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Decisions and Risk Management that led to the Subprime Mortgage Crisis Case Study

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Updated: May 13th, 2019

According to the intelligence phase in the Simon’s model of decision making, there is need to think deeply on the possible cause of a problem in order to identify the most effective remedy (Turban, Sharda & Delen, 2010). Needless to say, the case of Subprime mortgage in the USA is said to have been caused by numerous challenges.

In line with this, it is imperative to mention that the crisis has landed the country into a terrible economic crisis (Muolo & Padilla, 2008). However, there are numerous issues that have been anticipated to be the cause of the problem. From a careful review of history, evidence has shown that the credit agencies, World Bank, home owners and investors are the major cause of the subprime Mortgage crisis (Muolo & Padilla, 2008).

Some economic scholars argue that specific individuals could be blamed for the crisis. Nevertheless, this should not be the case since there is need to first scan the environment that could have facilitated the spread of the crisis. For instance, during the time the onset of the crisis, the US economy had already begun to experience recession. For this reason, it is arguable that there lacked conducive environment for investment.

Needless to say, Muolo and Padilla (2008) argue that the security level had also gone down following the previous terrorist attacks such as that of September 2001. Evidence has revealed that investors feared to engage themselves in businesses due to the likelihood of incurring exorbitant risks.

In this case, central banks in the US took the initiative to lend money at low interests in order to stimulate investment while boosting the economy. In the process of creating a favorable environment for investment, the US investors experienced liquidity of capital with very low interest rates (Muolo & Padilla, 2008). This instigated them to venture into more risky investments, a factor that also triggered money lenders to venture into exorbitant deals.

In line with this, it is imperative to note that whenever problems are detected, there is need to set goals on how to eliminate them (Turban, Sharda & Delen, 2010). Nevertheless, this was not the case during the crisis. For instance, instead of the financiers in the US organizing on how to invest without worsening the crisis, they opted to indulge in more risky deals.

It was not long before the consumer demand set in, an aspect that resulted into housing bubble in the year 2005. Consequently, Muolo and Padilla (2008) assert that the country began to experience an increased foreclosure of vital activity. Moreover, major financiers were declared bankrupt and the fear of economic downtown set in. For this reason, lack of coherent goals in solving the crisis made the situation worse than it was before.

Moreover, one can argue that experts failed to recognize the urgency of responding to the crisis in time. As a result, key prayers such as money lenders have been blamed for the crisis. Furthermore, it is evident that there was no room to assess the legible and responsible individuals in solving the crisis. For instance, majority of the economic experts did not take initiative to guide people on how to invest amid crisis.

Moreover, the money lenders ultimately gave out loans to people who had poor credit legacy and this made the risk default to be quite high. Additionally, liquidity of capital caused the demand for mortgages to increase.

Needless to say, Muolo and Padilla (2008) revealed that leaders did not perceive the risk of the subprime mortgage crisis as harmful since the economy was still very healthy. Notably, it is recommended that in order to effectively solve a problem, there is need to evaluate the effects. The latter did not happen in the US during the crisis. Eventually, the invisible effects resulted into economic downturn.

Failure to identify the problem and its cause can be very fatal in any situation (Turban, Sharda & Delen, 2010). To support this claim, the Subprime mortgage crisis in the US accelerated at a significant rate and this has negatively affected the economy.

From a careful review of literature, the current situation that is marred by the crises has been regarded as one of the worst economic conditions in the history of US. Statistical evidences have revealed that from the year 2001 to 2007, the US economy has taken a downward trend (Muolo & Padilla, 2008). Nevertheless, economic experts have come to their senses and have tried to examine the current situation and the exact cause.

The crisis has categorically been regarded as one of the most hazardous in the US history. There are both programmed and non-programmed measures that have been employed in order to disintegrate the crisis. For example, respective entities have been given responsibilities to lay the remedies suggested in order to decimate the crisis. In this case, a mix of factors has been considered in order to find valid alternatives to boost the economy.

It is imperative to note that in the midst of problems, there is always an alternative way of working things out (Turban, Sharda & Delen, 2010). In the context of the Subprime mortgage crisis, there are alternative courses of action that can be employed in order to restore the situation.

For instance, money lenders and other financiers can opt for credible and stable clients who are able to fetch good returns with minimal risk defaults. In addition, credit entities should provide loans to investors at moderate interest rates in order to entice them to invest, a factor that will rejuvenate the current economic trend (Muolo & Padilla, 2008).

Needless to say, it is imperative to note that the US government should revise the monetary policies by creating a model that allows financiers to give out a restricted amount of money to investors especially on recession periods. Such policies will ensure that there is no excess liquidity, a factor that will enable the government to regulate the rate of demand and supply in the country (Muolo & Padilla, 2008).

Needless to say, it is important to note that the government and other financial entities should have a harmonized goal on how to reduce the menacing rate at which the economy is being consumed by recession. In line with this, I also recommend that there should be a holistic optimization whereby numerous financial organizations in the USshould come together and work toward eradicating the crisis.

It is anticipated that refinancing of the already collapsing financial institutions through taxpayer funds will also help in solving the crisis. Furthermore, long-term regulatory proposals should be made to protect consumers while expanding the banking system (Muolo & Padilla, 2008). Systematic and logical decision making processes are integral in seeking solutions to problems.

Turban, Sharda and Delen (2010) point out that by taking a well organized approach of making decisions, it is possible to succeed in incorporating all important aspects of devising solutions. In cases whereby decisions to be made have to do with a nationwide problem, it is important to conduct a very detailed research (Power, 2002). In this case, it is essential to bear in mind issues such as complexities, uncertainties, risky consequences, available alternatives, international and inter-organizational issues.

In order to create a constructive environment which is critical in decision making, it will be very essential to come up with an evaluation exercise. This will be attempts of making a clear objective. This should state whether the final decision will be organizational or national. It will be very critical to make an analysis of all the parties which have felt the impact of the Subprime Mortgage Crisis. It is used to come up with an appropriate representation of all the organizations which are expected to benefit from the final solutions.

In the basic part of generating alternative responses, an approach of bearing broad solutions is the most appropriate (Turban, Sharda & Delen, 2010). Many options will be considered in order to ensure that comprehensive solutions are reached.

Examples of responses that have a nationwide impact are regulatory proposals, home ownership stability plans, creation of home owner assistance, use of bail outs to redeem failed financiers, bank solvency strategies aimed at capital replenishment and employment of economic stimulants. State finance reserves together with central banks are needed to make very important decisions to help in restoring economic well being.

Another major issue that calls for great concern is the exploration of the possible solutions. Ideas have to be gathered from all dimensions (Power, 2002). Techniques of getting ideas from many data sources are very effective (Turban, Sharda & Delen, 2010).

This helps in making sure that all participants in the problem have a chance to give opinions which will impact the weight of the final decision made. In this particular case, governments have to be listened to without paying lots of respect to their economic status. Decision making is described as a process of considering numerous perspectives and coming up with organized ideas (Power, 2002). These ideas are then put into affinity diagrams which place them in common themes.

Most of the proposed solutions are expected to contain high levels of financial risk given that the issue at hand is purely economic. It is therefore very important to have a keen risk analysis. All the organizations and governments which are going to participate should understand that each choice comes with a probable threat. Cost management should be pre planned in case a give party fails to accomplish its commitments.

In choosing the best solutions, the right tools must be employed. Grid analyses and paired comparisons would be very dependable in comparing the possible responses (Power, 2002). They assist in opening the different options to everyone. It also offers room for improvements based on the recommendations of different experts.

It is a basic way of increasing the chances of success since it minimizes likelihood of relying on faulty solutions. A ladder of inference should be involved in the final analysis of the solutions before they are put into action (Turban, Sharda &Delen, 2010). This is supposed to communicate to governments by giving detailed accounts of why such specific responses have been chosen.

References

Muolo, P. & Padilla, M. (2008). Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis? New Jersey: John Willey & Sons.

Power, D. (2002). Decision Support Systems: Concepts and Resources for Managers, Los Angeles: Greenwood Publishing Group.

Turban, E., Sharda, R. & Delen, D. (2010). Decision Support and Business Intelligence, New Jersey: Prentice Hall.

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IvyPanda. (2019, May 13). Decisions and Risk Management that led to the Subprime Mortgage Crisis. Retrieved from https://ivypanda.com/essays/decisions-and-risk-management-that-led-to-the-subprime-mortgage-crisis-case-study/

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IvyPanda. "Decisions and Risk Management that led to the Subprime Mortgage Crisis." May 13, 2019. https://ivypanda.com/essays/decisions-and-risk-management-that-led-to-the-subprime-mortgage-crisis-case-study/.

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IvyPanda. 2019. "Decisions and Risk Management that led to the Subprime Mortgage Crisis." May 13, 2019. https://ivypanda.com/essays/decisions-and-risk-management-that-led-to-the-subprime-mortgage-crisis-case-study/.

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IvyPanda. (2019) 'Decisions and Risk Management that led to the Subprime Mortgage Crisis'. 13 May.

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