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It is considered as the worst financial crisis, since the occurrence of the Great Depression of the 1930s. The crisis threatened to collapse numerous large financial institutions around the globe. Such an occurrence was prevented through a bailout, offered to the affected banks by the national governments. In New York, among other nations of the world, the real estate sector was adversely affected. The housing market in the city suffered a big blow, causing evictions, unemployment, and foreclosures. This essay is an analysis of the 2008 financial crisis and its effects on NYC, highlighting the crash of the real estate sector, the public reaction, the economic recovery from the depression and the money flow from investors.
Factors that Triggered the Crisis
The business world presents a dynamic environment under which businesses operate. To this effect, businesses around the world are constantly faced with numerous economic and financial challenges. The techniques that these businesses employ in order to forecast and improvise countermeasures for these challenges proves significant in such conditions. It is evident that for centuries, the world’s economy has been hit with several global challenges beginning with the Great Depression of the 1930s. There are two principal causes that crippled the financial market in 2008, creating a meltdown of the real estate sector in NYC.
Market instability was brought about by several factors, among them being the increased ability to offer new lines of credit. Banks quickly generated much money that led to an upsurge of prices and amplified speculation in the financial markets. According to the IMF, in under seven years, the amount of money and debt had doubled in the economy. In effect, the flow of money became redundant which in turn slackened the level of economic growth as well as the purchase and sale of assets. This necessitated the use of fiscal and monetary policies by both the government and the Central Banks respectively.
Collapse of the Lehman Brothers Bank
On September 14th, 2008, the collapse of the Lehman Brothers, a leading global bank in New York City, threatened to cripple the world’s financial system. This marked a new stage in the 2008 financial crisis in NYC. This continued as other financial institutions were threatened with serious liquidity concerns. In his speech, the UK Financial Service Authority chair stated that the failure to constrain the creation of private credit and money by the financial system led the 2007/2008 financial crisis. By September 2008, the crisis became far stretched as stock markets around the world either crashed or became volatile.
The real estate market in NYC also experienced its fair share of problems initiated by this crisis. The housing market declined and suffered greatly. Homeowners who had taken out loans found themselves in shackles as they were incapable of financing their mortgage repayments. Lending large amounts of cash into the property market raised the prices of houses. The chain reaction caused a glut in the home market as mortgage-backed securities incurred massive losses. Laborers in NYC were put out of business and this, in turn, slowed the rate of building new homes.
Aftermath of the Crisis in NYC
The economy later began to shrink when the crisis began to subside. Banks became more reluctant to offer loans to the public. The reason behind this was that banks were only willing to lend when they obtained a guarantee that the loans they provided would be repaid. However, at the time the economic performance of most lenders was poor. This made the banks limit their level of lending. In addition, the repayment of the debt owed to the bank by the public still needs to be repaid. Most banks claimed that they did not have sufficient pool of resources to make more lending to the public.
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The Public Reaction
The Crisis in New York may have come as a shock to numerous persons who were not keen on the national economy matters. Nevertheless, numerous reports suggest that a good fraction of the population knew about the worsening economy, and it was only a matter of time before a crisis struck. The occurrence of this crisis sparked a sense of fear, especially among the working public. This was because the crisis turned into a great recession in the whole nation’s economy. Consequently, the recession was characterized by a high rate of unemployment. This was because most people who were employed in the real estate sector were rendered jobless. The corporate bigwigs like the chief executives and the policy makers, who were closest to the action, failed to do much to advise the public on the repercussions of the crisis. They did not want to admit how badly the situation and instead, they preferred not to display any emblems of weakness to the panicking public.
Secondly, as a result of the crisis, people became greedy. Numerous individual brokers and businesses desired to get rich quickly. For a city that relied on credit for growth and expansion, it was quite easy to lure individuals into taking up loans and mortgages. During this period, credit was unconstrained and the purchasing on credit span out of control. Brokers who facilitated the loans take-up process washed their hands of all responsibilities for these loans. This is by acting as middlemen for the loans but making away with the origination facilitation fees. Such brokers packaged these mortgages as ‘investments’ that thousands of people took up with the aim of selling them off at a profit. However, the ‘investments’ backed by mortgages went south when the global crisis struck in 2008.
The availability of cheap credit fostered investments by individuals in New York City based on pure speculation. Due to the influx of money into the financial system, people wanted to put this money to use. Awkwardly, everyone desired to purchase assets, which led to increased demand for those assets. This demand developed a new level of inflation within the economy. Also, with the increased uptake of loans, the insurance industry joined the party by offering credit default swaps. For a fee, the insurance companies would cover defaults by mortgage holders. Insurance brokers soon transformed these insurance covers to speculation that could be traded. Therefore, financial institutions were able to purchase and sell credit default swaps on assets that they did not necessarily own.
When the crisis struck, businesses and individual in New York City took desperate measures to save their businesses and ensure the safety of their money. Within the next few days after September 14th, the US government made efforts to rescue some of the giant institutions with the aim of reassuring the investors. Despite these efforts, these investors were still wary of the financial system. They had incurred heavy financial losses, and most of them were worried that the financial institutions would collapse just like the Lehman Brothers Bank. A business that wished to survive in that severe economy, at the time, was forced into cutting expenses because of the quick upsurge in the rates of interest. This was especially in the real estate sector.
Up to date, the effect of the 2008 global crisis is still felt within the New York City and in other parts of the world. However, after several years of market instability and volatility, the American economy has started to grow up again. The rate of unemployment has inched down and the level of economic performance, though not very significant, is well off. Despite this, the US economy cannot be said to have fully recovered. By the end of 2008, the US had accumulated nearly $1.8 trillion in trade deficits with its trading partners. In addition, New York City had been hit by an influx of labor and capital, meaning too many people and millions of dollars were chasing inadequate jobs and insufficient investment opportunities.
The crisis devastated the NYC real estate sector, which for years served as a backbone of the economy. Millions of homeowners were facing closure while the wealth they had accumulated over the years was being stripped away due to the recession. Springing back for this crisis has proved challenging partly because the rules of lending have been tightened to avoid past mistakes. The rates of homeownership have continued to decline. The census bureau data suggested that these rates are a little over sixty-seven percent, the lowest ever recorded since 1995. To date, steps have been taken to smoothen the price of home ownership. Financial institutions that incurred losses during the crisis have helped keep the housing sector in check. The recovery process is indeed slow, but brokers and developers are optimistic that the housing bubble will soon fully recover.
Flow of the Public’s Investment Money
Being one of the gigantic trading capitals in the world, NYC is a major hub for those willing to invest both locally and internationally. Due to this, NYC is the largest beneficiary of these funds. According to financial advisers and brokers, the real estate sector in NYC is more desirable to invest. Making the most profits from rental incomes, all depend on the cash flows. A positive cash flow is a factor that constitutes a viable real estate investment in income properties. Given the attractive cash flows, people looking for decent returns are venturing into the NYC real estate market in large numbers.
When the crisis hit in 2008, the recession caused a sublime disaster in the mortgage market. Therefore, the players in the market sought to find new ways of leveraging their real estate holdings with other investments. Erin M. Gorman, the sales manager for mortgage products in the Bank of New York stated that the crisis was not entirely concerned with subprime mortgages but also with home values. This meant that investors had to reposition their portfolios. Most of the investors did this by borrowing against homes. Such mortgage leveraging and refinancing activities provided an opportunity for the flow of money being put into other high yield investments.
The Economy in the United States is slowly recuperating and the real estate market significantly since the crisis occurred. Investors from all around the world are again eager to put their money into the real estate business in New York. It has come a long way to regain its status as the haven of investments. Stable price and comparative liquidity have facilitated the flow of more money into the real estate market again. It promises good returns given the increase in population in the United States that creates demand for more housing facilities. Nevertheless, some investors remain wary and opt to maintain a certain mix of portfolios for leveraging purposes.
The crisis highlighted the imminent risks of imperfect markets. The risks comprised of housing bubbles, the financial regulatory oversights, high level of debts and misuse of financial instruments. The summation of all these factors can result in the occurrence of the worst economic crisis. The US economy has made a remarkable recovery since 2008. Prices have stabilized, and the mortgage and real estate markets have continued to appeal to investors around the world. However, it is crucial for individual players and businesses in these markets to be more proactive than reactive. Contingency plans that may be put to use when such a crisis is imminent should be developed. These are crucial measures to evade the kind of anxiety and greed that, on the contrary, exacerbates the problem.
In conclusion, the financial and real estate markets in New York City have proved to be both highly attractive and volatile. The 2008 global crisis brought these markets to their knees sparking insecurity amongst investors. Another crisis is inevitable if the activities within these markets are not regularly regulated. If the investors no longer have faith in the performance of their portfolios within the market, investment rates are likely to drop. Due to this, the recovery process when a crisis strikes is often sluggish. This is evident as eight years after the crisis, the US economy is yet to make a full recovery. Nevertheless, the Central Bank monetary policies and facilitation of liquidity in the economy have played a leading role controlling the negative risks of prices instability in the country. Consequently, this has supported economic activity in the nation and also stabilized the financial system.
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