Main Factors of the GFC.
The 2008 Global Financial Crisis was built around a number of interrelated problems, which combined contributed to the emergence of a worldwide financial crisis in a more complex manner than a single factor could have. They can be identified as The Housing Bubble, Credit Market Failure, and Regulatory Failure.
The US Housing Bubble
The housing bubble in the United States began in the mid-1990s when people had increased their wealth from the stock market, pushing demand of housing up (Baker, 2008). By 2002 the stock market collapsed and fueled the housing market as people looked for a safer, more reliable investment (Baker, 2008). At this point house prices started rising at a much higher rate than building costs or …show more content…
Those who had the power to regulate the market, the Federal Reserve System, contributed to the problem by setting interest rates at an inappropriately low level of 1%, thus allowing the housing bubble to expand (Inside Job, 2010). The central bank also had the opportunity to regulate the mortgage system through direct intervention. In doing so, they could have controlled the housing bubble, but instead dismissed the problem and claimed the market would be better off without interference (Baker, 2008). Had they been proactive and addressed the issue, rather than letting it develop into a market collapse then it is highly likely the cost on the economy would have been far less significant. Many people have noted that the lack of action by the regulator is nothing but “wilful blindness” (Peihani, …show more content…
A few of them directly impacted the occurrence of the GFC. The first being the sharp reduction of tax rates to improve incentives for savings, investment, job creation, business start-ups and expansion, entrepreneurship and work, (Ferrara, 2011). This policy allowed many people to take out loans for businesses and homes without having the ability to repay them. As a result, many banks were unable to attend to their customers’ requests of withdrawals and hence had to be bailed out by the Government. The government, along with key stakeholder groups such as Investment banks, had issues within their organisational culture, which can be attributed to the GFC, as stated: ‘the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance initiatives.’ (OECD, 2009). The organizational culture of the US Government was heavily based on opportunities and ‘dreams’, thus leading to their policies of low interest rates which encouraged more people to take out loans to start businesses or buy homes. The government’s crisis management in the aftermath of the GFC was also an issue. Prevention of the crisis was non-existent, as the government did not attempt to change their policies regarding the low interest rate or the corporations’ financing of subprime mortgages, allowing them to make their huge profits. Containing the
The 2008 Global Financial Crisis was built around a number of interrelated problems, which combined contributed to the emergence of a worldwide financial crisis in a more complex manner than a single factor could have. They can be identified as The Housing Bubble, Credit Market Failure, and Regulatory Failure.
The US Housing Bubble
The housing bubble in the United States began in the mid-1990s when people had increased their wealth from the stock market, pushing demand of housing up (Baker, 2008). By 2002 the stock market collapsed and fueled the housing market as people looked for a safer, more reliable investment (Baker, 2008). At this point house prices started rising at a much higher rate than building costs or …show more content…
Those who had the power to regulate the market, the Federal Reserve System, contributed to the problem by setting interest rates at an inappropriately low level of 1%, thus allowing the housing bubble to expand (Inside Job, 2010). The central bank also had the opportunity to regulate the mortgage system through direct intervention. In doing so, they could have controlled the housing bubble, but instead dismissed the problem and claimed the market would be better off without interference (Baker, 2008). Had they been proactive and addressed the issue, rather than letting it develop into a market collapse then it is highly likely the cost on the economy would have been far less significant. Many people have noted that the lack of action by the regulator is nothing but “wilful blindness” (Peihani, …show more content…
A few of them directly impacted the occurrence of the GFC. The first being the sharp reduction of tax rates to improve incentives for savings, investment, job creation, business start-ups and expansion, entrepreneurship and work, (Ferrara, 2011). This policy allowed many people to take out loans for businesses and homes without having the ability to repay them. As a result, many banks were unable to attend to their customers’ requests of withdrawals and hence had to be bailed out by the Government. The government, along with key stakeholder groups such as Investment banks, had issues within their organisational culture, which can be attributed to the GFC, as stated: ‘the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance initiatives.’ (OECD, 2009). The organizational culture of the US Government was heavily based on opportunities and ‘dreams’, thus leading to their policies of low interest rates which encouraged more people to take out loans to start businesses or buy homes. The government’s crisis management in the aftermath of the GFC was also an issue. Prevention of the crisis was non-existent, as the government did not attempt to change their policies regarding the low interest rate or the corporations’ financing of subprime mortgages, allowing them to make their huge profits. Containing the