The Economic Crisis Of 2008-2009 - 1818 Words

The recent economic crisis of 2008-2009 that started in United States of America rapidly spread around the world due to the integration of the financial markets and the simplicity for investors to move throughout such markets. Therefore, countries had to deal with the economic effects of said crisis from a macroeconomic and regulatory perspective . From a regulatory perspective, governments realized the importance of the Prudential Banking Regulation and Supervision (PBRS) as a mechanism to control financial institutions and protect customers. However, in pursuing that purpose, regulators in the European Union (EU) and in the United States of America (USA or US) omitted a key aspect of the PBRS: incentives for the financial institutions†¦show more content†¦It was always a win- win situation . However, in 2008 the real estate bubble busted. The house market deflated and the prices of houses decreased sharply. Homeowners could no longer sell their houses at a higher price and creditors cannot longer receive a substantial payment for their mortgages. Banks will have now to manage lawyers, judicial process, and costs associated with the foreclosure. To make things more complicated, many of these loans (known as â€Å"subprime loans†) were sold to financial institutions. These financial institutions packaged several of these mortgages as a collateralized debt obligations (CDOs) and sold them to investors. The result, mortgages of all types from homeowners in the US were spread among investors all over the world. At the same time, CDOs turned to be a terrible investment for investors, so financial institutions could no longer sell packages of CDOs or at least repackage them: â€Å"Why? Because of the sheer scale of the housing bubble. Nationally, housing was probably overvalued by more than 50 percent by the summer of 2006, which meant that to eliminate the overvaluation, prices would have to fall by a third† . Then, investors started or at least threatened to start withdrawing their funds from the financial institutions, so financial institutions were force to liquidate their assets, generating a deleveraging process and a massive bank run. Furthermore, the general