Essays on Analysis of the Global Financial Crisis Coursework

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The paper "Analysis of the Global Financial Crisis" is an outstanding example of a finance and accounting coursework.   The global financial crisis, from which the world has not yet recovered, actually began with the decline of housing prices in the US starting in 2006, although it would take nearly three years for the impact to be fully felt. Once the “ housing bubble” burst, the crisis proceeded along two distinct but closely-related paths, exponentially worsening as time passed. The first path was the housing and mortgage business in the US. Median home prices in the US rose steadily from 1990 and increased very rapidly between 2000 and 2005.

(ThinkReliability, 2009) As home prices rose, the supply of houses increased as speculative developers sought to profit from the higher prices. In order to actually sell the increasing supply of new houses, credit standards for buyers were lowered, including lower required qualifications, very small or in some cases no required down payments, and low introductory ‘ teaser’ and adjustable interest rates on mortgages to attract customers. The result of the compromises by the lending industry to increase the number of housing customers was to put a great many people who did not actually have the financial resources to afford homes at those prices into debt.

Because down payments were small, and monthly payments were reduced because of lower interest rates, consumer spending actually increased during the 2000-2005 period. This was aggravated by the availability of credit that had spread from the mortgage market to other forms of consumer lending; owning a home allowed consumers to take out lines of credit against their homes’ (inflated) equity, often from the same banks or lending companies who had arranged their mortgages.

(ThinkReliability, 2009) The supply of customers for new homes was not limitless, however, and eventually, the housing market reached a point of over-supply. Once that point was reached, housing prices began to rapidly decline, and along with them, the equity value of existing homes. To make up the shortfall in revenues from the new housing customers who were no longer coming in, banks and lending companies began to increase the interest rates on adjustable-rate mortgages, increasing homeowners’ monthly payments.

Many homeowners who could afford a home at, for example, a 4% interest rate suddenly found themselves being charged much higher interest rates, which made their mortgage payments exceed their monthly budgets. Because existing home values were based on overall home prices, when the prices dropped the equity in existing houses did as well, sometimes disappearing altogether or becoming negative, i.e. , the homeowners actually owed more than what their houses were worth; in March 2008, over 10% of US homeowners – almost nine million borrowers – had negative equity in their homes.

(ThinkReliability, 2009) Reduced equity meant that homeowners could not borrow against, and lower home prices meant that they could not sell their houses for the amount that had already been borrowed against them, either in mortgages or equity lines of credit. And of course, the number of homes being put on the market by homeowners seeking to escape their debt simply aggravated the over-supply problem, driving home prices even lower. Home foreclosures increased as consumers defaulted on their loans in growing numbers, and this too added to the over-supply problem and even worse, left banks and lending companies holding bad loans.

It was at this point that the second path of the crisis began to be revealed.

References

Anderson, Richard. (2010) “Obama’s banking proposals: the impact on Europe”. BBC News [Internet], 22 January 2010. Available from: .

Crotty, James. (2008) “Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’”. Political Economy Research Institute Working Paper Series Number 180. University of Massachusetts – Amherst, September 2008.

Oatley, Thomas P. (2000) “The Dilemmas of International Financial Regulation”. Regulation, 23(4): 36-39. [Internet] The Cato Institute, Winter 2000. Available from: .

Roubini, Nouriel. (2008) “Ten Fundamental Issues in Reforming Financial Regulation and Supervision in a World of Financial Innovation and Globalization”. RGE Monitor [Internet], 31 March 2008. Available from: .

ThinkReliability. (2009) “2008-2009 Financial Mess – Cause Map™”. [Chart] Available from: .

Vittas, Dmitri. (1992) “Policy Issues in Financial Regulation”. Country Economics Department Policy Research Working Paper WPS910. The World Bank, May 1992.

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