Economic Downturn

The US experienced great recession in 2008 and this affected both the country’s and the global economy. However, the recent economic downturn has been attributed to poor lending practices in the housing market. Although, reduced financial intermediation services and increased interest rates played some key roles in the financial crisis, the accounting and lending policies in major corporations contributed a significant amount to this situation. First, the credit rating agencies such as Fitch, Standard and Poor, and Moody issued flawed investment grade ratings to subprime securities. The agencies based their ratings on risk models and assumptions that were incorrect and this included an inadequate consideration of liquidity that were paid by the issuers of the securities. The ratings contributed to the spread of “toxic” assets in the financial system (Maxfield 1). Second, the corporations portrayed failure and weakness in their governance arrangement such that they did not serve their initial purpose of providing safety to excessive risk taking in their companies. Also, their accounting and regulatory requirements proved to be insufficient (Crespi and Francesco 141).

Third, Fannie Mae and Freddie Mac played a critical role that led to the financial crisis. They purchased an increasing volume of mortgage thus fueling rapid growth in mortgage market. Since they were government sponsored entity, the government allowed them to operate with little capital (Maxfield 1). However, these two organizations were privately owned and they focused much on growth and earning profit for their shareholders such that they abandoned to manage their risks. Their decision allowed mortgage brokers to provide them with inferior originated subprime mortgage. Lastly, the corporations provided many loans with flawed credit standards. They created many mortgages that went to too many consumers. These mortgages were based on erroneous credit underwriting standards. Also, they were based on unrealistic assumptions of the rising home value and the possibility of repayment.


Works Cited

Crespi, Francesco, and Francesco Quatraro, eds. The economics of knowledge, innovation and systemic technology policy. Vol. 6. Routledge, 2015.

Maxfield, John. “25 Major Factors That Caused or Contributed to the Financial Crisis — The Motley Fool.” The Motley Fool. 28 Feb. 2015. Web. 18 Mar. 2016. <>.



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