discuss the causes of the recent world financial crisis in 500 words?
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Answer:
due to corona virus , the whole world faced financial crisis.
The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. They created interest-only loans that became affordable to subprime borrowers.
In 2004, the Federal Reserve raised the fed funds rate just as the interest rates on these new mortgages reset. Housing prices started falling in 2007 as supply outpaced demand. That trapped homeowners who couldn't afford the payments, but couldn't sell their house. When the values of the derivatives crumbled, banks stopped lending to each other. That created the financial crisis that led to the Great Recession.
Deregulation
In 1999, the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, repealed the Glass-Steagall Act of 1933. The repeal allowed banks to use deposits to invest in derivatives. Bank lobbyists said they needed this change to compete with foreign firms. They promised to only invest in low-risk securities to protect their customers.
The following year, the Commodity Futures Modernization Act exempted credit default swaps and other derivatives from regulations. This federal legislation overruled the state laws that had formerly prohibited this from gambling. It specifically exempted trading in energy derivatives.
Who wrote and advocated for passage of both bills? Texas Senator Phil Gramm, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs.4 He listened to lobbyists from the energy company, Enron. His wife, who had formerly held the post of Chairwoman of the Commodities Future Trading Commission, was an Enron board member. Enron was a major contributor to Senator Gramm’s campaigns. Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Larry Summers also lobbied for the bill’s passage.
Enron wanted to engage in derivatives trading using its online futures exchanges. Enron argued that foreign derivatives exchanges were giving overseas firms an unfair competitive advantage.
Big banks had the resources to become sophisticated at the use of these complicated derivatives. The banks with the most complicated financial products made the most money. That enabled them to buy out smaller, safer banks. By 2008, many of these major banks became too big to fail.
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