Financial Crunch

The Financial Crunch of 2007-2008

Christy Abernethy
English 112
Mrs. Marcum

1 | Page

Financial Crunch

The Financial Crisis of 2007-2008 was an epidemic of such level that could have had
the potential to destroy and crumble our Financial and Banking industry. Economists state that
this recession was the worst financial crisis since the Great Depression of the 1930s. With the
scare of difficulty and struggle the recession also affected not only the United States but also
surrounding countries as well. The whirlwind started a trickle effect into our employment rate
and other economic factors that we rely on for a profitable and functioning mode of civilization
with in our society. Within this essay I will relate as to why the financial crisis happened and
how the employment rate came into factor as well as how the Obama Reform Act came into
forum for hopes that this can deter a future recession from happening.
The summer of 2007 the United States and Global Financial Markets found themselves
facing a potential financial crisis and disaster that could threaten and potentially collapse the
financial industry as a whole which on turn would also affect the economy as a whole in the big
picture of economics. Due to the banks being able to regulate themselves, they were able to make
and break as they went along to which lead to a new credit category; Predatory Loans.(Cecchetti)
They were payday loans, and sub-prime mortgages which catered to high-risked customers that
would involve high fees, penalties and high interest rates. With creditworthy applicants being
scarce but the need for more money producing loans the competition between lenders began to
heat up for revenue and market share. In turn lenders became more relaxed with underwriting
standards and originated riskier mortgages to less that creditworthy borrowers. Not
understanding what types of loans the borrowers were in they signed on the dotted line. And then
when the housing market took a downfall the realization of the loan came into play and the
foreclosures began as a result. The once prominent housing bubble that peaked in 2005-2006
2 | Page

Financial Crunch
has now fallen and has led to evictions, and foreclosures. To which stated by Times columnist
and Nobel winning economist Paul Krugman (2007) Foreclosures not only threaten financial
stability, but creates human suffering. [and] injustice. The economy has taken a turn for the
worse and the scare amongst millions begin to unfold and stands still as if time has frozen
Significant roles in businesses began to fail due to the economic stall in activity in
purchases of houses, which then in turn economically worldwide slowed down to almost a stand
still leaving no choice but to start layoffs and unemployment percentage grew. We as an
economy were scared, we did not want to spend our hard money. Where were we going to go?
Would my family be next? How long will we be in this financial despair? The only choice after
struggling to keep the doors open for most places of business was to close the doors to not being
able to pay the bills because the consumers were scared of spending and credit tightened and
international trade declined and then the unemployment starts from long-term jobs, mom and
pops stores and as well as small and large businesses chose to close the doors due to the backlash
from the financial crisis that was on hand that had created a barrier against a thriving and
surviving business.
Government and Central banks responded the best as they could with saving failing firms
and stabilizing firms by fiscal stimulus and monetary policy expansion and was able to catch the
crisis before it was a complete failure of the financial system. (wiki) The financial crisis could
have been avoided according to The Financial Crisis Inquiry Commission and was caused by
widespread failures in financial regulations and supervision. (wiki) The crisis demonstrated the
need for comprehensive financial reform both within the United States and Internationally and
by doing so Obamas Administration proposed a set of reforms that were embodied such as the
Dodd-Frank Law and the US Congress passing the American Recovery and Reinvestment Act,
3 | Page

Financial Crunch
which are steps that must still occur domestically and internationally to lay a firm foundation for
financial stability and to help and enact in the United States to lessen the chance of a recurrence
for a financial disaster.

Works Cited
Cecchetti, S. G. (2009). Crisis and responses: The federal reserve in the early atages
of the financial crisis. The Journal of Economic Perspectives 23(1). 51.75.
Dymski, G. A. (Sept. 2010). Development as a social inclusion: Reflections on the us
subprime crisis. Development 53(3).p 368-375. DOI:10.1057/dev.2010.48
Acheron, M. ; Clark, R. J. (April 2009) Unemployment: The language of the crisis:
Organization for Economic Cooperation and Development. The OECD
Observer 272, p 8-9. Retrieved from
http://www.oecdobserver.org/news/archivestory.php/aid/2863/Unemployment_
:_The_language_of_the_crisis.html
Morelli, P.; Pittaluga, G.; Segehezza, E. (Mar.2015). The role of the federal reserves
as an international lender of last resort during 2007-2008 financial crisis.
International Economics and Economic Policy 12(1) Retrieved from
http://www.researchgate.net/publication/271737609_The_role_of_the_Federal
_Reserve_as_an_international_lender_of_last_resort_during_the_20072008_fin
ancial_crisis

References
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308

4 | Page