The great recession of 2008 in the U.S was the most devastating period. Different factors led to the failure of the market leading to the recession. It led to a prolonged rising unemployment and low growth and.

One structural cause of the great recession was the development and use of new financial instruments. In 1971, the gold dollar standard collapsed and there was a move to the floating exchanges. There was a removal of controls on capital between nations and a major reorganization of capitalist finance occurred (Morrow, 2010). Bankers, insurers, academics, and fund managers to boost income developed new institutions and instruments. In 2009, subprime mortgages increased. These mortgages targeted borrowers with less-than-adequate savings and less-than-perfect credit. This increase had started in 1999 as the mortgage association endeavored to make home loans accessible (Morrow, 2010). The borrowers were considered high risk thus; the loans had high-interest rates and variable payments. However, many argued that this was a disaster (Kosakowski, 2008).  To add to the mortgage risk, total consumer debt continued to increase during this period.

Another structural factor that led to the great recession was the Low interest rates, cheap loans and the rising advantage of investments. Between the years 1996 and 2004, there was a significant decrease in the long-term interest rates, which was associated with a trade deficit. To finance the deficit, the U.S. government had to borrow abroad which lowered the long-term interest loans. The foreign funds were re-loaned by financial institutions to homeowners, consumers and financial investors.

In the 1990s’, the stock market boom collapsed and the Federal Reserve reduced the short-term interest rates to stimulate the economy. After adjusting to inflation, the real interest rates were negative by 2004. For bankers, it meant that the money was free. Financial firms in turn could be able to borrow cheaply and increase their loans as well as profit margins. With the rise of the credit insurance at the time, investors believed they were at no risk of loan defaults and continued borrowing at low interest rates. Large investment banks increased their leverage ratios from 23 in 2004 to 30 in 2007 (Morrow, 2010). This meant that for every dollar of capital, the banks had 23 dollars worth of liability.  The rise of the leverage finally inflated the financial markets as related to the real economy. This increased the financial fragility of the system and increased chances of a break down.  When the housing prices started to fall in 2008, this triggered the financial crisis.

Another structural cause of the recession was government failure. There was misregulation in the market. The CDSs market for example was not regulated at the time. The government did not regulate the issuers to be well prepared in case of a worse scenario (Kosakowski, 2008).  Another major deregulation was the removal of selective credit controls, which was meant to reduce financial risk. In addition, the Securities and Exchange Commission relaxed their rules on capital base and restrictions on the leverage of major investment banks.  This allowed the investment banks to choose their own leverages based on their own developed risk model. This led to increased bank leverage ratios and the transfer of capital to collateralized obligations of debt.

The U.S housing bubble was another cause of the recession. At this period, subprime mortgages increased. These mortgages targeted borrowers with less-than-adequate savings and less-than-perfect credit. This increased had started in 199 as the mortgage association endeavored to make home loans accessible. The borrowers were considered high risk thus; the loans had high-interest rates and variable payments. However, many argued that this was a disaster (Kosakowski, 2008).  To add to the mortgage risk, total consumer debt continued to increase during this period.

With an increase in housing prices, the mortgage-backed securities market gained popularity. Commercial investors took the chance and invested in the MBS.  MBS market is very profitable provided the homeowners continue paying their mortgages, and the housing prices continue to increase. However, the risk became real when the homeowners defaulted on their payments and the housing prices began to fall (Kosakowski, 2008). With an increase in housing prices, the mortgage-backed securities (MBS) market gained popularity. Commercial investors took the chance and invested in the MBS.  MBS market is very profitable provided the homeowners continue paying their mortgages, and the housing prices continue to increase. However, the risk became real when the homeowners defaulted on their payments and the housing prices began to fall (Kosakowski, 2008).

Another structural cause of the recession was the failure of the commercial banks. The credit crisis affected most of the banks involved leading to acquisitions, takeovers and bankruptcy. The Government announced the takeover of Freddie Mac and Fannie Mae due to losses made in the subprime mortgage market.  One week later another company Lehman Brothers filed for bankruptcy.  Such buyout and takeovers continued in September 2008 (Kosakowski, 2008). On 21 September 2008, Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) converted to bank holding companies from investment banks. On 25th the same month, the Federal Deposit Insurance Corporation (FDIC) seized Washington Mutual, which had been exposed to the mortgage debt. On 29th, Citigroup (NYSE: C) acquired Wachovia the 4th largest bank in U.S at the time (Kosakowski, 2008).  When the market failed, the issuers were caught off guard with no backup plan.

The individualistic explanations of the financial collapse are that it was an act of God, result of stupidity and greed, over regulation of the free market and the building of many houses. The structural factors challenge this by explaining that this was not a natural occurrence. It was perpetrated by failures in the structures in the economy.

The building of many houses but targeted borrowers with less-than-adequate savings and less-than-perfect credit did not cause the financial failure. This was considered a high-risk investment and thus requiring high interest rates. When the commercial investors entered this market, the housing prices increased.  When the homeowners defaulted in their payments, the housing prices started to decrease (Kosakowski, 2008). This was also viewed as greed and stupidity on the part of commercial investors. For an investor, the aim is to make money by utilizing any opportunity. With the structures in place, the commercial investors could not dictate the prices of housing rather the forces of demand and supply were in play.

References

Kosakowski, P. (2008, November 03). The Fall Of The Market In The Fall Of 2008 | Investopedia. Retrieved March 19, 2016, from http://www.investopedia.com/articles/economics/09/subprime-market-2008.asp

Morrow, R. (2010). A critical analysis of the US causes of the Global Financial Crisis of 2007-2008‖. Australian Marxist Review, (53).

 
Do you need an Original High Quality Academic Custom Essay?