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Free «Most Important Causes of the Financial Crisis» Essay Sample

The financial crisis was caused mainly the growth and subsequent collapse of the housing bubble in that it because the value of assets tied to real estate to fall dramatically and as a result damaging financial institutions world wide.  As a result, the market became skeptical mortgage related securities and they acquired huge losses in the early 2008 and 2009. The mortgage industry, which is a huge part of the US financial system, became stifled. This caused credit to become tightened and international trade declined as the lenders could not afford to advance more financed to the business world and hence a global slow down in the economy. Some may blame the credit rating agencies and investors for failing to put the accurate value and proper consideration for risks involved with mortgage related financial products. According to me, the According to the Dodd-Frank Wall Street Reform and Consumer Protection Act would ensure that the mortgage institutions do not over lend and remain solvent through the tighter regulations

 
 
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The other cause of the financial crisis is poor capital management practices and lack of transparency by the financial institution. According to the Dodd-Frank Wall Street Reform and Consumer Protection Act there would be capital requirements for major financial institutions. This would help to create sound lending institutions with sufficient capital levels. This is to prevent liquidity shortfall in the future and to ensure that all financial institution can support the liabilities that come with lending.

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Lastly Weak and fraudulent underwriting practice contributed a lot to the collapse of major institutions that lend out money without considering the credit worth of the clientele. As a result, these lead to huge solvency problem and many foreclosures in the US market. Testimonies of one chief underwriter for correspondent lending suggested that just before the US housing bubble the mortgage underwriting standards were pathetic. The mortgages did not contain all proper documentations. This coupled with easy credit culture ensured that many lenders had poor businesses on their book that could not pay up their loans and mortgages. Greed of some institution that wanted to make a quick buck encouraged these fraudulent underwriting practices thus flooding the market with unwanted credit. The Dodd-Frank Wall Street Reform and Consumer Protection Act seek to close such loopholes in the market system through strict regulation and supervision of the industry.

In summary, I feel the Dodd-Frank Wall Street Reform and Consumer Protection Act help to create sound economic principles to grow jobs, protect consumers, zero in on wall street and gig bonuses, end the too common bailouts and too big to fail mentality to prevent another financial crisis. The act in summary created consumer protections with authority and independence .It tries to end the too big to fail bailouts at the expense of the taxpayers,  by putting in place new capital and liquidity requirements that make it quite undesirable for firms to get too big. In addition, advance-warning system created helps to identify and handle systemic risk in the market. The act also promotes transparency and accountability in exotic instruments thus removing loopholes for malpractices that could go undetected hence investors are safe. Finally, it enforces regulation on the books by empowering and strengthening the regulators to be able to monitor any abusive financial fraud, system manipulations and the likes that cause many institutions to close down during the crisis.

   

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