[BP1]More a single form of defense but rather

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specifically subprime is defined by customers with a credit history too risky
for Fannie Mae or Freddie Mac to accept.

 BP2To
what?

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were

With
all the previous facts stated , I  learned
from doing research on this topic that we as Americans and as investors cannot
rely on a single form of defense but rather need a multitude of defense liens. I
have learned that we cannot count on monetary policy to depend on financial
security.10 A more credible system needs to be in place to help investors
recognize real possibility of loss and help people determine and fix prices
properly. Although the United States is a long ways off, we need to keep making
sure we push for a more stabile resilient financial system to help avoid future
problems. 11

Looking
back on the financial crisis of 2008, we should have learned some valuable
lessons. The first lesson should be to now use debt more strategically.11 When
homebuyers opted to obtain easy credit, it did include low down payments and
interest payments, however when the interest rates reset, they could no longer
make payments and had to file for bankruptcy. This not only effected them at
the time, but then tarnishes their credit history because it then remains on
file for a decade. Investors hopefully now understand how important having
smart financial advisors to help manage their clients personal risk.1 With the
high rates of foreclosed homes and unemployment, a big lesson to be learned from
the financial crisis of 2008 is that being employed might be the most important
asset for someone. People should start boosting their social security benefit
to ensure that even if the stock market were to fall again, their monthly
income would not. Social security lasts as long as the one receiving it and as
long as their spouse.

As
for the United States, the output of goods formed by labor and property was
decreased by 6% between the last quarter (2008) and first quarter of 2009. The United
States also saw the unemployment rate increase by 10%, which is double before
the financial crisis and highest since the 1930’s. Also, hours worked per week
was lowered to 30 the lowest number since the statistic was kept track of. The financial
crisis also caused a stirrup between the distribution of wealth in the US. Data
collected from over 4,000 families showed that 60% of total wealth had declined
and 77% of the wealthiest people saw a decrease while only 50% of least wealthy
families only faced a decrease.

There
are many consequences to what happen in the financial crisis of 2008. This did
only affect the United States, this effected the world. I would like to discuss
the outcomes this event had on financial markets, including the US stock and
other global financial institutions such as European banks. There were many
people fearing that a global economic collapse could happen and then there are
many people that refuted the possibility. The investment bank UBS said their
would be a global recession and it would not get better for at least a couple
years. The UK soon started systemic injections and UBS suggested the United
States do the same, with banks around the world also lowering interest rates.92
The UBS also suggested recession on October 16th with the United
States’ lasting three, Europe’s two, and UK’s four quarters long. Other countries
such as Cambodia and Kenya saw significant impacts to their economic growth.
Cambodia went from 10% to around 0 in 2009 while Kenya only reached 4% growth
compared to their previous mark of 7% in 2007. The Overseas Development Institute
reported that growth reductions were attributed to decreases in commodity
prices, trade, and investment. After many people in countries such as Ghana,
nearly 250,000 people were living below the poverty line. The Arab group was
the best off after the 2008 financial crisis because of the fact that they
alternate source of financing that included their large account deficits like
FDI. 92

The
final reason, and the one of the most important, was that investors redefined
what an acceptable risk was.  Looking at
history over the previous 50 years, everybody including investors
underestimated the chances of failed housing prices. Market contributors did
not understand the stability of the financial system and the risk with and it had
with collateralized debt obligation and mortgage back security. A clear example
of this can be shown when banks guessed that around $450 billion dollars of
collateralized debt obligation were sold in before 2007. JP Morgan estimates
that 102 billion of that which had been liquidated was around 32 cents to the
dollar while the mezzanine was near 5 cents. There was a clear conflict between
the clients and professional managers that untimely led to bad investments and
higher priced assets. For asset managers, they wanted to increase their assets
to maximize their compensation because more assets mean more pay for the
professional managers. Looking at history to prepare for the future is often smart,
however when it came to looking at mortgage risks and the possibility of decreased
housing prices, everybody underestimated the events to come.

            From the years 2000 to 2003, federal
fund rates were lowered by 5.5BP2 %
(6.5-1.0). These low interest rates isBP3 
what encouraged more borrowing and was another factor in the crisis. Some
researchers think that this happened to dampen the attacks of September 11th.
89Studies from other countries have also showed that rapid credit growth
played a crucial part in this crisis. Ben Bernanke, the Federal Reserve
chairman, noted that the US account deficit rose by over 650,000,000 dollars. The
US was then forced to borrow a large amount of money from countries in Asia and
nations that were exporting oil. The balance of payment identity made it that
the US then had to have an investment equaling the deficit. Because of this,
prices of assets were raised why interest rates were lowered. Countries like China
who had high personal savings could lend their kinds of funds, unlike the US
who used it to increase the pricing of housing.

            Subprime lending means giving loans to people who might
face troubles in the future making payments on timeBP1 .
Also, subprime lending was given to people that large investment banks such as
Freddie Mac and Fannie Mae saw as too risky due to their credit history. 6
This can be due to many reasons ranging from medical issues, divorce, and
unemployment. Prior to 2004, subprime lending mortgages were lower than 10% but
saw a dramatic increase to around 20% in 2006. In my opinion, the people most
to blame were the lenders. They gave out funds to people who had poor credit
history and probably could not make payments if they faced future problems and
had a higher risk of default. When the banks stormed the market with capital liquidity,
it let investors seek out riskier opportunities to strengthen their investment.
Another result was that they were lower interest rates across the United
States.7 Not only were the lenders at fault but the home buyers should have
not been exercising interest outside of their means. Soon the bubble busted and
as a result, when families had to fix their mortgages to higher rates they
could not keep up with the demand and resulted in foreclosure.1

            The average price of a typical American household had
been increased between the years of 1998 and 2006 by a staggering number of
125%. Also, in the year 2006, the ratio for price of a median home rose to 4.6
times the income of median homes. This price appreciation lead to many American
families to take out second mortgages and also resulted in families refinancing
their houses at a lower interest rate. In 2007, a pool of money that NPR
suggests was over $70 trillion dollars in income investments, had higher yields
than Treasury bonds the US offered years prior. However, the safe income
investments did not grow nearly as fast and large investment banks had to
counter this with things such as collateralized debt obligation and mortgage
back security, that credit rating agencies deemed safe. Collateralized debt
obligation helped aid financial institutions to gather funds from investors to help
subprime lending and further increased the housing bubble, which also lead to
large fees. 2006 saw the peak of the housing bubble and then in 2007 foreclosures
on over 1 million properties had happened. In September 2008, prices of US
homes dropped on average 20% while there was greater than a 80% increase in foreclosed
homes (2.3 million). 34

The global financial
crisis of 2008 is particularity interesting for me because this event affected
me and my family directly. At the time, my mother was working for Merrill Lynch
and my father was currently employed at Lehman Brothers. A specific memory for
me was when my mother, on the evening of September 14th, (a Sunday) was
in the living room talking to my father asking if he would have a place to work
come Monday. Less than 14 hours later my father lost his job along with many
others. The financial crisis of 2008 also referred to as the “global financial
crisis” might have been the worst financial crisis since the 1930s, the Great
Depression. Not only did this event affect the United States but
internationally, the financial crisis crippled stock markets around the world,
large financial institutions such as Lehman Brothers collapsed or was bought
out, and wealthy nations had to develop rescue packages to help save their
financial system.1 Although there are numerous reasons, this paper will
highlight several explanations such as; the housing bubble, subprime lending,
credit conditions, and the inaccurate prediction of risk. These and many more
causes resulted in the financial crisis and lead to many outcomes such as a
recession in the United States and a negative impact on stock markets around
the world.1