Causes of Problems
Overview
The financial crisis from 2007-2009 resulted in the near-collapse of the financial system. As investors reaped the benefits of higher returns, regulations changed to meet demand. When the investments failed, entities, such as Bear Stearns, began to go bankrupt. The American people were affected with the loss of jobs, lost homes, and the decline of home values. Taxpayer money was used for bailouts to save such institutions as banks and automakers. Eight years after the crisis started, the economy continues to recover.
Causes of Problems To pinpoint a single underlying cause of problems for the financial …show more content…
The FRB (2010) discussed the four weaknesses. First, the shadow banking system was reliant on unstable short-term funding, which became susceptible to runs. Second, several deficiencies in risk management were detected. Examples include: a deterioration of mortgage and commercial real estate underwriting standards, the extreme dependence on credit ratings, the ability to track risk exposures was inadequate, and the use of short-term funding. Third, the amount of debt households, businesses, and financial firms undertook was more than they were able to handle, excessively leveraged. Fourth, for the most part, derivatives permitted hedging of risk; however, the use of credit derivatives allowed for taking excessive risks, specifically American International Group (AIG). The private sector created volatile financial