The Financial Crisis Of 2007-08 - 1894 Words

The definitive event of the early twenty-first century was The Financial Crisis of 2007-08. Since that event, scholars have tried to identify what the causes and the effects of the crisis. The causes and effects of the collapse are varied and many scholars show a consensus about what these causes and effects are. Scholars who researched The Financial Crisis of 2007-08 agree that bank deregulation starting in the early 1970’s a major contributor. The deregulation allowed for banks to increase in size by absorbing subsidiaries and allowed for banks to take more risks. Matthew Sherman dictates, â€Å"Many argued that consolidation in banking was an inevitable evolution and championed it as financial ‘modernization,’ but the changes posed†¦show more content†¦K. Sabeel Rahman contends â€Å"As a substantive policy, the Glass-Steagall Act’s separation of commercial and investment banking was seen as crucial to preventing abuse by financial firms in se lling securities†. (Rahman 627). The idea behind stopping commercial and investment bank mergers was to avoid conflicts of interests that could cause harm to the consumer and potentially wreak the financial system. Rahman continues, â€Å"Thus the primary arguments in favor of Glass-Steagall revolved around the need to curb conflicts of interest† (Rahman 629). Glass-Steagall was successful as it stopped banks from taking depositor money and using that money to buy securities and other financial instruments and then turning around and marketing those assets to consumers as well as their own depositors. Other scholars, like Janice McClendon, point out that investment banks would create securities that were based of other basic assets that originated at the commercial bank. Two such securities that were core to the crisis were mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Janice McClendon contends, â€Å"The underpinnings of the global financial crisis can be traced back to the development of primary and secondary residential housing mortgage markets and the securitization of these mortgages into investment-grade mortgage-backed securities (‘MBS’ or ‘MBSs’)† (McClendon