The 2008 global financial crisis
The 2008 global financial crisis led to the highest rate of unemployment and home foreclosures in the United States since the 1929 Great Depression. Coghlan, McCorkell and Hinkley review the root causes of the 2008 financial crisis in their article what Really Caused the Great Recession? The collapse of the financial crisis began when banks started creating collateralized debt obligations, which they bundled and sold as risky mortgage-backed securities to other investors. Large financial institutions such as Bear Stearns and Lehman Brothers put themselves at risk because they were investing in risky loans that were extremely vulnerable to low mortgage prices. Secondly, banks engaged in predatory lending by deceiving borrowers about their loan terms. Banks gave out unconventional mortgage loans with high-interest rates and balloon payments to borrowers with no income, job, or assets. Eventually, when borrowers failed to pay their mortgages, financial institutions such as Bear Stearns, Merril Lynch, and Lehman Brothers went into bankruptcy, which triggered the collapse of the global financial market.
The most alarming revelation by Coghlan is the fact that the Federal Reserve allowed financial institutions to engage in risky predatory lending that could potentially cause a financial collapse. Regulators should have anticipated how a downturn in housing prices would impact the financial markets. Moreover, it is shocking that regulatory bodies allowed banks to engage in activities that put people’s livelihoods at risk. Coghlan et al. observe that over sixteen million homes were foreclosed in the U.S between 2006 and 2014. Overall, the article substantiates that risky, unregulated activities by financial institutions were the root causes of the 2008 financial crisis. Accordingly, the article underscores why regulators must improve their understanding and monitoring of the competitive conditions and structural changes in the financial marketplace to prevent another financial crisis