2007 – 2008 Financial Crisis

Reflection Paper
_____________________________________

In Partial Fulfillment
of the Requirements for the course
MGT 145 – Investment

Submitted by:
Loreto, Fayenna Dana

MGT145 – MTh 1:30 P.M. to 3:00 P.M

21 September 2023
 The 2007-2008 financial crisis was a catastrophic moment in global economic history. A time
of uncertainty, panic, and turmoil that left a lasting impact on individuals, institutions, and
economies worldwide, which set a precedent to all of the financial agencies as well as the national
governments to regulate the financial market better. As Warren Buffet said in his interview with the
Wall Street Journal (2018), although the originator of the bubble is hard to ascertain to place any
blame for the global crisis but everyone involved were either foolish, crooked, or both, entangling
even the honest borrowers with their web.

The financial crisis of 2007-2008 was a complex web of interrelated factors, but a few key
elements stand out. The most immediate trigger was the bursting of the U.S. housing bubble, which
had been fueled by lax lending standards and an excessive proliferation of subprime mortgages.
Which was perpetuated by the increasing demand for ‘safe’ investment with great returns. Financial
institutions had bundled these risky mortgages into complex securities and derivatives, predatorily
spreading the risk throughout the global financial system, while they assume none themselves.
When housing prices began to decline, these securities lost their value, leading to massive losses for
banks and investors. Even the honest, good credit borrowers saw no more value in their mortgage,
when the value of their property was decreasing, while their mortgage continued to balloon.

Another contributing factor was the excessive disregard of risk and lack of regulatory
oversight in both the financial sector and national government. Financial institutions had engaged in
risky practices, such as issuing complex financial instruments like collateralized debt obligations
(CDOs) and credit default swaps (CDS), without fully understanding the potential consequences. Due
to the massive excacerbation of these predatory lending practices along with the lack of up to date
ratings from rating agencies, the proliferation of demand for these types of securities continuously
increased, blindly assuming the constant increase for the price of homes.

The consequences of the 2007-2008 financial crisis were profound and far-reaching, triggering
a severe recession, leading to widespread job losses, home foreclosures, and a decline in confidence
of the cosnumers towards the financial market, meanwhile some profited over the crisis. As Warren
Buffet (2018) disclosed, these people and organizations were effectively shunned by the financial
sector for having been predatory in a market that relied on trust; however, he also said that they still
made their money, which was the only thing that mattered at the time. National Government then
intervened when the situation was already wrosening, wherein they implmented the Troubles Assets
Relief Program (TARP), or commonly called Bank Bailout.

The crisis also exposed the issues of inequality, as many of the institutions and orgnizations
were responsible for the turmoil were bailed out by the government, while average citizens suffered
the economic fallout. According to Crash Course (2015), both TARP and the DODD Frank Law were
reverse incentives, wherein the policies resulted in negative effects. Because of the safety net,
institutions were able to assume larger risks due to the promise of support when the situation goes
haywire, evident for both Lehman and AIG.

The financial crisis of 2007-2008 provided several important lessons that we should not
forget. Firstly, it highlighted the need for effective regulation and oversight of financial markets to
prevent excessive risk-taking and ensure transparency. Secondly, the crisis underscored the
importance of financial literacy. Many individuals and investors were unaware of the risks associated
with their financial products, leading to devastating consequences. Improved financial education can
empower people to make more informed decisions. Lastly, the crisis emphasized the
interconnectedness of the global economy. Events in one part of the world can have far-reaching
consequences, and international cooperation is essential to prevent and mitigate future crises.
 The 2007-2008 financial crisis was a pivotal moment in history that has and continues to
shape our world. It fully exposed the flaws of the financial system, arising the need for better
regulation and oversight from agencies and the government. It highlighted the importance of
financial literacy and global cooperation avoid the problem altogether or mitigate the effects when
another crises arises. As we reflect on the crisis, we must use its lessons to build a more resilient
financial system and legislatures for the future, ensuring that such a devastating event is not
repeated.

References

CrashCourse (2015). How it Happened - The 2008 Financial Crisis: Crash Course Economics #12.
Economics. Retrieved from https://www.youtube.com/watch?v=BHw4NStQsT8

Wall Street Journal (2018). Warren Buffett Explains the 2008 Financial Crisis. Retrieved from
https://www.youtube.com/watch?v=k2VSSNECLTQ

Wall Street Journal (2018). Why Warren Buffett Said No to Lehman and AIG in 2008. Retrieved from
https://www.youtube.com/watch?v=1QeUcfqkUzcv