Reference no: EM132308684

Question: Read through the below post and provide any on of the following:

1. Ask a probing question, substantiated with additional background information, evidence or research.

2. Share an insight from having read your colleagues' postings, synthesizing the information to provide new perspectives.

3. Offer and support an alternative perspective using readings from the classroom or from your own research.

4. Validate an idea with your own experience and additional research.

5. Posting should be at least 250 words and require some information from the text, academically reviewed paper, some significant commentary that requires knowledge of the subject matter, a web link to an article or other source.

Introduction

The banking crisis that commenced in August 2007 affected the markets and hastened the Great Recession. During the Great Recession, a major financial crisis came in after the decline of housing prices which contributed to the fall in the health of numerous banking and financial institutions. The Great Recession was different from the other recession from the time of second World War due to the fact the actual Gross Domestic Product (GDP) was larger and lasted for a long period of time. The only distinction between the Great Depression and the Great Recession was due to the fact that the United States government decreased taxes during the duration of the Great Recession but increased the same during the period of the Great Depression.

Analysis of the results

There are a number of factors that were responsible for the commencement and progression of the recession of 2009. Among the factors was the government policies that triggered for the commencement of the Great Recession. The following are some of the potent major government policies that collectively undermined long-term business leadership.

Bank misregulation, specifically the international Basel capital rules accompanied by the country's adaptation to them. The 2001 Recourse Rule led to the subcontracting of risk evaluation by regulators to government-authorized rating activities. Eventually, such led to the establishment and highly-leveraged methodical accumulation of the uppermost generating AAA-and AA-rated securities among banking institutions internationally (Delgado, Porter, & Stern, 2015). The need for these securities was satisfied majorly through the augmented securitization of the United States subprime Alt-A mortgages.

The government also continuously increased leverage which was majorly led by the Freddie Mac and Fannie Mar credit policies and the fact that there was a political fascination with taking credit for intensified homeownership into the American mortgage system. Throughout the housing boom, diminished down payments and varying underwriting standards were a significant factor in government policy. According to Economist Eugene White, the United States housing boom and bust in the period of the 1920s was compatible in terms of size with the previous one. System based leverage developed in the boom in the 1920s because there was no government involvement in the mortgage market. Additionally, there were no particular incentives that were given to the banking sector for the accumulated build-up of the balance sheet openness to high-risk mortgages. As such, when the price of real estate declined in 1926, it was not sufficient to trigger a banking crisis.

References: Markham, J. W. (2015). A Financial History of the United States: From Enron-Era Scandals to the Subprime Crisis (2004-2006); From the Subprime Crisis to the Great Recession (2006-2009). Routledge.

Delgado, M., Porter, M. E., & Stern, S. (2015, June). Clusters and the great recession. In DRUID conference, Rome (pp. 15-17).