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Failure Of Three Regulation In Financial Crisis

1838 words - 7 pages

Since the year 2008, many countries had been suffered from a financial crisis or Hamburger crisis, because of the mistaken policy, complex financial system etc. which cause a severe shock to the financial system globally. From this impact, the federal government of United State of America (USA) and other countries had injected a large fund for retrieving this situation significantly. Therefore, it can be explained that understanding the main causes of the financial issue can assist each country to clarify problems. The purpose of this essay is to elucidate regulatory failure in 3 major types: first, misguided intervention in the U.S. second, failure of financial risk management, next, the lack of transparency regulation in private and public sector, and a case study from Lehman Brothers.
Firstly, an erroneous policy from the U.S government caused a long term effect to a financial system globally. Generally, the housing and financial market had been strongly promoted. The competition among financial institutions was increased as same as Gross domestic Product (GDP) in each country. To be more specific, reducing of interest rate in short time and sub-prime borrowers had been facilitated to own a home easily and that caused a sub-prime crisis. Ely shows that the US government used the financial institutions as Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) to support sub-prime borrowers or people who had lower credit. Moreover, banks had been pressed to extend loan for homebuyer with a low interest rate policy. Many flexible campaigns attract borrowers to own a house. By the supporting from Fannie Mae & Freddie Mac and the Federal Home Loan banks, opportunities had been provided to people in different levels. The economic system has been advanced dramatically, because of the demanding of housing market reached a high point rate in 2006. Also, the US GDP increased nearly 25 percent during 2006 to 2007. During the lowest interest rate, people used credit to own a house, credit cards or car. The economic system was shifted to a high level as same as the increasing of household mortgage debt has rose to 75 percent during 5 years (2000-2005). It can be explained that US household received more chances to own a houses, housing market had been promoted considerably. It seems to be good news for global financial market, especially US government, because of the positive result which was responded by homebuyer and investor hastily. On the other hand, hiding some information such as a long term effect from interest rate, the ability to pay debt, and the fluctuation of housing market, most borrowers and investors could not know both sides information (It is called ‘Moral Hazard’). Banks and non-banks needed to gain more profit neither borrowers could not pay a debt nor had a financial problem , and US government only concerned about the increasing of economic system and GDP rate. Even though,...

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