USA SUB PRIME MORTGAGE CRISIS,,2008

sources 

'It is believed that someone who has experienced near to death re-evaluates his priorities and values in life''

joseph stiglitz freefall

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]...

sources,,,

''freefall'' joseph stiglitz,,,

''time for a visible hand-lesson from 2008 crisis'']

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

Sub prime mortgaze crisi had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality...same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated...

What were the main causes,,that has been discussed here..

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

Few reason for crisis..

Incentive problem

Executives compensation system

Executive compensation schemes (combined with accounting regulations) encouraged

the provision of misleading information. Executives that are paid

with stock options have an incentive to increase the market value of shares,

and this may be more easily done by increasing reported income than by

increasing true profits. Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

-INCENTIVES FOR ACCOUNTING FIRMS

-SECURITISATION

-RATING AGENCY INCENTIVES

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

-TRANSPARENCY AND COMPLEXITY

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

-REGULATORY AND ACCOUNTING ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

-Modeling Problems

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

INTELLECTUAL INCOHERENCE

The failure of the financial system to perform its essential functions:

•      Housing Price Bubble and Collapse.

•      Financial Market Freeze and Collapse.

•      US Housing Bubble created by

•      Low interest rates

•      Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates

•      Securitization of  mortgages, sold to unwary buyers as highly rated

•      US Bubble popped when

•      Interest rates rose in 2006, housing prices fell

•      Subprime mortgages and securities defaulted

•      Subprime Debt Obligations made in USA held around the world caused global financial shock.

•      Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

•      COURSE OF THE CRISIS

•      MORTGAGE CRISIS.

•      COLLAPSE OF COMMERCIAL REAL ESTATE

•      BANKING CRISIS

•      DECLINING VALUE OF EURO.

•     Few steps and suggestions to correct that crisis

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

There were a series of financial sectors reform

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

Curbs  on excessive risk sharing.

Curbs  on derivatives.

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

harsh vardhan pathak

msc integrated economics

doon university