Have we learned any lessons from the financial crisis of 2007-8 Assignment

Have we learned any lessons from the financial crisis of 2007-8 - Assignment Example When the criticality of the matter dawned on the American society, it was difficult to accept the dire consequences of the downfall. Organizations deemed stable enough to survive any surging economic pressure proved to be at the verge of collapse in the 2008 scenario. President Obama had to help America resolve the issue, and settling it needed firm decisions taken in good time to save the average American from the consequences resulting from the crisis. This is how the Dodd-Frank law surfaced as a potential solution to the imminent financial collapsing of the great economy. It is of essence to highlight the critical lessons learnt from the crisis and doing that is the sole purpose of this paper. Causes of the 2008 Recession An analysis of the real situation in 2008 and highlight the main causes of the collapsing of big financial institutions. One fact about the issue is that Americans had build too much trust on some of the banks that they did not see the crisis, coming and this is the main reason why Americans became victims. This does not assert that people should not trust banks but should do so after judging their credibility based on their financial reports. At least people should make an informed choice be ore trusting financial institutions. ... Understanding how banks operate is essential in analyzing how the recession resulted. All banks often make investments that can turn to be failures. If that happens, experts can calculate the asset value and these banks can receive recapitalization for the loss. However, the level of trust is very fundamental in determining whether a bank is worthy of recapitalization. Its performance in the market must prove that it is not subject to sudden collapsing. Banks deemed stable enough in the market have resulted to a form of pathology as Fischer described in his recent speech. These banks reached a point whereby assessing how much they lost in bad investments became a challenge. Before the onset of the recession, these banks were safe havens for most people. Majority of financial experts thought that these banks only suffered losses via mortgage insecurities. However, facts reveal that other toxic investments increased the losses incurred by banks. The bigger banks stand better chances in the market because of the privilege they have. Their stability in the market becomes a crucial factor that serves to reduce chances of bankruptcy declaration. While the less stable banks have a great fear of taking great business risks in fear of ending up bankrupt, the bigger banks can take costly risks much more easily as Arcand, Berkes and Panizza mentioned in their working paper released in 2009. In 2006, big banks sought to take advantage of the declining house prices hoping to make profits in the secondary market as Feng, and Serilitis in their research paper in 2009 on efficiency and technical change in U.S banks. Their investment in housing had its basis on mortgage security. Predictions were that housing