Recession Turmoil Caused By U.s. Subprime Mortgage Crisis

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

The federal government reacted to the financial crisis that emerged in 2007 and affected industries in many ways. This crisis caused an economic meltdown that saw a lot of people lose their jobs, homes, and savings. The Federal Reserve implemented several solutions that were designed to improve the liquid assets of the financial institutions and create favorable conditions in financial markets. These solutions resulted in changes to the Federal Reserve's financial records. The solutions were enforced so as to fulfill the Reserve’s objectives on financial policies which involve employment and price inflation.

The Great Recession inflicted abundant harm in the U.S. and global economy; 8.7 million jobs vanished (Center on Budget), 9.3 million Americans lost their homes (Kusisto), and the U.S. GDP fell below what the economy was capable to produce (Center on Budget). The financial crisis was unforeseen by millions and few predicted that the market would enter a recession. Due to the impact that the recession had, several studies have been conducted in order to determine what caused the recession and if it could have been prevented. Government intervention played a key role in the crisis by providing the bailout money that saved those “Too Big to Fail” institutions. Due to the amount of money invested in the bailout and the damage that the financial crisis had on the U.S. population, “Too Big to Fail Banks”, and financial regulation are two of the biggest focuses of the presidential candidates. Politicians might assure voters that change will occur, but is it to late for change to be efficient, are the financial institutions making the same mistakes that led to the financial crisis?

There are many research institutions that are quick to point the finger and blame one specific entity or event for the events that occurred during the economic decline in 2008; however, the entire situation cannot be put onto the shoulders of one company, or the faults of one industry. There were several causes that played into the financial crisis, but two causes stand out as the pre-dominant elements of the collapse of major financial establishments: manipulation of the housing market by two government-funded companies, and the greed of wealthy Wall Street bankers and investors who knowingly took advantage of the system.

After the bursting of the United States housing bubble, many homeowners found themselves in a dire situation. Following the dot-com bubble burst, the Federal Reserve slashed interest rates, meaning credit was cheap. Lower lending standards also meant that consumers with not-so-great credit were suddenly able to attain adjustable rate mortgages with a minimum of money down and easy initial terms. In 2004, approaching the pinnacle of the housing market’s climb, former Federal Reserve Chairman, Alan Greenspan, actually encouraged Americans to take out adjustable rate mortgages. Then, as 2006 came, Americans saw the housing market reach its peak and subsequently plummet downward. As a result, it became difficult to impossible forthe borrowers

Several years ago, many of us could not imagine mortgage meltdown ending. It seemed as if the foreclosures/short sales were increasing and the American dream of buying a home was decreasing. Many people felt hopeless and cheated when it came to the economy’s poor status due to the housing crash. Many lessons were learned from the collapse and although it may seem hard to believe, there were silver linings in the mistakes made during the mortgage meltdown. Today, real estate buyers are benefiting from the past mistakes and have more confidence in their home buying purchases.

Is the Federal Reserve Accountable for sub-prime market economic disaster and its sustainability in a post disaster U.S economy?

There is much speculation that the Fed help caused the crisis because it kept its policy rate to low due to fear of deflation. Ben S. Bernanke, who was the chairman of the Federal Reserve during the crisis, defends the Fed by saying “The collapse of house prices interacted with vulnerabilities in both the private and public sectors to produce the crisis.” (Hoover.org) It is hard to determine whether or not the Fed helped caused the crisis, but it is certain they had a part. During the crisis the Fed decided to bail out investment bank, Bear Stearns and insurance company, AIG, while letting Lehman Brothers fail without a bail out. This was because AIG and Bear Stearns where considered too big to fail, while Lehman Brothers was considered insolvent and the Fed felt that they did not have legal authority to do so. When Lehman Brother collapsed it led to a market panic, in response the Fed extended the discount window to non-bank financial institutions and financial markets. They also provided funding for money market mutual funds. Bernanke argues that these policies help prevent a global financial system crash.

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

There are a number of people who can be blamed for either financial crisis. For instance, The Great Depression has been blamed on France because of hoarding gold. President Herbert Hoover was blamed for the Great Depression by the public, but mainly the Democrats. He was only in office for eight months when the stock market crashed and he even warned President Coolidge in 1925 that there was speculation of the excessiveness of the stock market.

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage

According to the specialists, there are many reasons for this global financial crisis. We try to focus some prime reasons behind this