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Preventing the Sub-Prime Mortgage Meltdown Essay

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Updated: Apr 5th, 2022


The global financial crisis (GFC) is among the extreme events in financial and economic history. It was the nastiest GFC that the global fraternity has ever observed. This is with exception of the 1930’s Great Depression. GFC is observed to have originated from many causes. The most essential is the crisis in the sub-prime mortgage.

The U.S. sub-prime mortgage market is perceived to have stimulated the financial meltdown. However, the root of the crisis resulted from inconsistent practices. The unstable financial system was also a contributing factor. Actually, both the real sector and financial roots of the sub-prime mortgage meltdown could have been prevented.

Topic sentence 1

The Securities Exchange Commission (SEC) should constantly inquire and monitor the creditworthiness of borrowers and avoid overlooking the risk thresholds.

First, buyers took mortgages from financial organizations to acquire houses. They projected a drop in the prices that would again rise to enable them to operate at a higher profit margin. Consequently, the U.S. sub-prime mortgage sector gave loans to individuals with declining credit. The sector also gave loans to those deprived of cash for a down payment. This created insufficiency in the financial organizations’ reserves. The move lead to inflation as well as the final entry of the sub-prime mortgage crisis.

Second, the financial institutions consistently invested in commercial real estate despite the prevailing recession and the inability of Americans to settle their mortgages. The individual risk boundary established by the risk managers was violated through the breach of thirty real estate dealings. However, SEC overlooked the banks’ management ignorance of the risk limits.

Topic sentence 2

The government should have promptly intervened and regulated the mortgage market using policy measures to prevent the sub-prime mortgage meltdown.

First, the build-up to the crisis emerged from deprived government mediation. The government was unconcerned about the way financial organizations carried out their corporate activities. Preceding the watershed, free markets appeared to be lucrative compared to the regulated businesses. The result was the deregulation of the financial sector. Banks had a margin for innovation and the introduction of new loan techniques without pursuing the approval of the Federal Reserve Bank (FRB).

Second, the deregulatory policies including the government-supported mortgage-securitization resulted in an escalation in the loose low-income house debts. The financial organizations gave home loans easily to homeowners. However, there was a limited check on borrower qualification. From the unregulated systems, loans resulted to be bad debts to the real estate that failed to control their capital accounts.

Topic Sentence 3

The economic and financial policies should not have been based on the outdated principles of commercial theories namely, the cumulative demand and interest rates that were insufficient.

First, the insolvency in the sub-prime organizations reverberated as fiscal and commercial organizations pegged the monies on the dollar. The inflation and the resultant weakening in the dollar worth caused other monies to weaken. From the insolvency of the sub-prime sector, the government intervened by reducing the interest rates of its FRB. The action crippled FRB by exhausting its capital such that it could not further prevent the dollar from escalating inflation.

Second, the credit crisis in the U.S had been forthcoming. The world began expanding the dollar as its currency reserve (Inside the Meltdown). The subsequent impact was the generation of the periodic fiscal prosperity that was weak and probable to plummet. The system was disposed to commercial influence by the financial organizations that intended to augment their achievements.


The sub-prime mortgage meltdown occurred since the government and financial institutions failed to create appropriate policies to avert any future crisis. The short-term guidelines should be in the form of economic salvage strategies as opposed to monetarist in form. Besides, governments must always intervene to ensure that both the fiscal and monetary policies are not flawed by the contracting parties. The lasting policy frameworks must be ready to help the economy digress from the existing guidelines that are founded on ordinary monetarist methods.

Works Cited

Inside the Meltdown. Ex. Prod. Michael Kirk. Boston, MA: WGBH Educational Foundation. 2009. DVD/Transcript.

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IvyPanda. 2022. "Preventing the Sub-Prime Mortgage Meltdown." April 5, 2022. https://ivypanda.com/essays/preventing-the-sub-prime-mortgage-meltdown/.


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