The 2008-09 financial crises whose origin was traced to the United States presented a moment that continues to attract as much debate on how it all began. In most economies, the regulatory authorities are at the center of issuing guidelines that are meant to help their economies become sustainable. Sometimes some monetary policies work for the benefit of such economies, and at other times they seem to work against the intended purpose. In the US, events leading up to the crises stem from possible under regulation or over-regulation. This paper fronts the argument that it was due to over regulation that the crises occurred. The federal regulatory interventions, as well as unusual monetary policy measures, led to the crises.
When the Community Reinvestment Act (CRA) became strengthened by Congress, it marked a policy move that would culminate in the financial crisis (Stiglitz 5). Several rules therein influenced the banks to make moves that eventually proved to be catastrophic. Here, banks that had recorded a low CRA rating approval could now be denied the opportunity of merging with another bank by the regulators (Stiglitz 5). They could also be restricted to open new branches. That meant community organizations could lodge complaints that counted against the CRA rating of a bank (Stiglitz 6). Consequently, such organizations began putting banks under pressure to offer loans. In the end, the banks responded by partnering with these organizations to offer low-income borrowers millions of mortgages that did even qualify for credit previously (Stiglitz 6). The resulting impacts were massive defaults that culminated in the financial crises.
At the same time, it also came out that the regulators erred in failing to foresee a systematic risk that came with the new regulations (White 332). The problem came about as a result of relying on crediting agencies to calculate or rather estimate their own risks without proper intervention. The reality of that matter is that there were risks in over-the-counter derivatives and high leverage that unfortunately did not feature on their radar (White 332). They made the assumption that the system was bound to work effectively if the banks managed their own risk effectively. Ironically, the new regulations were meant to counter the systematic risk but the events that happened after that represented a situation that exposed over regulation tendencies.
On the other hand, the Federal Reserve credit expansion measures were also the cause of the financial crises. It did this by lowering the short-term interest rates and in effect impacting on the type of mortgages written as well as “fueling growth in the dollar volume of mortgage lending” (Stiglitz 6). Such a move led to a housing bubble that eventually resulted in the housing stock overbuilding. The Adjustable-rate mortgages (ARMs) had become cheap, and that only meant the risk of refinancing had shifted to the borrower from the lender at a higher rate (Stiglitz 6). In the end, the monthly repayments of the borrowers went upwards, and problems arose in repayment that culminated in the financial crises.
In conclusion, there is no doubt that over regulation emanating from unusual monetary policy measures and federal regulatory interventions resulted in the financial crises. Some of the regulations were meant to spur the economy while others were meant to safeguard the markets, but they ended up working against their intended purposes. For example, strengthening of CAR was a bad move that made the banks to engage in measures that eventually proved costly such as lending mortgages to persons not creditworthy. The Federal Reserve credit expansion move was also costly as it led to the housing bubble. The regulators were also at fault for not foreseeing the actual impact of systematic risk.
- Stiglitz, Joseph E. “The anatomy of a murder: Who killed America’s economy?.” Critical Review 21, 2-3, 2009, pp. 329-339.
- White, Lawrence, H. “How did we get into this financial mess?” Cato Institute, 2008.