On Crisis and Resolution

It is my belief that the 2008 financial crisis was caused by a number of issues, most prominently subprime lending and borrowing in an over zealous pursuit of profits, a lack of preventative action, deceptive investment banking, and finally an inconvenient rise in interest rates. I am also confident that the crisis could have been averted through more stringent monitoring of the asset-backed security and consumer lending markets. Furthermore, a similar crisis can be prevented through new government regulatory measures. It can be argued that one of the initial causes of the crisis is rooted in the Federal Reserve’s decision to lower interest rates following the tech bubble burst in the early 2000s. There would have been a massive increase in the availability of capital, creating a rationale for banks to lend to subprime borrowers and reap the profits of charging higher than market interest rates. Consumers then fueled this lending through willingness to pay high interest rates in the anticipation of riding the rising real estate prices of the time. This would allow them to refinance a few years later at a lower interest rate. In hindsight, this is when strict monitoring would have been able to take the issue and “nip it the bud.” However, the Federal Reserve and the Federal Housing Administration either failed to notice these irrational, predatory lending trends or just botched and didn’t acknowledge them. Shortly after the surge in predatory lending, banks began to diversify all of the risk they had created by constructing the now infamous mortgage-backed securities. This practice would have just been another way of entering the asset-backed security market, but investment bankers were able to structure the packages in a way to distort the credit ratings and conceal the true risk-laden nature of the securities. This unethical