Wednesday, August 28, 2019

Role of the American Government in Creating the Conditions for the Term Paper

Role of the American Government in Creating the Conditions for the Emergence of the Financial Crisis - Term Paper Example This paper discusses how the US government’s requirements for the banking system to provide affordable housing led to a global economic crisis. The greatest mortgage crisis scandal is possibly that it directly resulted from intentional loosening of underwriting standards. This was with the objective of ending discrimination, despite warnings that it could culminate into extensive defaults. Loans were at the core of the financial crisis, which were made with practically non-existing underwriting standards. There was no asset or income verification, no down payment and there was little consideration of the applicants’ ability to repay Relaxed underwriting standards implied that there would be a considerable reduction or removal of assets, income, savings and credit history as well as the overall repayment capability from the equation. This is in addition to permitting products that avoided the criteria for basic good lending practices. Banks did not come up with the idea of loosening underwriting standards. The regulators, at ‘progressive’ political forces and community groups’ behest, loosened them. This encouraged lenders to offer products and underwrite loans impartially, irrespective of the borrower’s repayment capability and financial soundness Due to globalization and currency integration such as dollarization, goods and services, stock and financial markets, trade and housing have close inter-connection globally, resulting into greater global interdependence. As one of the world’s largest economies, any slowdown in the economy of the United States will inexorably spread to other countries. This is exactly what happened leading to the rapid spread of a severe financial crisis around the world.

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