Financial Crisis Inquiry Commission. (2011). Financial crisis inquiry report. Washington, D.C.: Financial Crisis Inquiry Commission.
Paulson, Jr., H. M. (2010). On the brink. (1 ed.). New York, NY: Business Plus.
Koepp, S. (1987, July 06). Rolling back regulation. TIME, Retrieved from http://www.time.com/time/magazine/article/0,9171,964890,00.html
Saturday, November 12, 2011
RJA #11: Argument
Claim:
Deregulation of the financial and banking sectors, leading to the increased use of complex financial instruments, had a major role in causing the crash in 2008.
(page xviii of the Financial Crisis Inquiry Report)
Reason 1: The FCIC concluded that failures in regulation and supervision led to the collapse of the financial markets (Financial crisis inquiry report page xviii)
Therefore, the majority of the commission whose job it was to investigate the crisis believes that deregulation of the financial markets had a key role in causing the economic collapse in 2008. They also stated that the passage of The Commodity Futures Modernization Act of 2000 effectively eliminated oversight by both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). This elimination of oversight as well as the changing of bankruptcy laws in 2005 caused a boom in the derivative market.
(Financial crisis inquiry report page 48)
Reason 2: The unregulated use of Derivatives as an investment tool contributed greatly to the instability of the financial system (Financial crisis inquiry report pagexxiv).
As stated in reason 1, the derivative market boomed in the few short years between 2005 and 2008. Although a short time period, the effects of this unregulated sector of the market caused great damage to the entire economy. To put it into perspective, in 2000, the derivative market value was $3.2 trillion, while in 2008, the market value was $20.3 trillion. The problem with the derivative market is that little or no collateral is needed to make very risky transactions usually involving a lot of money.
(Financial crisis inquiry report page 48 and 49)
Reason 3: The financial crisis could have been averted had the big mortgage banks been scrutinized by more prudent lending standards (Financial crisis inquiry report page xix and page xxiii).
During the years of the housing boom, from the early 2000's to 2008, mortgage lenders began utilizing more and more lenient standards for giving people mortgages. The "safe mortgage", the 30 year fixed rate with 20% down, was all but abandoned in favor of mortgages that were easier to get; no need for documentation, down payment, or a great FICO score, there is a mortgage for you. On top of the riskier borrowers, banks were betting that home prices would never decrease, and had bet a lot. (Financial crisis inquiry report page 4-6)
Objection 1: The deregulation of the financial markets and the use of derivatives were not the cause of the financial crisis (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 443).
It was a key factor, because with regulations of the derivative market, rampant speculation and banks like Lehman Brothers could have never leveraged 30 to 1 with investors' money.
Objection 2: The cause of the financial crisis was, in fact, the proliferate of subprime mortgages in the years leading up to 2008 (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 444).
I agree that this is one very important cause of the collapse as well, but not the only one.
Deregulation of the financial and banking sectors, leading to the increased use of complex financial instruments, had a major role in causing the crash in 2008.
(page xviii of the Financial Crisis Inquiry Report)
Reason 1: The FCIC concluded that failures in regulation and supervision led to the collapse of the financial markets (Financial crisis inquiry report page xviii)
Therefore, the majority of the commission whose job it was to investigate the crisis believes that deregulation of the financial markets had a key role in causing the economic collapse in 2008. They also stated that the passage of The Commodity Futures Modernization Act of 2000 effectively eliminated oversight by both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). This elimination of oversight as well as the changing of bankruptcy laws in 2005 caused a boom in the derivative market.
(Financial crisis inquiry report page 48)
Reason 2: The unregulated use of Derivatives as an investment tool contributed greatly to the instability of the financial system (Financial crisis inquiry report pagexxiv).
As stated in reason 1, the derivative market boomed in the few short years between 2005 and 2008. Although a short time period, the effects of this unregulated sector of the market caused great damage to the entire economy. To put it into perspective, in 2000, the derivative market value was $3.2 trillion, while in 2008, the market value was $20.3 trillion. The problem with the derivative market is that little or no collateral is needed to make very risky transactions usually involving a lot of money.
(Financial crisis inquiry report page 48 and 49)
Reason 3: The financial crisis could have been averted had the big mortgage banks been scrutinized by more prudent lending standards (Financial crisis inquiry report page xix and page xxiii).
During the years of the housing boom, from the early 2000's to 2008, mortgage lenders began utilizing more and more lenient standards for giving people mortgages. The "safe mortgage", the 30 year fixed rate with 20% down, was all but abandoned in favor of mortgages that were easier to get; no need for documentation, down payment, or a great FICO score, there is a mortgage for you. On top of the riskier borrowers, banks were betting that home prices would never decrease, and had bet a lot. (Financial crisis inquiry report page 4-6)
Objection 1: The deregulation of the financial markets and the use of derivatives were not the cause of the financial crisis (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 443).
It was a key factor, because with regulations of the derivative market, rampant speculation and banks like Lehman Brothers could have never leveraged 30 to 1 with investors' money.
Objection 2: The cause of the financial crisis was, in fact, the proliferate of subprime mortgages in the years leading up to 2008 (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 444).
I agree that this is one very important cause of the collapse as well, but not the only one.
Monday, October 31, 2011
RJA #10c: Objections
- The deregulation of the financial markets and the use of derivatives were not the cause of the financial crisis (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 443).
- The cause of the financial crisis was, in fact, the proliferate of subprime mortgages in the years leading up to 2008 (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 444).
- Not many people had said prior to the crash that the instruments and practices were too risky (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 446).
RJA #10b: Reasons
- Reason 1: The FCIC concluded that failures in regulation and supervision led to the collapse of the financial markets (Financial crisis inquiry report page xviii).
- Reason 2: Even those who were once proponents of deregulation such as Chris Cox, the head of the SEC, admit that more regulation is necessary in light of the newly developed instruments ( Roger Lowenstein, The end of wall street, page 236).
- Reason 3: The financial crisis could have been averted had the big mortgage banks been scrutinized by more prudent lending standards (Financial crisis inquiry report page xix and page xxiii).
- Reason 4: The regulations of the banking sector that were in place before Reagan took office were in place solely to protect the investors and consumers of banking products.(http://www.infoplease.com/ce6/history/A0835397.html).
- Reason 5: The unregulated use of Derivatives as an investment tool contributed greatly to the instability of the financial system (Financial crisis inquiry report page xxiv).
RJA #10a: Claim
What was the root cause of the 2008 financial crisis?
Claim:
Deregulation of the financial and banking sectors, leading to the increased use of complex financial instruments, had a major role in causing the crash in 2008.
(page xviii of the Financial Crisis Inquiry Report)
Claim:
Deregulation of the financial and banking sectors, leading to the increased use of complex financial instruments, had a major role in causing the crash in 2008.
(page xviii of the Financial Crisis Inquiry Report)
Thursday, October 27, 2011
RJA #9b: Freewriting
What are the root causes of the 2008 financial crisis?
I believe that the financial crisis of 2008 was cause by years of deregulation, leading to unbridled speculation and securitization with risky assets. This belief is upheld by research on the topic. The sources I have looked at provide me with the information that I need to come to the conclusion that the use of the complex financial instruments and mathematical algorithms that are used to assess risk and securitize risky assets were the main cause of the crisis in 2008. The greed of Wall Street bankers was also a major contributor, in my opinion. If they hadn’t have pushed so hard on the government agencies for the deregulations they enjoy and which allowed them to continue with the practices that have, in hindsight, proved to be do detrimental to the financial system of the United States and of the world. The repeal of the Glass- Steagal Act in 1999 led to banks being able to merge with security underwriting companies. The merger between Citicorp and Travelers’ Insurance Group led to the formation of Citigroup. This merger occurred without congressional approval, so it was technically illegal. The congress then granted the company an exception while they passed the legislation to make the merger legal. The article in the 1987 time magazine quotes that the wall street investment bankers wanted to keep commercial banks out of the securities business, because ‘they would get in over their heads if they were allowed such privileges.’ How right they were! And twenty one years before the crisis, no less!
I believe that the financial crisis of 2008 was cause by years of deregulation, leading to unbridled speculation and securitization with risky assets. This belief is upheld by research on the topic. The sources I have looked at provide me with the information that I need to come to the conclusion that the use of the complex financial instruments and mathematical algorithms that are used to assess risk and securitize risky assets were the main cause of the crisis in 2008. The greed of Wall Street bankers was also a major contributor, in my opinion. If they hadn’t have pushed so hard on the government agencies for the deregulations they enjoy and which allowed them to continue with the practices that have, in hindsight, proved to be do detrimental to the financial system of the United States and of the world. The repeal of the Glass- Steagal Act in 1999 led to banks being able to merge with security underwriting companies. The merger between Citicorp and Travelers’ Insurance Group led to the formation of Citigroup. This merger occurred without congressional approval, so it was technically illegal. The congress then granted the company an exception while they passed the legislation to make the merger legal. The article in the 1987 time magazine quotes that the wall street investment bankers wanted to keep commercial banks out of the securities business, because ‘they would get in over their heads if they were allowed such privileges.’ How right they were! And twenty one years before the crisis, no less!
RJA #9a: MLA-Style Annotated Bibliography
Bibliography
Commission, Financial Crisis Inquiry. Financial
Crisis Inquiry Report. Washington, D.C., 2008.
This source is very reliable. It is the report published by the commission of congressmen who analyzed the financial crisis. The report mainly focuses on the causes of the financial crisis, and as such will be where I draw most of my info from for my paper.
Henry M. Paulson, Jr.
On the brink. New York: Business Plus, 2010.
This is another reliable book, I believe, because it is written by the Secretary of the treasury, Henry Paulson Jr. This book outlines the events leading up to and after the crash in 2008.
Koepp, Stephen.
"Rolling back regulation." TIME 06 July 1987.
http://www.time.com/time/magazine/article/0,9171,964890,00.html
http://www.time.com/time/magazine/article/0,9171,964890,00.html
Subscribe to:
Posts (Atom)