The housing collapsed in the United States is

The world is now a place where every middle class and lower middle class people can afford things as it has become very easy to acquire bank loans. The scenario was not the same in the last 10 years in the early 21st century. The global financial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn, resulted in the US Federal Bank injecting a large amount of capital into financial markets. September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer confidence observed to go down to the bottom as everyone was in the fear of what could lie ahead for the society. The housing market in the United States were suffering greatly as many homeowners who had taken out sub-prime loans found them were unable to repay and clear their dues with the bank or the money lenders. As the value of homes plummeted, the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today’s market than the bank had loaned out originally. The banks had a liquidity crisis on their hands, and giving and obtaining home loan became increasingly difficult as the fallout from the sub-prime lending bubble burst. This is commonly referred to as the credit crunch.

It was the time when the housing collapsed in the United States is commonly referred to as the start  for the global financial crisis, some experts who have examined the events over the past few years, and indeed even politicians in the United States, may believe that the financial system was needed better regulation to discourage unscrupulous lending.

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Australian then-Prime Minister, Kevin Rudd, and then-Treasurer Wayne Swan delivered their first budget in response to the global financial crisis, with the main objective being to fight inflation – a major problem in the local economy at the time.

In October 2008, the Rudd government announced that it would guarantee the deposits with the banks. With the economy facing a recession, an economic stimulus package worth $10.4 billion was announced. This included payments to seniors, carers and families. The payments were made in December 2008, just in time for Christmas spending, and retailers predominantly reported strong sales. The first homebuyer’s grant was doubled to $14,000 for existing homes, and tripled to $21,000 for new homes.

The automotive industry was also helped by providing a source of money, as several major lenders had withdrawn from the market completely, leaving banks to fill the gaps in lending the required amount.

There was very little Australian corporate bond issuance throughout 2008 but in the last few weeks there have been some signs of life. In global bond markets, there has been a marked surge in non-financial corporate issuance since the beginning of this year. Indeed, corporate issuance in the US so far this year has been around or even higher than pre-crisis levels in terms of volume, if not in terms of spread. One interesting development in the local market is that two of the recent corporate offerings have been targeted at the retail market. It will be certainly interesting to see how that plays out.

In Australia, a very large share of private-sector bonds is issued by the financial sector. Again reflecting the developments in global credit markets from August 2007, bond issuance by the banks was clearly affected. Initially, this took the form of a widening in spreads at issuance (Graph 6). Then at various times in the months following, it was difficult to issue at any price (for both Australian and other global financial institutions). The banks therefore took their opportunities to fund themselves as they arose. The banks adopted a conservative strategy of getting as far ahead on their funding programs as possible. This was evident in January and February 2008, when there was sizeable issuance by the banks in offshore markets. Indeed, in January 2008, issuance by Australian banks was a significant share of total issuance (by both US and other global institutions) in the US market. The impact of the financial crisis, compounded by excessive political interference, has resulted in the IASB agreeing to an urgent and complete revision to the standards on financial instrument accounting. Many people were of the opinion that they would never see such drastic revisions to standards in their lifetime. The revision to the standards is considered quite remarkable, given that many entities were only just being accustomed to reporting their business in terms of the current standards.

The question that should be asked is whether the amount of intensive pressure that is being applied by the politicians will result in a high quality set of accounting standards, or some mediocre, confusing, interim, stepping stone that will appease the politician The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting.

However, the observed variation is consistent with market forces determining the choice. Fair value accounting is used when reliable fair value estimates are available at a lower cost and when they convey information about operating performance. For example, with very few exceptions, firms’ managers commit to historical cost accounting for plant and equipment. Our findings contribute to the policy debate by documenting the market solution to one of the central questions in the accounting literature. Our findings indicate that, despite its conceptual merits, fair value is unlikely to become the primary valuation method for illiquid non-financial assets on a voluntary basis. By world standards, Australia has responded to the GFC reasonably well through a combination of government stimulus, a resources boom, a responsive Reserve Bank, and pre-existing prudential standards. The GFC-battling measures put in place have come with a price tag, including increased government debt and historically low interest rates, which have hit the cash returns that retirees can achieve. Still, many would argue that it is a price well worth paying.

As per the above discussion it can be said that the Australian government were well cautioned to absorbed the shock which was the consequence deliberated by the global financial crisis. The main scenario was  rotating around subprime mortgages, on the second hand it was collateralized debt obligations, the presence of frozen credit markets were also a unavoidable  condition, it was mostly credit default swap which happened.

   The Great Recession that started in 2008 has had significant effects on the US and global economy; estimates of the amount of US wealth lost are approximately $14 trillion. Various causes of the financial crisis have been cited, including lax regulation over mortgage lending, a growing housing bubble, the rise of derivatives instruments such as collateralized debt obligations, and questionable banking practices. In addition to these and many other reasons, we explain two factors that partially contributed to the crisis: certain management incentives and fair value accounting standards.

Easy credit facilitated by agencies such as Fannie Mae and Freddie Mac enabled financial institutions to focus on the lucrative subprime mortgage market. Mortgage lenders initiated a growing number of new home loans, many of which were granted to individuals with a poor credit rating, who would eventually be unable to service monthly mortgage payments once interest rates increased. Unfortunately, gains generated from securitization of the home loans and from income on the servicing of the loans inflated financial profits, motivating executives of mortgage origination firms to focus on quantity, rather than quality, of borrowers. Investors, seeking new investment opportunities, fueled the demand for mortgage-backed securities that were created through securitization of the home loans. Such securities received high ratings from analysts who also did not correctly assess the underlying default risk.

So we can conclude that the global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

On the one hand, many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models were not so vocal, influential and inconsiderate of others’ viewpoints and concerns

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