Discuss at least two economic reasons/factors that contributed to the financial

Question

Discuss at least two economic reasons/factors that contributed to the financial crisis that occurred in 2008. (Due: Day 4(Thursday) by 11:59pm; word count: minimum 300 words). Please submit the essay in a word document, and I will return you assignment for not meeting this requirement. Please be aware you MUST NOT copy and paste paragraphs from other sources without paraphrasing that is plagiarism! The essay must be your original paper, and paper will not be graded or I will give a zero on that assignment, if your paper matches with other sources substantially.

Explanation / Answer

There are different economic reasons that led to the financial crisis of 2008. The first reason is the Banks deviating from the stringent guidelines while issuing loans and opted to go to the subprime lending under the influence of a greed to earn more and maximize the shareholder value. It involved issuing loans to people with poor credit ratings. But, it did not happen and banks suffered huge losses as customers defaulted when they were losing their jobs and value of real estate property was plummeting. Therefore, in pursuit of earning higher interest and maximize the profits, banks neglected the guidelines and performed moral hazard in their decisions.
The second economic reason is the misuse of deregulations awarded to the banks and formation as well as trading of risky assets such as CDOs. Deregulation made banks to enter into the investment activities and they identified the real estate market as hot opportunity. To gain more from the mortgage business of real estate properties, mortgage was passed from one institution to another as collateralized debt obligations (CDOs), causing sharp formation of bubble in real estate market . To accelerate the revenue making process, it got support from subprime lending and bank opted for it aggressively. With credit default, and value of houses falling down with increased supply of homes in the market, even genuine consumers stopped paying the EMIs and conditions of the economy worsened. It contributed to the financial crisis of 2008.
The third economic reason is lack of proactive approach from the end of regulatory bodies in the USA. The agencies like the Federal Reserve, Security exchange commission and other bodies, were looking at each other and waiting for others to act first. SEC thought that it is Fed that should regulate the banks and Fed thought that it is SEC that should prevent speculation and regulate the players in capital markets. It made them see the US economy melting, due to their inaction and economic crisis of 2008 took place.
  

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