January 10th, 2018
“the third depression” historical analysis – 2009 financial crisis
The antecedent of the current crisis has primarily been attributed to the mortgage market though assessment has revealed more contributors in imprudent corporate governance, inefficient regulatory framework and unsound government policies (Kirkpatrick, 2009; Weiss & Larson 2008; Larson 2007). With the anticipations of significant capital gains in the mortgage industry, the house prices in the U.S kept on rising to reflect such anticipations (Larson 2007; Rötheli 2010). Part of this problem arose from government policies that promoted private home ownership through avenues such as low interest that resulted from years of low federal funds rates implemented through the Fed’s monetary policy thus increasing the housing demand significantly (Larson 2007; Rötheli 2010). Following, the September 11 terrorist attack the Fed had kept the bank rates at minimal levels to cushion the economy against the adverse effects of the occurrence (Larson, 2007). Such lower bank rates were however allowed to continue even after the economy had shed off the effects of the terrorist attack thus presenting the financial institutions with enhanced opportunities to lend to the investing public at fairer terms (Larson, 2007).
The increased motivation to lend and the availability of “sub prime” mortgage market created increased housing demand – since more people could afford to acquire long-term loans at low interest rates – led to a higher imprudence risk of reckless loan appraisals (Rötheli 2010). Irrespective of the existence of regulatory bodies their ability to diagnose the crisis early enough was curtailed. Banks and other financial institutions were reporting high profits that covered the illiquidity risk they were subject to (Larson, 2007; Drawbaugh 2010).The low federal fund rate applied over a prolonged time period also by reducing inflation rates to an all time low, had managed to wipe out the value of various saving instruments – e.g. deposit certificates and treasuries thus discouraging saving through these forms (Larson 2007). Once borrowers were unable to raise repayment funds leading to loan defaults, many banking institutions were put at a risk of collapse necessitating government bailouts for their recovery. Go to part 5 here.