Research Main Causes of the Financial Crisis of 2008-2009

Financial Crisis of 2008-2009
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Introduction
The global financial crisis of 2008 -2009 was appalling. Millions of Americans lost their job and homes. Almost $13 trillion in family wealth was ruined, eradicating about two decades of gains. This report will examine the economy decline between 2008 and 2009 explaining its main causes, the government response between 2008 and 2010, the prolonged recovery of recession, and the high unemployment rate for a longer period. Furthermore, the report will explain why salaries of middle class stagnated for a longer period and the preparedness of the U.S. economy for another financial crisis. The report will utilize statistics and graphs to provide profound understanding of the financial crisis (The Pulse of Capitalism, 2011).
Main causes of the financial crisis of 2008-2009
Until the 2008 global financial crisis, the U.S. economy had a steady growth. In 2003, the GDP was $306.5 billion, which almost equaled the average of 1993-2000 that was $326.2 billion. Moreover, in 2004 the GDP increased to $460.3 billion. However, the economy started to worsen in 2006 when there was a rapid increase of housing prices. Between 2008 and 2009, the country economy worsened further after experiencing the global financial crisis. The financial crisis of 2008-2009 was caused by various factors, including wrecked international monetary system, securitization of loans, and market-to-market accounting (The Pulse of Capitalism, 2011).
The trade imbalance between the developing and developed nations contributed to the global financial crisis. By keeping their currencies artificially depressed against the U.S. dollar through purchasing dollars with newly printed native currencies, export oriented countries, such as China amassed substantial reserves of dollars. Similarly to the petrodollars of the 1980s these funds were then recycled back into the U.S. fiscal system. To put this money to proper use, financial firms had little options but to lower underwriting standards and thus increase the group of prospective borrowers (Thomas, Hennessey, & Holtz-Eaki, 2011).
Banks conventionally retained most of the loans that they originated, which gave lenders incentive to underwrite loans that had only little possibility of defaulting. However, the introduction and propagation of securitization resulted to decreased incentive to check the quality of underwriting standards since the originating bank did not hold securitized loans (Thomas, Hennessey, & Holtz-Eaki, 2011).
In 1990s, the SEC and FASB required public companies to value their assets at market value as opposed to historical cost, a practice that had been deserted during the great depression. This dragged nearly all banks in the country into insolvency from an accounting viewpoint when the credit market seized in 2008 and 2009, thus rendering it unfeasible to value assets (Thomas, Hennessey, & Holtz-Eaki, 2011).
After the twin oil embargoes of the 1970s oil producing nations started to amass, substantial reserves of petrodollars that were later recycled back into the U.S. financial system. This circumstances forced banks and other types of financial firms to place the money to work in increasingly trivial ways, such as subprime mortgages (The Pulse of Capitalism, 2011).
The housing slump had a significant effect on the U.S. economy. Individuals and investors could not sell their houses for a quick profit. Mortgages rates adjusted upwards and could no longer become affordable for many homeowners. Furthermore, thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This resulted to huge losses in mortgage-backed securities and numerous banks and investment firms started to make losses. This also caused a surplus of homes on the market that lowered housing costs and slowed the development of new home construction, placing several homebuilders and laborers out of business. The depressed housing prices also made numerous homes have less value than the mortgage value and some owners opted not to pay their mortgage (Thomas, Hennessey, & Holtz-Eaki, 2011).
The Government response to the financial crisis
In response to the financial crisis, the government initiated a set of programs developed and administered by the U.S. Treasury to even out the country’s financial system, re-establish economic growth and avert foreclosures in the wake of the 2008 financial crisis through acquiring troubled companies’ assets and equity. The Troubled Asset Relief Program (TARP) firstly gave the Treasury purchasing power of $700 billion to acquire illiquid mortgage-backed securities and other assets from key institutions in an effort to reinstate liquidity to the money markets. The fund was created after the passage of the Economic Stabilization Act, but the Dodd-Frank Act later decreased the $700 billion authorization to $475 billion (U. S. Department of the Treasury, 2012).
The government initiated numerous efforts under TARP to address the condition of the American auto industry, housing market, and financial system. The Automotive Industry Financing Program (AIFP) was started in December 2008 to avert the uninhibited liquidation of Chrysler and General Motors (GM) and the collapse of the U.S. auto industry. The possibility for such a disturbance at that time posed a large risk to financial market stability and endangered the general economy. Furthermore, it could have had devastating effects to other automobile firms, the several suppliers, and other businesses that relied on the automotive industry. This could have also resulted to loss of over one million American jobs. Therefore, in an effort to assist both Chrysler and GM, which were on the point of collapse, the government offered temporary loans to both companies and their financing entities in 2008. The treasury offered a total of $51 billion to GM through TARP to help in restructuring process. Conversely, the treasury provided $1.9 billion to Chrysler under a debtor‐in‐possession financing agreement for support during its insolvency proceeding. In addition, government invested $17.2 billion of TARP funds in Ally Financial and advanced $1.5 billion to a special purpose vehicle (SPV) created by Chrysler Financial. This facilitated the companies to finance the purchase of their vehicles by dealers and consumers (U. S. Department of the Treasury, 2012).
The US economy was greatly affected by the house bubble that had doubled home prices. In 2009, home prices dropped, home values reduced by almost one-third and American families were struggling to purchase and maintain their homes. In response the government initiated a number of steps to strengthen the housing market and assist struggling homeowners evade foreclosure. The treasury under TARP established two core programs including, Making Home Affordable (MHA) and the Hardest Hit Fund (HHF). The Making Home Affordable Program (MHA) offered mortgage relief to homeowners to stop avoidable foreclosures. The foundation of the program was the Home Affordable Modification Program (HAMP), which permanently decreased mortgage payments to reasonable levels for qualifying borrowers. Conversely, the Hardest Hit Fund was offered to families that were...