Shirah Mc Jeriwayne S.

Bucio
FINM 4 C 3

The credit crisis of 1772 intensified market rumors and eventually shattered the credit bubble into
panic as debtors opted to withdraw their money from banks at the same time, drying up the banking
sector's liquidity and causing hundreds of American planters to struggle to pay their debts. While
the financial crisis of 2007–08, also known as the subprime mortgage crisis, was characterized by
a severe contraction of liquidity in global financial markets as a result of the collapse of the US
housing market.

I. ROLES OF CREDIT IN THE CRISIS:

The American colonies existing capital was limited therefore the planters borrowed from the
British creditors. The problem lies since the lines of credit were open to all and it was hard to
determine who was indebted to planters. Although it has generated a trade growth and credit
expansion between Britain and other colonies leading but lead crashing down into a credit boom
from 1770 to 1772. In this period where credit-borrowing was easy to attain, offers low-interest
rates, take note that there was no strict business regulation so you can easily sell of loan to other
banks or use credit notes. An unregulated financial market led to a single mistake to cause a big
crisis. (Anand, 2020). While deregulation in the financial industry was the primary cause of the
financial crisis of 2007-2008. This allowed banks to engage in derivatives-based hedge fund
trading. To support the profitable sale of these derivatives, banks demanded more mortgages. The
economic crisis was precipitated by the collapse of the housing market, which was fueled by low-
interest rates, easy credit, insufficient regulation, and toxic subprime mortgages. New financial
laws and an aggressive Federal Reserve are two of the Great Recession's legacies. Also, this led to
a series of events that contributed to the global financial meltdown. The credit rating agencies
aimed for increasing profits and market share by giving inaccurately strong ratings to
underperforming assets. This conduct fueled the meltdown that ultimately led to tens of thousands
of foreclosures. Banks closing owing to bankruptcy, overstock of inventory, and people being
unable to pay their bills are all similarities in both crises. The two crises had a lot in common in
that their credit protection was insufficient, and both of their loans were not sufficiently secured at
the time. The banks were unable to keep track of the available credits in advance. As a result, the
credit crisis contributed to the economy's decline. It appears to be making little effort to investigate
the red flags. In terms of credit, both crises were not adequately secured.

II. GOVERNMENT’S RESPONSE TO THE CRISIS:

In the credit crisis of 1772, the Bank of England took immediate actions by increasing the bill
discounts. The Bank did not only lend to the market as a whole by discounting good bills; it also
targeted specific individual banks in an operation more related to a current central bank "banking
crisis" of systemically important corporations. Three billion euros in savings had vanished, and
there were 310 bankruptcies in 1772 (Anand 2020). In turn, the credit contraction reverberated
throughout the real economy, resulting in an increase in bankruptcies and a drop in economic
activity as the economy sought to correct the excesses caused by credit expansion (William 2019).
By this, the Bank of England expands more credit to troubled banks. Lastly, the Bank of England
injected more working capital into selected parts of the private sector. While in the financial crisis
of 2007-2008 the first major federal response to the crisis was a $168 billion program of federal
spending and temporary tax rebates enacted in February 2008 under President Bush. A second
major response was the Housing and Economic Recovery Act (HERA) of July 2008, which
addressed the subprime mortgage crisis. Secretary Paulson was also a crucial factor in the passage
of the Troubled Asset Relief Program (TARP), which provided $700 billion to the Treasury to
combat the crisis. Secretary Paulson was also instrumental in the passage of new legislation (the
Housing and Economic Recovery Act (HERA)) that allowed Fannie Mae and Freddie Mac to be
put into conservatorship. The Treasury also helped a number of initiatives aimed at restoring
the housing market and other economic stability, such as the car industry.
III. THE AFTERMATH OF THE CRISIS:

From 1764 to 1771, the average number of bankruptcies in London was 310. During the crisis,
banks that were heavily involved in speculating had a difficult time. Distressed by the turn of
events, this is what we call the modern-day "American Revolution". During the financial crisis of
1772, there were no policy modifications because there was no clear authority in charge of the
policies, and the central bank was not yet known. During the financial crisis of 2007-2008,
numerous rules were altered, including the FSOC which is responsible for keeping bank and other
financial, banking industry tests that assess the impact different financial shocks might have on
their stability, CFPB which protect consumers from a risky or abusive financial product, Volcker
Rule that prevents the bank from engaging speculative trading activities, and others.

IV. CONCLUSION

Both crises are likely to recur in the future. These kinds of financial catastrophes are not
uncommon. A crisis, similar to the credit crisis of 1772 in terms of financial market manipulation,
could arise if financial sectors are not properly supervised. Meanwhile, banks continue to grow in
size, and they are attempting to reduce or eliminate even this regulation. The financial crisis of
2008 shown that banks are incapable of self-regulation. They could cause another global crisis
without government oversight like Dodd-Frank.

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