Finance discussion 1: reply to 2 students individually with 200-300 word

student #1 post: The financial crisis was caused by the deregulation in the financial industry. Deregulation is when the government reduces or eliminates restrictions on industries, often with the goal of making it easier to do business. It removes regulations that interfere with firms' ability to compete, especially overseas. It eliminated the regulation requiring mortgage companies to verify income to decide whether or not to approve new mortgages. Potential new homebuyers just had to show proper ID and make a statement of income to apply for a mortgage. It allowed private investors to create interest-only loans that became affordable to subprime borrowers. Subprime borrowers are individuals with a less-than-perfect credit rating. Lenders will usually charge subprime borrowers a slightly higher interest rate on loans, because they are viewed as having a greater risk of defaulting. By 2005, many lenders dropped the required FICO score to 620, making it much easier to qualify for prime loans and making subprime lending a riskier business. Mortgage companies were holding these subprime buyers to specific dates and times. It trapped homeowners who couldn't afford the payments, but couldn't sell their house. Falling prices also resulted in homes worth less than the mortgage loan, providing the lender with a financial incentive to enter foreclosure. Then when all the people who could not really afford the homes they bought they started losing them and the bubble burst. With the increase of money supply banks started handing out lots and lots of loans, which eventually led to major debt. When the values of the derivatives crumbled, banks stopped lending to each other. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of US dollars globally. Two things could have prevented the crisis. The first would have been regulation of mortgage brokers, who made the bad loans, and hedge funds, which used too much leverage. The second would have been recognized early on that it was a credibility problem. The only solution was for the government to buy bad loans (Amadeo, 2019). The Bush administration could have reduced the outsized fiscal deficits that spurred foreign borrowing, and more generally could have acted to slow an overheated economy. The Federal Reserve could have raised lending rates to decelerate the credit boom. Regulators could have been more stringent about applying prudential principles to all of the complex financial operations in which financial institutions were engaging. But instead, none of these government agencies did anything. Some suggest that unconventional monetary measures may provide the scope to respond to a crisis through negative rates, forward guidance pledges to hold rates at lower levels longer than justified by inflation targets or policy rules, or other innovations ("The New York Times Company", 2017). Another takeaway is the importance of multilateral preparedness and action. Institutions like the IMF have played a crucial role in responding to crises and keeping the global economy on track. The ability to respond effectively to these challenges has required a constant process of reform that needs to continue. But with the effectiveness of these ideas at best uncertain, there is reason for concern about the potency of monetary policy. The Great Recession could easily have been avoided if the Fed had paid more attention to monetary trends and kept money growth stable ("Be a global citizen."). Student #2 post: In the video we learned about bonds, what they are, where they came from and how they eventually became popular during times of war. Nathan Rothschild was a man from the family who made buying and selling bonds a way of life and was able to accumulate wealth for his family or generations to come. Is showed us the value and risk of bonds by using examples of when it worked and when it didn’t. In the case of the Rothchild family they were able to capitalize on the bond market after a “bad” investment made during the war with Britain and France. They had assumed that a war with Napoleon would rage on so they had stockpiled gold bunion but the war was over before it began so they had to invest it or be financially ruined, needless to say the gamble paid off. Once the family understood the value of bonds, they grew rich om them and to this day continue to be well off in the process. A case in which bonds did not work was Argentina back in the 1970-80’s, where inflation rates were changing every few hours crippling and collapsing their economy. If you are going to use bonds you have to ensure the economy you are buying them from can sustain them and make good on them. Along with the flux in the buying and selling’s of bonds a smart consumer and business needs to be made aware of the finical market when it comes to running, operating and being a successful business. In analyzing the article about the Financial Crisis of 2007-2008 I learned several things. 1. Without clear cut guidelines and regulations, it leaves room for a burst of the bubble and in this particular case the housing bubble bursts and many financial instructions had to be bailed out by the federal government. 2. This one is a bit more obvious read the fine print when thinking about purchasing any property. If the economy goes belly up you could be not only money but out of place to live or do business. 3. To go along with number one on this list making sure that there is clear cut regulations but also that they are enforced. One of main reason according to the article is subprime mort age bubble’ which eventually burst. Due to the high mortgage approval rate it created a larger market of homebuyers which resulted in the rise of housing prices causing people to refinance their homes, or buy new ones because the loan rates were so low. So banks and lending agencies were lending more money than the market had or they could afford which eventually cause the burst in in 2006 and it lasted for the next few years. The complete collapse was prevented by the financial bailout and new rules and regulations that have been put in place to help prevent this financial crisis from happening again. An investigation was conducted and there were several theories on why this crisis happened and how it could be prevented in the future. One of the main things that was believed and proven to cause this was the lack of corporate governance and financial regulations issues that have since been fixed by having FASB (Financial Accounting Standards Board delegated by SEC with the task of financial reporting standards; which I believe it best. Banks should not be able to take such risk and gambles that plunge the nation into a crisis. Being vigilant as a business is what is going to help you in spite of the ebbs and flows during any financial issue.