing and as a result, the Modern Portfolio Theory was dismantled. The investors, therefore, started to focus more on their portfolio’s overall risk profile instead of using individual asset classes in evaluating risks.
What role, if any, should the government have played to prevent the crisis?
The government should have reduced the unusually large fiscal deficits that instigated foreign borrowing. The Federal Reserve should have decelerated credit boom by raising lending rates. Finally, regulators should have been keener in making decisions and policies that that affected the complicated financial operations.
In your own opinion, did the financial institutions deserve a "bailout" from taxpayers? Justify your stance.
In my view, the financial institutions had to be bailed out. This is because these institutions are so interconnected such that if one falls, others fall too and ultimately the whole US economy. The government is quoted stating that, "We have no choice; if one of them goes down, so goes the entire US economy." (Basu, 2009)
Why/how was Dr. Michael Burry able to predict the housing market crash?
Dr. Burry predicted the crash after he researched on the mortgage-backed securities and the market of the residential mortgage. He observed the lenders offer most hazardous mortgages to buyers who were least qualified. He observed that there was no possibility of housing prices rising at a rate higher than that of incomes. He also realized that rating agencies such as S&P lacked incentives to critically scrutinize collateralized debt obligations (CDOs)
References
Basu, Deepankar. The Us Financial Crisis . Delhi: Aakar Books, 2009. Print.
