The collapse of Lehman Brothers is an indication of the outbreak of the US financial crisis. Let us first look back the process of this financial crisis.
The US financial industry was contained because of the federal government’s tight regulation before 1981. The government gradually delegates its power to the financial industry to make the financial market become alive after 1981. In the 1990s, the financial department had merged with several companies and financial derivatives got the most popularities with the market, however, whose instability planted seeds for the subsequent crisis. The Commodity Futures Modernization Act of 2000 was passed through, which contributed to the growth of derivatives. In the 2000s, the derivatives industry was dominated giant firms including Layman Brothers. Investment banks created CDOs (collateralized debt obligations) which is the combination of mortgages and other loans and debts, then they sold CDOs to investors. Because of the interest relationship a lot of CDOs was rated AAA. With the positive background, a great number of buyers were given …show more content…
monetary policy has contributed to this. From January 2001 to June 2003, the federal funds rate decreased by 13 times from January 2001 to June 2003. The interest rate fell from 6.5% to 1%, a record low, and remained at the 1% level. Low interest rates have prompted Americans to save deposits, invest in assets, and provide banks with excessive loans. This directly led to the continuous expansion of the United States real estate bubble. In addition, the Fed’s monetary policy also “tempted” the market to form a forecast: As long as the market falls, the government will save the market, so Wall Street is full of speculative atmosphere. However, as monetary policy continues to tighten, the real estate bubble begins to burst and the rate of low credit defaults increases. The resulting breach of contract has begun to sweep all profitable and ambitious financial
The US financial industry was contained because of the federal government’s tight regulation before 1981. The government gradually delegates its power to the financial industry to make the financial market become alive after 1981. In the 1990s, the financial department had merged with several companies and financial derivatives got the most popularities with the market, however, whose instability planted seeds for the subsequent crisis. The Commodity Futures Modernization Act of 2000 was passed through, which contributed to the growth of derivatives. In the 2000s, the derivatives industry was dominated giant firms including Layman Brothers. Investment banks created CDOs (collateralized debt obligations) which is the combination of mortgages and other loans and debts, then they sold CDOs to investors. Because of the interest relationship a lot of CDOs was rated AAA. With the positive background, a great number of buyers were given …show more content…
monetary policy has contributed to this. From January 2001 to June 2003, the federal funds rate decreased by 13 times from January 2001 to June 2003. The interest rate fell from 6.5% to 1%, a record low, and remained at the 1% level. Low interest rates have prompted Americans to save deposits, invest in assets, and provide banks with excessive loans. This directly led to the continuous expansion of the United States real estate bubble. In addition, the Fed’s monetary policy also “tempted” the market to form a forecast: As long as the market falls, the government will save the market, so Wall Street is full of speculative atmosphere. However, as monetary policy continues to tighten, the real estate bubble begins to burst and the rate of low credit defaults increases. The resulting breach of contract has begun to sweep all profitable and ambitious financial