The Financial Crisis Of 2008: How Did We Get Here Reaction Paper

Mathematics and Economics
Name
Institution
The financial crisis of 2008: How did we get there?
Introduction
In September 2008, the financial crisis in the U.S reached dangerous heights with the collapse of Lehman Brothers and the potential collapse of the American International Group (AIG). Consequently, Panic among institutions perceived to be “too big to fail,” caused the credit markets to crumble. As a result, the stock market plummeted, and the overall economy plunged into a deep recession. However, the Financial Crisis Inquiry Commission indicated that the widespread failure in financial regulation, excessive borrowing, and risky investment, and inconsistent responses from the government were the main forces behind the crisis.
Rather than putting up regulatory structures in place, the various regulatory commissions allowed businesses to regulate themselves. Consequently, this approach opened gaps for the corporates to engage in unsuitable activities such as shadow banking. Furthermore, in more serious situations, rather than downgrading non-performing institutions, the regulatory authorities continued to rate the institutions as safe even in the face of mounting troubles. For instance, instead of clamping down on the Citigroup’s excesses in the run-up to the crisis, the Federal Reserve Bank of New York deemed that particular situation as normal. Therefore, regulatory commissions lacked the will as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.
On the other hand, due to weakened regulation, business institutions engaged in excessive borrowing that later put the financial system on a collision course with the crisis. A few years before the crisis, too many financial institutions, as well as households, borrowed to the hilt. Consequently, the F...