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Financial Crisis

May 9, 2008 • Volume 18, Issue 18
Did lax regulation cause a credit meltdown?
By Kenneth Jost

Introduction

Reflecting the worldwide credit crisis, the big Wall Street investment house Bear Stearns faced bankruptcy in March before being rescued by JP Morgan Chase and an emergency $29 billion loan from the Federal Reserve.  (Getty Images/Michael Nagle)
Reflecting the worldwide credit crisis, the big Wall Street investment house Bear Stearns faced bankruptcy in March before being rescued by JP Morgan Chase and an emergency $29 billion loan from the Federal Reserve. (Getty Images/Michael Nagle)

The flood of subprime mortgage defaults roiling the U.S. housing market is also feeding a worldwide credit crisis. Using complex computerized models, lenders have pooled credit instruments of all sorts — mortgages, credit-card debt, corporate and government bonds — for trading in lightly regulated financial markets. The banks, investment funds and other players that trade in these markets say that such "securitization" promotes economic liquidity by spreading and diversifying risk. Critics say the practice actually allows dubious loans to uncreditworthy customers to spread virus-like through worldwide financial markets. Investment banks in the United States and elsewhere are taking billion-dollar losses as they are forced to revalue their holdings. The U.S. Treasury Department has proposed a major overhaul of financial-markets regulation, but the sweeping plan offers little by way of immediate relief. In any event, any proposals for additional regulation will face stiff resistance from the financial community.

ISSUE TRACKER for Related Reports
Credit and Consumer Debt
Jul. 20, 2012  Debt Collectors
May 17, 2011  Future of the Euro
Oct. 10, 2008  Regulating Credit Cards
May 09, 2008  Financial Crisis
Mar. 02, 2007  Consumer Debt
May 26, 2006  Teen Spending
Nov. 19, 1999  The Consumer Culture
Nov. 15, 1996  Consumer Debt
Sep. 13, 1985  America in Debt
Jan. 25, 1980  Consumer Debt
Apr. 11, 1975  Consumer Credit Economy
Jan. 12, 1972  Directions of the Consumer Movement
Nov. 10, 1965  Personal Debt in a Consumer Economy
Jan. 02, 1957  Tight Credit
Feb. 10, 1956  Consumer Credit
Mar. 30, 1949  Installment Credit
Aug. 09, 1941  Restriction of Consumer Credit
Jan. 28, 1941  The Big Business of Making Small Loans
Jan. 17, 1934  Federal Credit Aid for Consumers
Jan. 01, 1930  Installment Buying, 1920–1930
BROWSE RELATED TOPICS:
Consumer Credit and Debt
Investment and the Stock Market
Regulation and Deregulation
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