Thursday, November 21, 2019

Use valid academic sources to illustrate the proximate causes for the Research Paper

Use valid academic sources to illustrate the proximate causes for the massive downturn of the U.S. economy 2009 - Research Paper Example What is however, significant to note that the crisis created a kind of contagion effect on other sectors of the economy also and started to take deeper roots in terms of creating recessionary pressures on the economy? During the last quarter of 2007, US officially went into the recession and official response from US government started to emerge. US took massive action in terms of supporting the failing institutions and government injected tax payers’ money in order to ensure that the whole financial system of the country should not collapse. This also included separate responses from the different actors of the State including The President, Congress, Treasury as well as the Fed Chairman while working in their official capacity. As discussed above that the original cause of financial crisis was the busting of asset bubble wherein the subprime mortgage portfolio of the banks started to get worse. Over the period of time, banks started the practice of lending to subprime borrowers- borrowers with impaired credit history- in order to earn higher returns. Most of the banks however, also securitized their mortgage portfolio and subsequently repackaged their loans and sold them in the form of mortgage based securities. (Cocheo. 2007). The real issue started to emerge when the subprime borrowers started to default and the banks have to divert their own funds to payoff their obligations on the mortgage based securities. This mismatching of the cash flows therefore created the credit crunch for other sectors of the economy and slowly started to engulf the whole economy. The apparent reason may be the subprime mortgages however, underlying this crisis, many critical weaknesses of the regulatory environment of the country. It is generally argued that the overall regulatory environment of the developed countries was so relaxed that the firms took undue advantage and started to adapt the business practices which were risky and put the entire

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