The paper "JPMorgan and the Dodd-Frank Act" is a great example of a finance and accounting assignment. There are different factors that were responsible for the recent financial crisis. However, the financial system was the root of the financial crisis, as this developed various issues that contributed to the financial crisis. A major factor that contributed to the crisis is banks. It is believed that before the financial crisis happened, most banks experienced increased returns. The banks generated a lot of money within a considerably short period of time. This was unlike the preceding years.
Most of the money generated by banks was from loans. When a bank gives out loans to many people, it creates new money. Therefore, just before the financial crisis, banks had created large sums of new money through making loans. It, therefore, took the banks a few years to double the amount of money and debt in the economy. The new money created by the banks was directed to various sectors inside and outside the financial sector. These include residential property, commercial real estate, financial markets, businesses outside the financial sector, and credit cards and personal loans.
A large sum of the money was used on the residential property and financial markets. The least money was spent on businesses outside the financial sector and credit cards and personal loans. When banks lend large sums of money into the property market, the prices of houses increased. This, therefore, also resulted in the increase of personal debts. The loanees were expected to make repayments of the loans together with the accrued interest. However, since the personal debts of people rose faster than their income, this resulted in most people being unable to repay their loans.
This, therefore, forced them to stop their loan repayment. In this case, therefore, there was a high probability of banks going bankrupt. Specifically, the bankruptcy of the Lehman Brothers starting in 2008 contributed highly to the financial crisis. All this is, therefore, considered to have caused a financial crisis. 2. Was the government bailout necessary to prevent a collapse of the financial system? Why or why not? The financial crisis had immense adverse effects on the financial system.
The financial system was at risk of collapsing. However, the government intervened in order to prevent the financial system from collapsing.
Risell Adam and Allayannis George. “JPMorgan and the Dodd-Frank Act.” University of
Virginia, Darden Business Publishing. March 13, 2012.