2008 Financial Crisis Essay

To paraphrase from William Shakespeare, the Financial Crisis Inquiry Commission wrote “The fault lies not in the stars, but in us” (“Conclusions of the Financial Crisis Inquiry Commission”). This is true when speaking of the financial crisis that occurred recently in 2008, almost heightening towards a second Great Depression. After years of deregulation and the combination of lenders and banks craving unimaginable amounts of money, it goes to show as to why the fault lies in the people. Due to the unregulated market of derivatives, the unsupervised rates from rating agencies, and the greed of professional bankers and investors, a command-and-control approach is necessary to regulate the financial system. For instance, when looking at regulation,

This essentially blocked Congress from passing any sort of regulation on this market, leading to fifty trillion dollars unregulated in the market. These unregulated OTC derivatives mixed with credit default swaps were sold as insurance against mortgage backed security. AIG sold millions of dollars of these insurance policies, without any money to back them up when things went terribly wrong. These credit default swaps were also turned into other securities - that essentially allowed traders to bet huge amounts of money on whether the value of mortgages went up or down. Even so, as housing prices increased, more and more people began to default because they could not afford the incredibly expensive payments, and as supply increased, demand fell down. This led to a surplus of unpaid mortgages in the hands of investors who could not pay these off, causing the whole financial system to eventually freeze. All these bets, financial instruments, resulted in an incredibly complicated web of of assets, liabilities, and risks, and when something went wrong, the whole web fell down together, which it