Academic junk, from copying, ChatGPTing and imagine. But I have to write it. Just post it to check the blog's English composing ability.
1.Intro
The courses at FISF often refer to the 2007-2008 financial crisis, also known as the Global Financial Crisis (GFC), as a major example of a global economic meltdown. It was the worst crisis since the Great Depression of 1929, and I am curious about what caused it and how it was resolved. Although many experts have analyzed the Global Financial Crisis from different perspectives, I want to present my own understanding as a high school student.
Moreover, as we face a recession in the post-pandemic age, some people may fear that another economic crisis is on its way. Three small-to-mid size banks failed in March 2023, including Silicon Valley Bank (SVB). The China-U.S. States trade war continues since January 2018, when Donald Trump began setting tariffs and other trade barriers and Joe Biden kept the tariffs in place. By examining the causes, consequences and viable solutions of the financial crisis, we can develop a potential strategy to help us as individuals avoid losses and to assist organizations such as governments, banks and corporations to prevent such catastrophes.
2.Facts
The global financial crisis was first manifested in early 2007, when Freddie Mac announced that it would stop investing in certain subprime loans and New Century Financial Corporation, a leading subprime mortgage lender and securitizer, filed for bankruptcy protection.
The consensus among the public is that the crisis originated in August 2007, with massive withdrawals of short-term funds from various markets, triggered by a widespread decline in U.S. house prices and the ensuing concerns about the quality of subprime mortgages. The rating actions taken by credit rating agencies in mid-2007 - in terms of the number of securities affected and the average downgrade - seemed to catch investors off guard. The average downgrade was 5-6 notches, which was significantly higher than the historical average. For instance, the average downgrade was 2-3 notches during the 2000-2001 recession when one third of corporate bonds were downgraded.
As a result, credit markets continued to tighten, and the Federal Reserve established short-term lending facilities and implemented other measures to enhance the liquidity of financial institutions. However, this did not stop the bleeding, as asset prices continued to fall.
In 2008, problems emerged in different corporations, from Bear Stearns, the sixth largest U.S. investment bank, to IndyMac, the largest mortgage lender in the U.S. The situation deteriorated as Fannie Mae and Freddie Mac were taken over by the government in September 2008. The collapse of Lehman Brothers, Washington Mutual, and other financial firms also shocked the market and the crisis soon spread to Europe.
The crisis persisted into 2009. By October, the unemployment rate in the U.S. rose to 10%.
Causes
While the causes of the crash are disputed, it can be concluded that the housing bubble and the subsequent subprime mortgage crisis contributed to the financial crisis, which occurred due to a high default rate and resulting foreclosures of mortgage loans. In my opinion, some of the following factors contributed to the crisis.
Deregulation of the financial industry, which allowed banks to use their customers’ deposits to invest in risky and complex financial products, such as derivatives, without adequate oversight or regulation.
Securitization of subprime mortgages, which involved bundling low quality loans into securities that were sold to investors as high-return assets. These securities were backed by the value of the underlying mortgages, which depended on the borrowers’ ability to repay their loans and the stability of the housing market.
The housing bubble, which was fueled by cheap credit and lax lending standards that encouraged many people to buy houses they could not afford. As the demand for housing increased, so did the prices, creating an illusion of wealth and prosperity. When the housing bubble burst in 2007, the value of the subprime mortgages and the securities based on them plummeted, leaving the banks with huge losses and liabilities. Many borrowers defaulted on their loans, and many homeowners found themselves owing more than their houses were worth.
Government policies that encouraged home ownership, which provided easier access to loans for subprime borrowers and caused overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate.
The financial system became frozen after the housing bubble burst, as banks stopped lending to each other and to consumers and businesses. The crisis spread to other sectors of the economy, such as manufacturing, trade, and employment, and resulted in the Great Recession, the worst economic downturn since the Great Depression of the 1930s.
Lesson
Such crises may undermine public belief in a globalizing economy and the "political" or "financial" elites. "The policymaking elite failed to appreciate the risks of a systemic breakdown. The financial elite was discredited by both its behavior and its need to be rescued. The intellectual elite was discredited by its failure to anticipate a crisis or agree on what to do after it had struck. The political elite was discredited by their willingness to finance the rescue, however essential it was," said Martin Wolf.
As policymakers, what should be learned are as the causes. Those risky behaviors and irresponsible chasing for profit should be controlled to prevent risks from accumulation and ensure market stabilization. The overheated housing market, shadow banking system, and more factors should be monitored through policy-making and strengthening the regulation and supervision of the financial system. Countries should coordinate the policy responses at national and international levels to prevent global economic meltdown. Policymakers also should balance the trade-offs between stability and efficiency, and design policy measures that are targeted, temporary, and transparent, and that preserve the market mechanisms and the rule of law.
As individuals, we should be careful with debt, as the crisis was triggered by the collapse of the subprime mortgage market. Borrowing beyond our ability may cause terrible results. As for investing, us individuals should not pursue "quick money", invest unadvisedly, or invest in complex financial products beyond our knowledge, which will end up with nothing. Moreover, saving for emergencies is of significant importance, while families, whose wealth mostly existed as real estate and securities failed in the global financial crisis.
More
Thanks for all at Fudan University and Fanhai International School of Finance who offer me the precious opportunity to have these 12 lessons. They truly expanded my knowledge in economics and finance, equipped me with the basics and lit up my curiosity in these fields.
Hope this report will show my simple understandings, and I do hope I can have the oppotunity to study at FISF in the near future to get more relative knowledge to take this field as my lifelong career.