Effects Of The Financial Crisis That Hit The Western World

The Causes and Effects of The Financial Crisis That Hit the Western World After September 2008
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Introduction
On September 15th, 2008, Investment bank Lehman brothers bank filed for Chapter 7 bankruptcy as the United States grappled with the worst financial crisis and economic recession since The Great Recession of the 1930s. The financial crisis prompted the government to bail out large financial institutions with $700 billion else according to Ben Bernanke (the then Fed Chairman) the United, States ‘would not have an economy by Monday’ CITATION Anr08 \l 1033 (Sorkin, et al., 2008). As the issue spiraled, the stock markets crashed, many financial institutions under duress were either acquired or filed for chapter 7 bankruptcy. The financial crisis had a ripple effect on the economy as it led to increases in unemployment as the US lost 2.6 million jobs in 2008 aloneCITATION Lou09 \l 1033 (Uchitelle, 2009), many people lost their investments and savings. The issue also went global causing the European debt crisis and slowed economies of many countries. The financial crisis was many years in the making primarily caused by deregulation and compounded by financial innovations in the unregulated financial industry and complex relationship between investment banks and rating agencies. Financial innovation birthed subprime loans, predatory lending, the creation of CDOs and the cumulative impact of these products in an unregulated space led to the crisis. All these issues could be traced, to decades-long deregulation of the industry which allowed the financial institutions to create new, highly profitable financial products, which bore catastrophic effects on the economy.
Causes
Deregulation
After the Great Depression, the government tightened its grip of the financial sector to ensure stability. The regulations prevented another financial crisis and were epitomized in 1999 by the Gramm-Leach-Bliley Act (Citigroup Relief Act) which repealed the Glass-Steagall Act of 1933. However, starting in the 1970s (after 40 years of no financial crisis, even during and after World War II), the bank lobbyists in Washington lobbied for deregulation, especially which barred banks from speculating with depositor’s savings. They cited that American banks could not be competitive internationally and they promised low-risk securities to protect customers. The deregulation enabled some financial institutions in America to consolidate and become ‘too large to fail’ because their failure threatened the whole financial ecosystem. For example, in 1972, Morgan Stanley Bank had 110 total personnel, one office and controlled a capital of 12 million dollars and by the time of the financial crisis, it had over 50,000 workers and several tens of billions in capital CITATION Cha10 \l 1033 (Inside Job , 2010) despite losing about 2.3 billion dollars first few months of the crisis CITATION Dav08 \l 1033 (Ellis, 2008). Citicorp and travelers group merged to form Citigroup, which became the largest financial services company in the world and although at the time of the merger it violated the Glass-Steagall Act of 1933, its repeal followed shortly after. Most of the other banks and investment financia...