Financial Crisis Of 2007-2008 What Regulatory Change Is...

In the wake of the Financial Crisis of 2007-2008, what regulatory change is advisable? Wenna Yang Mount Holyoke College The 2008 financial crisis should not be the last one readers will experience, but this paper would like to present a picture of how it unfolded and where went wrong, so that hopefully we can learn from it. This paper will address some post-crisis regulations and why regulators responded this way. It concludes that the key is to carry out reforms addressing the moral hazard issue deeply in our current financial system. Why can’t existent policies and regulations prevent next financial crisis from happening? To answer this question let’s first briefly review how the 2008 financial crisis unfolded. The†¦show more content†¦Now not only middle class could afford larger houses, but thanks to Fannie Mae and Freddie Mac, 69% of Americans had home by 2006. This is exciting if the story stops just here. Unfortunately it didn’t. Banks and Government Sponsored Enterprises spotted a money machine for themselves—securitizing these mortgages. They went ahead to purchase these mortgages, package them and then resell them to Structured Investment Vehicles (SIVs). SIVs, using mortgages as collateral, made products named Collateralized Debt Obligations, and CDO squares. They then sliced CDOs into credit tranches based on the level of credit risk. By doing so, SIVs and GSEs successfully transfer the credit risks to capital market investors, which would later be considered too big to fail and let the tax payers bear the consequences of the these people’s gambling. I’ll elaborate later why a ban on securitizing would not solve the problem mainly because as long as the gamblers can pass on risks to next person, they don’t bear the risks themselves. They would be motivated to lever and make risky investment for prof its no matter in the form of securitizing or others. Housing prices stopped rising in 2007. One of the ramifications was that those who rely on re-financing to pay off their previous loans were not able to re-finance any more. People started to default. This entailed big uncertainty the financial market mainly because it became an impossible task to