Please read each passage below, I need a few sentences in response to each part. Please use at least one source. Please cite the reference(s) properly. Part 1 and 2 can be on the same document, however, please keep them separate by labeling them.
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My thoughts after watching the video The Crisis of Credit Visualized are primarily two things: big banks and investors are the problem with the credit crisis, and the part of this process that would have immediate and significant results if regulated is regulating the standards needed to qualify for a mortgage. The problem with the 2008 crisis was that anyone and everyone was approved for their mortgage regardless of their ability to pay, which lead to homeowners defaulting on loans left and right. With the way the banks and investors currently buy/sell/trade mortgages and CDOs, suddenly all those triple A investments became risky, and the bubble eventually burst. The weak link in that system is the qualifications for being approved for a mortgage, and that can be quickly addressed in order to disrupt the chain of corruption. If the government would have enforced the standards of qualification, we may have avoided, or greatly mitigated, the nightmare that was the housing crash.
Too Much or Too Little
I am generally of the mindset that too much government regulation poses the greater risk to the common good and to businesses, but some regulation is necessary. In regard to the 2008 market crash, it’s easy to say more regulation could have alleviated the situation, but the fact that the banks are so centralized and operate with a different set of rules than your average business is the real crux of the issue. Regulation can act to help the common good, like we talked about with food safety standards, or it can hinder the success of businesses, as you may see with unions and the very specified standards imposed by them. At the end of the day, whether regulation helps or hurts depends on what is being regulated and who’s perspective you’re looking through. Regulating the standard needed to apply for a mortgage may anger the investors that can no longer amass fortunes based on shoddy CDOs but may be better for the common good in avoiding another market crash.
The easiest way the regulations could have prevented the 2008 credit crisis was to set documentation requirements for mortgage lenders. Government should be in the business of helping and protecting people and that means protection from making underinformed life altering financial decisions. There is nuance to what people should and should not be protected. I should be able to do my own research on what noise cancelling headphones I’m purchasing, but a home purchase gone wrong can destroy credit, eat up savings and make people homeless. When the banks are calling the brokers asking for more home loans, brokers will start selling dreams bigger than what the borrower can afford because being handed the keys to a house is an amazing feeling and the last thing a borrower is thinking about on that day is the next mortgage payment.
There could have been regulations set on the trade of derivative instruments as well. This would not be a target on any individual company but on the vehicle itself, considering the kinds of risks involved and the effect those risks would have on the value of consumer investments and their homes.
The Same Road to Different Destinations
Too much or too little regulation causes a greater danger to the greater good. Businesses can always adapt to the way they need to conduct business. There are two forces at work between businesses and people. People, in general, want to live happy lives. Businesses on the other hand, are in the business of making profits and the path of least resistance is the road on which business wants to travel. The worst version of that path is the selling of mortgages to consumers who don’t know they are unable to pay back the loan but are living their dream.
I See What You’re Trying To Do
Even when my wife and I were going through the process, the broker was going through the pre-approval process and told us we could get a home at a certain amount. I had done the math and I knew what kind of monthly payment we could afford, and I told the broker that was above what we could afford on a monthly basis. “You don’t want to limit your options before you get started” was the reply.
We ended up in a house that was valued 55% of what we had been pre-approved for and it was near the top of what we could afford.