Summary: The Global Financial Crisis

The global financial crisis was triggered by the U.S. housing slump in 2007 and 2008. After the dot-com bubble burst in 2001, investors were looking for another place to invest. They found this in real estate which was thought to be safe because prices were thought to always go up. With mortgages available at low rates Americans began to take on more debt. U.S. firms also began to borrow heavily to buy assets with relatively small initial out of pocket capital costs. When the market crashed in 2007, investors tried to sell their assets to pay for their debt, but that drove lower prices and greater losses.
The rise and fall of U.S. housing prices was driven by three main factors: Low interest rates, unscrupulous sales practices, and incentives
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When Lehman Brothers failed the prevailing question on Wall Street was who’s next? Banks were unwilling to loan to each other at reasonable rates. In response the fed lowered their interest rates to almost nothing (Pozen p. 155). The fed should not stick rigidly with low interest rates, because there is a fear of runaway inflation. The fed should continue with low interest rates only as long as the threat of inflation remains low. Recently the government has made the 250,000 dollar FDIC insurance permanent, this is a bad idea. The old limit of 100,000 covered 98% of all bank customers, most have less than 6000 in their accounts (Pozen p. 183). The higher insurance limit only makes banks less responsible with their lending. The new limit also raises the government’s liability in the event of a …show more content…
It discusses the intentions and unintended consequences of the act. A main discussion point is Treasury recapitalizing banks under the too big to fail doctrine, which was a broad and inconsistent bill that Pozen argues should be limited to financial institutions extending lines of credit that are entrenched in the financial system. This means to stop giving capital infusions to financial institutions that have recently converted to banks as well as insurance companies. Additionally, the Stimulus Act of 2009 did some counterproductive things by unlinking pay for performance and allowing banks to redeem preferred stock early and without paying a premium. This identified the banks that were weak and needed the capital versus healthy banks that did

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