Housing Market Crash
In 2007 when the housing market crashed the whole world was effected. Trillions of dollars have been lost and we are still trying to recover and make sense of all that took place. This economic catastrophe could have been minimized if the proper accounting practices had been followed and if the regulatory framework in place were unassailable. Alan Greenspan, in his evaluation of the housing crash stated, “...the financial system would have held together, had the second bulwark against crisis-our regulatory system-functioned effectively.” (Greenspan, 212) Creditors, credit rating agencies and banks were neglectful in certain areas and found loopholes in the system that eventually lead to the collapse of the financial system. One of the main issues that lead to the crash was not following the simple practice of fair value accounting. Fair value accounting is the process of assigning a proper price to assets and liabilities (Fair Value Measurements). Often, companies who practice sound accounting have systems where financial information runs through the hands of multiple groups and people. By verifying and scrutinizing the financial information mistakes and errors can be avoided. In order to achieve higher revenues people, firms and banks misrepresented information necessary to make sound financial decisions. Stephen G. Ryan said, “The subprime crisis was caused by firms and households making bad operating, investing, and financing decisions, managing risks poorly, and in some instances committing fraud.” (Ryan, Stephen G.) Aside from fraud and the misrepresentation of information, people did not follow simple rules of smart accounting. When accounting one needs to take into consideration the real amount of debt being issued and the ability of the debtor to repay that debt. Loans were being offered to buyers of land and property with little to no effort of adequately evaluating property, houses, buildings and their fair value prices (Congleton). Loans that