Analyzing the Current Financial Crisis and Banking Industry (Essay Sample)

Analyzing the Current Financial Crisis and Banking Industry
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Introduction
The current financial crisis is because of the global financial crisis that peaked in 2008. Its effect is still felt after five years and is considered to have been the worst since the great depression, which took place in the 1930s. The depression had a significant effect on big financial organizations and prevented the state from securing the banking sector. The financial crisis led to the dropping out of the stock markets worldwide. The financial crisis affected the living standards of every American in every imaginable way.
Analysis of the crisis
According to Dermine (2013), before the crisis, loans and mortgage lending was done in an irresponsible manner in America. Loans were given to borrowers who had poor credit histories. The borrowers would later struggle to repay their loans. To contain the crisis, the bad debts were passed to the big banks in America to remedy the crisis. The Financial institutions placed mortgages together in pools in an attempt to turn them into evidently low-risk securities (Blundell-Wignall, Atkinson & Lee, 2008). The big banks argued that the property markets would fall and rise independently in different American cities. According to the financial institutions, the risks of each loan was uncorrelated hence, the risk of each loan would fall and rise independently.
The cause of the crisis was because most of the people who were offered mortgages and loans were unable to repay them. The result was the nationwide financial crisis, which led to many Americans losing their homes and jobs (Blundell-Wignall, Atkinson & Lee, 2008). The financial crisis was derived from many factors; some of them included financial products complex, failure of the regulator, and the low-interest rates, which were charged to the loan borrowers. The low-interest rates encouraged many people to borrow money. This led to the cost of borrowing exceeding the returns (Dermine, 2013). Most of the big banks and other financial institutions became bankrupt because most of the people who had borrowed money did not repay. The crisis spiraled as more and more people could not repay their loans because the employers, who are the financial institutions, were not making any profit (Dermine, 2013).
The federal government took control of the two biggest players in the mortgage market because the largest investment banks in America went bankrupt. This led to the downfall of most of the key businesses in the housing sector. Many people became unemployed and most of the mortgage lenders collapsed. The Federal Reserve responded to the effect of the financial crisis by providing funds to stabilize the financial markets (Blundell-Wignall, Atkinson & Lee, 2008). The US government responded by supporting the Troubled Asset Relief Program, whereas the Federal Deposit Insurance Corporation responded by increasing the deposits insurance limits to banks and other financi...