The 2008 global financial crisis

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The 2008 global financial crisis in the United States, which began with the collapse of the 2007-8 housing bubble, was the worst recession since the late 1920s Great Depression. Seven years since the recession, analysis has identified some of the principal perpetrators and sources of the crisis. It was reported that some of the reasons were attributed to an uptick in homeownership, which pushed down interest rates, as well as poor banking, lax credit, and rating agency regulations. Some strategies were developed to relieve the financial crisis's pressure. This paper will begin by discussing the financial crisis and how it impacted the country. Secondly, the article will look into interesting consequences that were caused by the crisis. Finally, this paper will tackle some theorist's stratification frameworks that are relevant to the 2008 financial crisis. Addressing these issues gives us a general understanding of the same.

The crisis led to the formation of essential policies. Following the recession, these policies were unconventional and conventional monetary policy tools; there was the adoption of the Trouble asset relief program and Economic Stimulus Act (Victoria & David 2010). In addition to the formation of these systems, there were a few regulatory changes. The regulatory changes were the establishment of Financial Stability Board, Reform on Dodd-Frank Wall Street and Consumer Protection Act. These changes were implemented to target exploited loopholes and culprits during the financial crisis. These reforms were to prevent any similar crisis from reoccurring in the future.

An analysis of regulatory reforms and post -2008 policies indicate that these changes were very effective in combatting the culprits and recession of the financial crisis. The economic turmoil was due to many causes as listed before. Other reasons were influenced by the United States housing market. Some of the issues that were involved in the real estate market are;

Creation of a housing bubble

There was a dramatic rise in the United States house prices from the year 1998 to 2005. The prices more than doubled during this period. The increase in prices was faster than average wages. Other issues that supported the existence of a bubble were identified from the rise in ratios of house prices to renting costs (Reinhart, Carmen & Kenneth 2008). There was an economist who found out that home prices that had been adjusted due to inflation were relatively constant. This could predict a severe collapse on what was known as a housing bubble. The increase in prices charged on houses reflected the growth in the need for housing which occurred regardless of a rise in the supply of accommodation.

Lowered interest rates made adjustment rate mortgages to become cheaper to the potential buyers who took advantage of the situation. Low-interest rates were caused by increasing account deficits that the United States was facing. The country’s state was mirrored by other countries like China which were vividly purchasing the States treasury bonds. The Fed were pumping liquidity into credit markets, and other World leading banks were also doing the same. The Banks main aim of the banks were to ensure the continuity in the flow of loans at low-interest rates.

In many places of the country, it became a lot easier and cheaper in receiving a subprime mortgage. A study done by the Federal Reserve indicated that interest rate differences fell dramatically in prime and sub-prime markets, which were America's least risky and most borrowers. Interest rates had dropped from 2.8% as per records in 2001 to 1.3% in 2007. Later in the years, mortgage leasers were made more profits, the banks found an interest in selling loans because they were involved in the sale of these mortgages.

House prices rise accentuated due to the influence in property speculation. It was evident in some business places where speculators of buyers were 10% to 15%. The US rules that were comparatively generous were able to exacerbate speculative activities. However, in the UK, it was different because the foreclosure was likely to cause individual bankruptcy. In America, homeowners could abandon, leaving their mortgage and houses. Market speculators had an understanding that under the Federal Reserve stewardship, assets would be given a soft landing and be treated with care (Murillo, Graham & Campbell 2010). Moral hazard was further created by the ‘Greenspan put' where investors reaped substantial gains. The investor's losses were mitigated by the Fed which responded with increased liquidity.

Some consequences arose. These factors caused a massive housing bubble. An estimate of 20% relative on the total new mortgages was on the value of subprime mortgages. Lending of subprime mortgages rose from $180 billion in 2001 to $625billion in 2005. There was an increase in risk levels between prime and subprime mortgages. Some factors led to the collapse of the bubble. First, In the US average hourly wages had remained stagnant. Under some instances, there were declines in the wages since 2002 until 2009.

The collapse of the bubble consequently prevented the rise of prices because housing had proven increasingly unaffordable. Second, prices rose for development in housing supply tracked. Costs were able to suppers this diminishing pressure once need could subside extra amount that exacerbated a fast decline in costs. Third, a rise in interests to the peak made ARMs to become less attractive, and it removed many buyers from the market who were non-prime prospective. Fourth, fewer households had finance requisite that could enable them to support the increasing debt. This was because personal savings that they got from disposable income had fallen to zero.

Marx and neo-Marxists theory can be used to understand the post-2008 financial crisis. Everyone recognizes that the financial crisis was a server because it hit the capitalist system. The crisis caused a depression something that some people viewed as a ‘credit tsunami hit.' Mainstream policy makers and economists were involved in reeling the situation. They vindicated Marxist in giving their predictions on the host of problems in the system. Some of the challenges they come up with include decline rates of profit, overproduction, speculative bubbles and class inequality (Adrian 2011). They reasoned that these were the primary causes that would inevitably lead to the serious global recession.

The crisis development was being tracked by the independent Marxist journal through a series of articles.

John Foster and Fred Magdoff collected issues that developed the crisis in an item, The Great Financial Crisis. They attempted to elaborate the nature, tragedy, and roots of the financial crisis. Basing their ideas on the theory, they argued that monopolies had squeezed out the competition, it had set prices that would ensure their profits. However, there were no investments in expanded production. Therefore, these made the economy to face problems of low growth. The theory addressed the reality of the booms that were experienced during the periods of monopoly capitalism.

Finance that was in the form of investment stocks banking and the development of financial wings that were in corporations, namely GE and GM had taken center stage in the economy of America. Much of the commercial activities were involved in borrowing money from bank investments. Loans were secured by financial institutions which they would use in investments from stocks to real estates and futures (Stanley 2016). This created giant bouts of speculation such as the 2006 bubble in housing.

Foster and Magdoff reasoned that financing the economy was a solution to the capital’s challenges as to what they saw as underpayment of employees. Certainly, it was evident that capitalists had held down workers benefits and wages for nearly three decades. Capitalists had problems in generating sufficient demands on their products because the employees' wages were stagnant.

In conclusion, the causes and consequences of the post-2008 financial crisis are highly related to neo-Marxist literature. In the literature, neo-Marxism provides some theoretical explanations of how a financial crisis may affect a nation economic stability. Research on the politics of a country's economy and policies may provide empirical supports that may expand the claims of neo-Marxist literature. By connecting neo-Marxist theory with modern events, research of the 2007-8 financial crisis provides has provided further support for Marx's theory of capital. Finally, is to understanding that the financial crisis shook the American economy, with many economic activities facing massive debts.

Works Cited

Aronowitz, Stanley. The Crisis in Historical Materialism: Class, Politics, and Culture in Marxist theory. Springer, 2016.

Buckley, Adrian. Financial Crisis: Causes, Context, and Consequences. Pearson Higher Ed, 2011.

Campello, Murillo, John R. Graham, and Campbell R. Harvey. "The real effects of financial constraints: Evidence from a financial crisis." Journal of Financial Economics 97.3 (2010): 470-487.

Ivashina, Victoria, and David Scharfstein. "Bank lending during the financial crisis of 2008." Journal of Financial Economics 97.3 (2010): 319-338.

Reinhart, Carmen M., and Kenneth S. Rogoff. Is the 2007 US sub-prime financial crisis so different? An international historical comparison. No. w13761. National Bureau of Economic Research, 2008.

November 23, 2022

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