Who Is Responsible For the Fiscal Crisis of 2008?

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Who Is Responsible For the Fiscal Crisis of 2008?

Most policy makers and economists are in agreement that that the fiscal crisis in 2008 can be attributed to the fall of the American Housing Market. In this case, they assert that subprime mortgage crisis in the United States was among the indicators of this crisis. Another arguable cause of the 2008 financial crisis was the forwarding of loans to individuals who lacked the ability to pay them back (Griffith, 18). Thirdly, the loosening of regulations governing issuance of loans/mortgages as well as creation of financial assets by financial institutions was a vital contributor to the crisis. In this case, the Community Reinvestment Act loans were more than subprime mortgages, thus bringing about the crisis. In this analysis, I will highlight the most cited causes of the fiscal crisis and the subsequent discussion of the prevailing market economy.

The downfall of the United States monetary policy is said thought to have been the biggest cause of the 2008 fiscal crisis. According to Mortimer 2008, the chairperson of the United States Federal Reserve Board, Alan Greenspan would have assumed responsibility for tragedy mistakes. For example, he oversaw the reduction of the discount rate; a strategy that did not serve its purpose of developing more investments but resulted to excess bank liquidity. In addition, his interpretation of the inflation figures was incorrect. He subsequently initiated a low stimulation and income policy investment. He had a view of curbing the decreasing price levels that did not exist in this case. Mortimer further asserts that he utilized incorrect percentages of inflation; the core percentage of inflation which was not inclusive of the prices of raw materials. More so, Greenspan supposedly undermined the liquid assets influx into the American economy through dollar investments in Asia.

Other economists however argue contrast to Mortimer suggesting that Greenspan is not blame for the financial crisis but the banks’ endeavors of pursuing unrealistic profits. Banks have been mooted to be nonchalant when considering granting mortgages fully aware that unemployed debtors lack the ability of paying part or the entire debt of these kinds, which are repayment and interest free for three or four years. However, since banks had continuous speculation for on the rising house prices, they perceived that they were on the verge of making profits if the mortgage debtors forfeited to pay their loans. This implied they had the possibility of selling the house at higher possible prices than what they were mortgage for. Banks in this case knowingly and willingly forwarded loans to individuals who lacked the capability of paying them back.

Other economists suggest that agencies rating credit allowances assumed responsibility for the financial crisis in the nation. These agencies are thought to have forwarded triple A score products, a move that was considered very risky. As early as 2006, the Federal Bureau of Investigation established that there were cases of fraud and corruption in the American Mortgage Market and within the government. Contrary to their informed judgment, credit lending agencies would have proceeded on to forward high ratings on their complex products (Mrak, 32). These rates were more often developed together with banks without sufficient confirmation of the borrower’s creditworthiness. Mortimer in this case asserts that complex products, otherwise referred to as toxic securities were bought globally by European Banks in particular.

Together with Greenspan, the pursuit of unrealistic profits by banks, and incompetent credit lending agencies, risky borrowers, and overburdened or incompetent supervisors are among the major reasons behind the financial crisis in 2008. The issue of responsibility in this case is relevant of reasons of designating a clear causes and establishing the individuals that should assume responsibility, and on the other hand, to establish clear economic measures for tackling the crisis problem in the United States. The individuals and groups attributed to the financial crisis in 2008 were jointly responsible with each contributing a portion of the entire problem. Each party was making decisions they thought would enable them effectively in tough economic environments. Greenspan intended to stimulate the economy through low interest rate strategies. He had a view of preventing the imminent crisis of deflation.

Banks in this case aimed at continuing their profit making; likewise with bank managers and credit agencies made decisions aimed at maximizing their income. Every party acted in a rational manner within their market system just as the economic theory dictates. The financial crisis in 2008 therefore did not emanate from sudden economic shocks in the market but from the collective decisions by different parties and individuals that resulted to adverse micro economic consequences; eventually affecting their markets and others as well. Mortimer asserts that macroeconomics and money issues over the past decade were forecasted to lead to this kind of crisis. Economists attempt advice business groups, individuals, and politicians who have minimal understanding complicated economic implications of such decisions.

Mortimer further criticizes the new macro economical theories of efficient market hypothesis as well as the new Keynesian Economic Theory as theories unable to analyze liquidity or crises problems, despite their dynamic equilibrium concepts. Mortimer 2008 views that the American economy bears a fundamental characteristic of shifting back and forth system between fragility and robustness. He attributes this system as the cause of economic system cycles such as the financial crisis in 2008. For example, in times of economic booms, when the cashflows and income are on the rise, economists perceive a euphoria sense as debts are in excess to what borrowers are willing and able to pay. The uncertainty that debtors can be able to see off their debts therefore goes on the rise thus making banks less willing to grant credit bearing the implications involved. In this case, they normally make the conditions harder through high demands on credit and collateral worthiness (Griffith, 45).

The strategies of rationing credit advances according to Mortimer should be perceived as the preface of the recession, and that this sign bore the possibility of being interpreted in the 2008 financial crisis. The demand for investments goes on the fall due to the reduced credit advance. In this case low rates of interest and large foreign fund inflows began to create conditions that began fueling the crisis several years back as well as the market boom and also encourage debt financial consumption; a prerequisite to the financial crisis. The home ownership in the United States increased to sixty percent in the year 2000 and subprime mortgage lending was a considered a major influence to this rise as well as the increased to the demand for houses.

Consequently, more borrowers forfeited from paying their mortgage debts and Mortimer asserts that this was another sign of the financial crisis and should have been acted upon. By 2008 the average prices for housing privileges had declined by twenty percent from their peak in 2006. This unexpected and great fall of housing prices implied that borrowers of mortgage opportunities possessed negative or zero equity of the houses they had applied for (Krugman, 53). In this case, this meant that the houses they owned were worth less than what they were being asked to pay. As of March 2008, ten percent of home owner in the United States were considered to bear negative equity shares on their homes as a result of the subprime mortgage crisis.

In addition, Government over-regulation measures, deregulation, and failed regulation have been seen to have caused the financial crisis to a point. The Congress had overseen the Alternative Mortgage Transactions Parity Act (AMTPA). This form of regulation did not allow creditors with no federal chartered housing connections to receive mortgages with adjustable rates. This oversaw the creation of new types of mortgage such as the balloon payment and mortgages of interests only. These new loan types were seen by the Congress as methods of replacing previous bank practices of amortizing fixed rate mortgages. This mode of deregulation faced its criticism in relation to the financial crisis as the Congress did not come up with sufficient means of regulating exploitations by this loan types. Even though economists and pundits attribute these kinds of government policies to as causes of the financial crisis, Federal Reserve Economists and the Financial Crisis Inquiry Commission assert that these measures had promotion bearing towards affordable housing.

In another case, the Financial Crisis Inquiry Commission in 2009 announced that the period between 1980 and 2007 witnessed an increase in the amount of debts on the financial sector; from three million dollars to thirty six million dollars which was more than double of the share of the nation’s gross domestic product. By 2006, the largest commercial banks in the United States were accountable for fifty five percent of the industry’s assets, a more than double of the figure accounted for in 1990. During the onset of the crisis in 2006, the profits of the financial sector constituted thirty percent of the entire corporate profits in the United States; a rise in figure from fifteen percent in 1980 (Krugman, 74). Many investment banks and other financial institutions used large debt amounts in their activities, and invested these proceeds through mortgage securities. This was seemingly a profitable strategy in the housing boom period but misconceptions led to huge losses when the prices of these houses began fall and mortgages consequently defaulted, leading to the financial crisis.

Conclusion

The financial crisis is considered to have originated from the United States. However, the imbalance that took place between the financial and the real sector, profits and wages, assets and personal income, can all be considered to have made the economic system vulnerable over the last two decades. It has been established that if keen scrutiny of the behavior of factors within the micro and macro economic system, then informed decision would have been made to counter the crisis before hand. But in this case the damage has already been done and economists suggest that banks in particular should revert back to their original measures of primarily focusing on the customers’ interests and less on their shareholders. This measure should then oversee the economic system achieving a stable format.  In this case, it is seen that reducing the inequality of income is necessary for stabilizing the system, as well as the legitimization of government economic measures.

Works Cited

Griffith, Jones, Stephany, José A. Ocampo, and Joseph E. Stiglitz. Time for a Visible Hand: Lessons from the 2008 World Financial Crisis. Oxford: OxfordUniversity Press, 2010. Print.

Mortimer, Paul. “Financial Crisis, Causes, Consequences, Cures.” Banks in Dire Straits. 2008: 2-17. Print.

Mrak, Mojmir. “Poor Performance of Rating Agencies and Current Financial Crisis.” Banks in Dire Straits. 2008: 30-33. Print.

Krugman, Paul R. The Return of Depression Economics and the Crisis of 2008. New York: W.W. Norton, 2009. Print

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