Essay on Financial crisis what went wrong

Submitted By AishaBanks
Words: 602
Pages: 3

By the mid-1980s the boom in real estate went bust, partly as a result of the passage of the Tax Reform Act of 1986, which eliminated many of the tax shelters that had made real estate an attractive investment in the first place. As a consequence, many deposits were withdrawn and hundreds of institutions failed. The subsequent bailout of the savings and loan industry proceeded for several years and cost about $210 billion.
Under pressure from shareholders to upsurge returns, banks operated with minimal equity, leaving them vulnerable if things went wrong. And from the mid-1990s they were permitted to use their own internal models to assess risk—in conclusion setting their own capital requirements. Predictably, they judged their assets to be ever safer, allowing balance-sheets to balloon without a commensurate rise in capital (see chart 2).

The rise in progressively risky financial transactions went hand in hand with rising consolidation in the financial industry. Banks accepted that their prospects of being bailed out by the government, in case their increasingly risky businesses failed, rose dramatically the larger they had become—meaning they became ―too big to fail. Therefore, since the early 1990s they absorbed other banks as a way to become more resistant against risks. Between1990 and 1998, the number of banking institutions decreased by 27 percent as banks continued to merge. An important legislative step in support of greater banking consolidation was the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which removed former restrictions on interstate banking and branching.

Following a period of economic boom, a financial bubble – global in scope – has now burst. The extent of this problem has been so severe that some of the world's largest financial institutions have collapsed.
Others have been brought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions.

Taxpayers will be bailing out their banks and financial institutions with large amounts of money. US taxpayers alone will spend some $9.7 trillion in bail-out packages and plans. The UK and other European countries have also spent approximately $2 trillion on saving and bail-out packages. This amount allows the government to pay off the UK mortgages which was enough to wipe many individual's mortgages, or clear out third world debt many times over.

Some of the bail-outs have also led to…