American Financial Crisis Essay -- Economics Economy

The US Financial System: A Crumbling Empire The financial system has been crucial to the role of free enterprise. â€Å"Financial markets have come to supply non-financial corporations with mechanisms for managing their risks and for comparing and evaluating diverse investment opportunities in a highly complex global economy† (Cindin, 2008). â€Å"However, despite the lifetimes it took to build our financial institutions, bad luck and careless risk management have jeopardized careers and mortgaged these institutions’ futures†(Wallace, 2008). The nation is currently attempting to deal with the biggest financial crisis since the Great Depression. It is now imperative that a way be found which will re-regulate finance without undermining finance’s needed innovative capacity. The origin of the financial crisis can be dated back to 2006. During that period in time, companies began buying trillions of dollars of complex financial products called ‘structured credit derivatives’. The value of these derivatives quickly escalated to over one-hundred trillion dollars due to the high demand from banks around the world. â€Å"These paper investments were supposedly backed by loans on houses, cars, businesses, and credit cards† (Francis, 2008). Nevertheless, several issues have erupted from the sale of these paper investments. The production and trading method for derivatives is unclear, and no one really knows what credit risk is transferred to whom. Basically, banks were fighting over assets with questionable values. Even though the sale of derivatives has disrupted our economy, it is not the primary reason for which the financial system is now in distress. The reckless selling of mortgage loans has lead to the eventual breakdown of our financial... ..., Jane & Francis, Theo. The Financial System Bailout: Deal or No Deal? (2008). Business Week. Retrieved November 2, 2008, from http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080925_596844.htm Solomon, Deborah & Crittenden, Michael & Paletta, Damian. US Bailout Plan Calms Markets, But Struggle Looms Over Details (2008). Wall Street Journal. Retrieved November 2, 2008, from http://online.wsj.com/article/SB122191819568460053.html?mod=googlenews_wsj Stewart, Heather. IMF Says US Crisis is Largest Financial Shock Since Great Depression (2008). Guardian News. Retrieved November 2, 2008, from http://www.guardian.co.uk/business/2008/apr/09/useconomy.subprimecrisis Wallace, Michael. Wall Street Talks: What the Bailout Means (2008). BusinessWeek. Retrieved November 2, 2008, from http://www.businessweek.com/investor/content/sep2008/pi20080922_128934.htm