financial crisis of 2007 -2008

1. Testing, Understanding,
and Analyzing the Case of
the Financial Crisis of 2007-
2008
OBJECTIVES

2. This activity promotes critical thinking,
collaboration, and in-depth analysis of a
significant economic event. Participants
not only test their understanding of the
case study but also apply their
knowledge to formulate
recommendations and lessons learned
from the 2007-2008 financial crisis/
Global Economics by Brian Duignan.

3. Facts of the Case
Point of View
Statement of the
Problem

4. Areas of
Consideration
Alternative Courses
of Action
Conclusion and
Recommendation

5. •The financial crisis of 2007–08, often known as the subprime
mortgage crisis, originated in the United States and had
widespread economic and societal consequences. It stemmed from
the collapse of the U.S. housing market, leading to a severe liquidity
contraction in global financial markets and threatening the
international financial system.
•This crisis resulted in the Great Recession, the most significant
economic downturn since the Great Depression. Several factors
contributed to the crisis, including the Federal Reserve's policy of
reducing interest rates, aggressive lending practices, changes in
banking laws, securitization of subprime mortgages, and the
weakening of regulations.
•As a result, the crisis began manifesting itself in 2004, causing
widespread financial turmoil, leading to the bankruptcy of major
institutions like Lehman Brothers, and necessitating government
and central bank interventions to stabilize the financial system.

6. •The crisis began in 2004 with rising interest rates and falling
home prices, causing defaults among subprime borrowers and
losses for banks worldwide. Major financial institutions, such as
Lehman Brothers, collapsed, and Fannie Mae and Freddie Mac
were nationalized, further destabilizing the financial system. In
response, governments and central banks implemented
interventions like the Troubled Asset Relief Program (TARP) and
quantitative easing measures to stabilize the financial system
and stimulate economic growth.
•The aftermath of the crisis included a decline in American
households' net worth, a decrease in GDP, and a rise in
unemployment. While the financial sector eventually recovered,
many ordinary Americans continued to face economic
hardships, leading to public discontent and movements like
Occupy Wall Street, which highlighted economic inequality and
disparities in the response to the crisis.

7. •The crisis highlighted economic inequality and led to public
resentment, sparking movements like Occupy Wall Street. Overall,
the financial crisis of 2007–08 was a multifaceted issue with
significant global implications, necessitating comprehensive
analysis and solutions.
•While the financial sector eventually recovered, the aftermath of
the crisis resulted in a decline in American households' net worth,
decreased GDP, and increased unemployment.
Statement of the
Objectives

8. •By pursuing these SMART objectives, this case analysis seeks to
provide a comprehensive and data-driven assessment of the
financial crisis of 2007–08, shedding light on its causes,
consequences, and the effectiveness of policy responses. This
analysis aims to contribute to a deeper understanding of financial
crises and inform future strategies for preventing and mitigating
similar crises. The case analysis of the financial crisis of 2007–08
aims to achieve the following SMART objectives:
SMART Objectives
Specific
Measurable
Attainable
Realistic
Time Bound

9. d. To explore the long-term implications of the crisis, including
its role in shaping financial regulations and public perception of
economic inequality.
SPECIFIC
a. To comprehensively analyze the root causes and contributing
factors that led to the financial crisis of 2007–08
b. To assess the economic, financial, and societal consequences
of the crisis, including its impact on households, businesses, and
financial institutions.
c. To evaluate the effectiveness of the government and central
bank interventions, such as TARP and quantitative easing, in
stabilizing the financial system and promoting economic
recovery.

10. d. To track changes in financial regulations and the
implementation of policies aimed at preventing a similar
crisis.
MEASURABLE
a. To quantify the extent of the decline in American
households' net worth during the crisis.
b. To measure the impact of the crisis on GDP and
employment rates, both in the short term and over a
more extended period.
c. To assess the amount of financial support provided
through government programs like TARP.

11. d. To use available resources and information to formulate
recommendations for addressing the aftermath of the
crisis.
ATTAINABLE
a. To gather and analyze historical data, economic
indicators, and policy documents relevant to the financial
crisis.
b. To draw on the expertise of economists, financial
analysts, and regulatory experts in conducting a
comprehensive analysis.
c. To access and evaluate academic research, government
reports, and financial market data related to the crisis.

12. c.To propose realistic and actionable policy
recommendations to prevent future financial crises
while considering the constraints of the financial and
regulatory landscape.
REALISTIC
a. To provide an objective and balanced assessment
of the causes and consequences of the financial crisis.
b. To acknowledge the complexity and multifaceted
nature of the crisis, recognizing that it resulted from a
combination of economic, regulatory, and behavioral
factors.

13. c. To consider the historical context while analyzing
the crisis's long-term impact, recognizing that some
consequences may extend beyond the immediate
aftermath.
TIME - BOUND
a. To complete the analysis and present findings
within a specified timeframe, ensuring timely
dissemination of insights and recommendations.
b. To periodically review and update the analysis as
new data, research, and policy developments
emerge related to the financial crisis.

14. •To make final recommendations or decisions regarding this
critical issue, Mr. Duignan must first analyze the root causes of the
crisis. It is evident from the historical account provided that a
combination of factors, including the Federal Reserve's monetary
policy decisions, changes in banking laws, the practice of
securitization, the repeal of the Glass-Steagall Act, and
overconfidence in the stability of the financial system, played
significant roles. He must weigh these factors' relative importance
and interplay to comprehensively understand the crisis (Dullien,
Sebastian, et al ., 2010)
•Financial crisis refers to a decline in the value of assets and
securities, which results in losses in financial institutions (Shuhao,
2021). In light of the financial crisis of 2007–08 and its multifaceted
causes and consequences, Brian Duignan, as a senior editor in
philosophy at Britannica with responsibilities spanning law, social
science, political theory, and religion, is faced with a challenging
task. His role necessitates a careful examination of the complex
factors that led to this crisis and the subsequent actions taken to
mitigate its impact.

15. •In his capacity as a decision maker or final
recommendation authority, Mr. Duignan needs to assess
the effectiveness of the measures taken to stabilize the
financial system and promote economic recovery.
(Singh, 2023) He should consider the impact of
government actions, including TARP, the American
Recovery and Reinvestment Act, and the Wall Street
Reform and Consumer Protection Act, in addressing the
crisis and preventing future occurrences.
•Furthermore, Brian Duignan should consider the key
events during and after the crisis, such as the failure of
Lehman Brothers, the government's intervention
through initiatives like the Troubled Asset Relief Program
(TARP) and quantitative easing (QE), and the long-
lasting economic and social consequences.

16. •Mr. Duignan's recommendations or decisions should
aim to provide a comprehensive understanding of the
financial crisis of 2007–08, its causes, effects, and the
lessons learned. He must draw upon his expertise
across various domains to offer insights that
contribute to a better comprehension of this pivotal
moment in economic history and inform future policy
considerations. (Rodni, 2023)
•Additionally, Brian Duignan should evaluate the
broader implications of the crisis, such as the
significant wealth disparity, public resentment, and
movements like Occupy Wall Street. This requires him
to reflect on the social and political consequences of
the crisis and whether meaningful reforms were
achieved.

17. •Key Events of the Crisis: It details the significant events
that occurred during the crisis, such as the collapse of
major financial institutions like Lehman Brothers, the
government's response to the crisis through programs
like TARP, and the impact on global financial markets.
Challenges that macro institutions are obliged to tackle
during financial distress entail credit booms and bursts,
which creates instability in the market (Shuhao, 2021).
•Causes of the Crisis: The article outlines the factors
that contributed to the financial crisis, including the
Federal Reserve's interest rate policies, subprime
lending practices, securitization of mortgages, changes
in banking laws, and overconfidence in economic
stability.

18. •Lack of Accountability: The article points out the lack
of legal consequences for key financial executives
and institutions involved in the crisis, with no one
being held criminally responsible. This issue raises
questions about the fairness and accountability
within the financial system.
•Effects and Aftermath: The article discusses the
long-lasting effects of the crisis on the American
economy, including the decline in household net
worth, lower GDP, job losses, and the slow recovery. It
also highlights the disparity in the impact of the crisis
on different segments of society, with wealthy
individuals and financial executives recovering more
quickly than the lower and middle classes.

19. •Public Resentment and Social Movements: The
article discusses the emergence of social
movements like Occupy Wall Street, fueled by public
resentment over economic inequality and the
perceived favoritism of the financial system
towards the wealthy elite.
•Policy Response: It mentions the policy
response to the crisis, including the passage of
the Emergency Economic Stabilization Act
(EESA) and the Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), as
well as their subsequent amendments and
rollbacks.

20. SWOT
Strength
Weaknesses
Opportunity
Threats
Strength
Weaknesses
Opportunity
Threats

21. •Federal Reserve's Monetary Policy: The Federal Reserve's
ability to adjust interest rates (strength) allowed banks to
extend consumer credit at lower rates initially.
•Securitization: The practice of bundling mortgages into
securities (strength) initially provided liquidity to banks and
diversified their portfolios.
•Economic Stability: The period of global economic stability
and growth (strength) prior to the crisis contributed to a sense
of confidence and complacency among financial institutions.
•Financial System Resilience: The financial system
demonstrated resilience by taking corrective actions such as
government interventions, quantitative easing measures, and
regulatory reforms to stabilize and prevent a complete
breakdown.

22. •Subprime Lending: Aggressively marketing subprime loans
(weakness) to customers with poor credit or few assets increased risk
and led to defaults.
•Balloon Payments and Adjustable Rates: Offering mortgage loans
with balloon payments and adjustable interest rates (weakness)
increased borrowers' vulnerability to defaults when home prices fell.
•Securitization Complexity: The complexity of securitization
(weakness) made it difficult to assess the strength of bank portfolios,
leading to doubts about solvency.
•Overleveraging: Banks and financial institutions exhibited weakness
in their risk management practices by overleveraging themselves
with subprime mortgages and mortgage-backed securities, leading
to significant losses.
•Regulatory Failures: Weaknesses in banking regulations, including
the repeal of the Glass-Steagall Act and weakened net-capital
requirements, allowed risky practices to go unchecked.

23. •Government Intervention: The government's intervention,
such as the Emergency Economic Stabilization Act, helped
stabilize the financial system and prevent a complete
breakdown.
•Regulation: The Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) aimed to prevent future
financial crises by instituting banking regulations.
•Regulatory Reforms: The crisis created an opportunity for
regulatory bodies to enact reforms, such as the Dodd-Frank
Act, aimed at preventing future financial crises.
•Economic Awareness: The crisis raised awareness about
economic inequality, leading to discussions and potential
opportunities for addressing income disparities and financial
system shortcomings.

24. •Global Impact: The financial crisis had global implications and led to
turmoil in financial markets worldwide.
•Bank Failures: Bank failures resulted in the loss of trust among
banks, freezing interbank lending.
•Slow Recovery: The slow recovery from the crisis affected American
households, with significant job losses and declining net worth.
•Public Resentment: Public resentment over perceived inequality led
to movements like Occupy Wall Street, which called for systemic
change.
•Regulatory Rollbacks: The rollback of certain regulatory reforms
after 2017 may create vulnerabilities in the financial system and
increase the risk of future financial crises.
•Recession and Job Losses: The crisis led to a severe economic
downturn, causing millions of job losses and a significant decline in
household net worth, which remains a potential threat in future
economic crises.

25. Alternative Course of Action (ACA) 1: Strengthen
Financial Regulations
Goal: Enhance financial regulations to prevent a similar crisis
from occurring in the future.
Advantages:
Mitigates Future Risk: Strengthening regulations would
reduce the likelihood of risky lending practices, excessive
leverage, and speculative behavior by financial institutions,
thereby minimizing the potential for future crises.
Improved Consumer Protection: Enhanced regulations can
protect consumers from predatory lending and ensure
greater transparency in financial products, contributing to a
more stable housing market.

26. Disadvantages:
Overregulation: Excessive regulations can stifle
innovation and economic growth if they burden
financial institutions with compliance costs and
bureaucracy.
Regulatory Capture: Strong regulations might be
susceptible to capture by the industries they
oversee, potentially undermining their effectiveness.
Reduced Credit Availability: Stricter regulations
could lead to tighter lending standards, making it
harder for some individuals and businesses to
access credit.

27. Alternative Course of Action (ACA) 2 : Improve Risk
Assessment and Monitoring
Goal: Implement better risk assessment and
monitoring practices to identify and address
emerging financial risks.
Advantages:
Early Warning System: Improved risk assessment
and monitoring can provide early warning signs of
potential crises, allowing for timely intervention.
Enhanced Risk Management: Financial institutions
can better manage their portfolios and exposure to
risky assets, reducing the impact of a crisis.

28. Disadvantages:
Privacy Concerns: Enhanced monitoring practices
could raise concerns about the privacy and security
of individuals' financial information.
Costly Implementation: Implementing advanced risk
assessment and monitoring systems can be
expensive, which might be a burden for smaller
financial institutions.
False Positives: Overly sensitive monitoring systems
could generate false alarms, causing unnecessary
disruptions in the financial industry.

29. Alternative Course of Action (ACA) 3: Promote
Financial Education and Consumer Responsibility
Goal: Implement better risk assessment and
monitoring practices to identify and address
emerging financial risks.
Advantages:
Early Warning System: Improved risk assessment
and monitoring can provide early warning signs of
potential crises, allowing for timely intervention.
Enhanced Risk Management: Financial institutions
can better manage their portfolios and exposure to
risky assets, reducing the impact of a crisis.

30. Disadvantages:
Limited Impact: It may take a long time for improved
financial education to have a measurable impact on
consumer behavior, and not all consumers may
choose to engage in financial education.
Socioeconomic Barriers: Access to quality financial
education may be limited for certain demographic
groups, potentially exacerbating economic disparities.
Behavioral Challenges: Even with financial education,
individuals may still make poor financial decisions
due to psychological biases or external pressures

31. In conclusion, the analysis of the Alternative Courses of
Action (ACAs) has provided valuable insights into addressing
the challenges in the financial sector and preventing future
crises. Each ACA offers unique benefits and considerations,
and a combination of these approaches may be the most
effective strategy. By combining these strategies, we can
create a holistic approach that not only addresses the
immediate concerns but also lays the foundation for a more
resilient and stable financial ecosystem. It is imperative that
regulatory bodies, financial institutions, and educational
institutions collaborate to implement these
recommendations effectively. This multi-pronged approach
will enhance the overall health of the financial sector, reduce
systemic risks, and ensure a more secure future for both
consumers and the economy as a whole. Based on the
analysis, we recommend pursuing a comprehensive strategy
that integrates all three Alternative Courses of Action:

32. Improve Risk Assessment and Monitoring: Implementing
better risk assessment and monitoring practices is essential
to identify and address emerging financial risks. This would
create an early warning system, allowing for timely
Strengthen Financial Regulations: Enhancing financial
regulations is crucial to prevent a recurrence of the crisis. It
would mitigate future risks by reducing the likelihood of risky
lending practices and speculative behavior by financial
institutions. Additionally, it would improve consumer
protection and transparency in financial products, fostering a
more stable housing market. This step is essential for
creating a robust regulatory framework that can deter risky
financial practices and protect consumers. By enforcing
stricter regulations, financial institutions will be less likely to
engage in irresponsible lending and speculative behavior,
reducing the potential for future crises.

33. Promote Financial Education and Consumer Responsibility:
Increasing financial literacy among consumers is equally
important. Empowering consumers with financial education
would enable them to make informed and responsible
financial decisions, reducing the demand for risky financial
products. Moreover, educated consumers are more likely to
make responsible financial decisions and avoid taking on
loans they cannot afford. This, in turn, will contribute to lower
default rates and a more stable housing market.
intervention and enhancing risk management within
financial institutions. By doing so, we can reduce the impact
of potential crises.

34. References
Rodni, L. (2023) “What was the Financial Crisis of 2007 – 2008?
Causes, Outcomes and Lessons Learned” thestreet
Singh, M (2023) “The 2007 – 2008 Financial Crisis” Financial
Crisis Review
Shuhao, W. (2021). Exploring the Principles and Laws of Financial
Crisis: from the Subprime Mortgage Crisis to New Crown
Epidemic [Review of Exploring the Principles and Laws of
Financial Crisis: from the Subprime Mortgage Crisis to New
Crown Epidemic]. Advances in Economics, Business and
Management Research, 166, 1–4.
Dullien, Sebastian, et al. The Financial and Economic Crisis of
2008-2009 and Developing Countries. 2010, pp. 1–340.