The Cause And Effects Of The Subprime Crisis

The U.S. economy is currently experiencing its worst crisis since the Great Depression. The crisis started in the home mortgage market, especially the market for so-called “subprime” mortgages, and is now spreading beyond subprime to prime mortgages, commercial real estate, corporate junk bonds, and other forms of debt. Total losses of U.S. banks could reach as high as one-third of the total bank capital. The crisis has led to a sharp reduction in bank lending, which in turn is causing a severe recession in the U.S. economy.

The sub-prime crisis affected, not only to the US, but it’s footpath across the world. The economic financial system across the world experienced suffering very badly, thereby leading the deteriorating of the economy. According to numerous economists, the crisis of 2008 was the most severe economic contraction, despite the fact that it is less than the Great Depression. To preserve financial policy steadiness, Federal Reserve applied conservative financial policy stimulus thereby decreasing the federal resources rate to almost zero and becoming the “lender of the last resort”. Fed created this new loan program to improve the deteriorating financial system.

The financial crisis of 2007–2008, also known as the Global Financial Crisis and 2008 financial crisis, is considered by some economists such as Nouriel Roubini, professor of economics and international business at New York University, Kenneth Rogoff, professor of economics and public policy at Harvard University, and Nariman Behravesh, chief economist and executive vice president for IHS Global Insight, to have been the worst financial crisis since the Great Depression of the 1930s. All of them agreed that this is a “one in fifty years event”, however the latest Great Recession is not a typical cyclical recession of the World Economy and no doubt will last for more that usual two years (Business Wire, Reuters). The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. (M. N. Baily, D. J. Elliott, 2009). So what are the cаuses of this crisis? Mаny factors dirеctly and indirectly caused the Great Recession, with expеrts plаcing different weights upon pаrticular causes. Major cаuses of the initial sub-prime mortgage crisis and following recession include: Internаtional trade imbalances and tax lending stаndards contributing to high levels of dеveloped

Many factors such as the U.S. Sub-prime mortgage crisis, credit crunch, decline in investments, higher unemployment rates, terror attacks, and the housing bubble caused the great recession of 2007 to 2009. The resulting loss of wealth led to severe cutbacks in consumer spending. This loss, combined with the craziness of the financial market led to the collapse and business investments. As consumer spending and business investments went down massive job loss followed. The largest indicator of economic activity is the real gross domestic indicator (GDP). The recession had a loss of business and consumer confidence. Spending declined and millions of jobs were lost. This resulted in a downward shift in the GDP, and a severe increase in unemployment

Jaffee, D. The U.S. Subprime Mortgage Crisis: Issues Raised and Lessons Learned. [online] World Bank. Available at: http://www-wds.worldbank.org/exter

The financial crisis of 2008 was the key element which resulted in the depression that the globe is immersed in today. It was astonishing to see that a crisis in the American housing market can initiate an economic depression with effect ranging so far and wide, that it threatened the global economy. Often it is compared to be as large and impactful as The Great Depression of 1930's. The credit crunch resulting from the liquidity problems of the major market players created an atmosphere of utmost distrust amongst the investors regarding the financial institutions in place.

The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively

Pajarskas, V. &. (2014). SUBPRIME MORTGAGE CRISIS IN THE UNITED STATES IN 2007-2008: CAUSES AND CONSEQUENCES (PART I). . Ekonomika, 93(4), 85-118. Retrieved from: http://db07.linccweb.org/login?url=http://search.proquest.com/docview/1644448172?ac.

A financial history well known for centuries’, financial institutes and analytical agencies all over the world spent millions dollars each year to research and prevent economic problems such as recession, inflation and the worst one, worldwide crisis. The United States has the strongest economy in the world with the well-developed financial sector and probably the strongest analytical center. However, it was not enough to prevent a financial crisis in 2008. For the last decades US economy consistently increased housing price on the market thus by the end of 2005 early 2006 prices reached the highest point ever in US history which pushed default rates up. Within few months’ price boom was over and US economy slightly turn over toward long term mortgage crisis which coincided with national recession between 2007-2009 and aggravated the situation. There were many causes of the crisis such as shortcomings of financial institutions, political situation in the country and so on, but there are only three main proximate causes, the mortgage crisis in US was triggered by house bubble on the property market, unsustainable risk increase and unstable system in financial sector.

The U.S. subprime mortgage crisis was a nationwide catastrophe that resulted in the increase of the default and foreclosure of home loans, and consequent decrease in the value of mortgage-backed securities. The mortgage crash was a result of non-bank originators being insufficiently regulated and engaging in excessive risk-taking behavior and questionable lending practices. However, the leading causes for the subprime mortgage extend further than flawed lending decisions. The subprime mortgage crisis would not have occurred had it not been for a series of fundamentally flawed government policies (Allen, 2015).

The financial crisis of 2007–08, also known as the Global Financial Crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. Mr. Ben Bernanke, Chairman of the Federal Reserve at the time, believed it was equally problematic in many ways; although unemployment only reached half the level due to the Fed’s actions combined with a $700B stimulus. It collapsed large financial institutions, and stock markets dropped to half their pre-crisis level. The surface cause was the bursting of the U.S. housing bubble, which had peaked in 2004, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.

In 2008 the U.S. and global economy confronted one of the worst crisis in the history. These financial crisis were considered the worst since the great depression in 1930’s. Several events took a place early in 2007 which led to the economy crash, such as, the massive decrease in home prices in the United States after it was significantly high. This decline in home mortgage market expanded rapidly causing massive crisis in the whole United States financial sector (Bullard, Neely, and Wheelock 2-4). Those crisis had dangerous effects on the stock banking industry, insurance firms, and Fannie Mae and Freddie Mac, the two most important enterprises commissioned by the government to assist mortgage lending, and some other mortgage lenders and financial service organizations. Those crisis generated a decline in banks and financial associations trust of others, believing that they will never get paid back. They simply stopped offering loans to people who needed money to buy a house or start a business, which created a massive decline in the home mortgage market and the whole financial sector of the United States (Havemann 1)

The most popularly known subprime mortgage crisis came into lime light when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. The maximum blame is pointed at the lenders who created such problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. When Fed flooded the markets with increasing capital liquidity, its intention was not only to lower interest rates but it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At that point of time, lenders found themselves loaded with capital for lending out and higher willingness to undertake higher risks in a surge to get greater investment returns. To overcome of the financial instability and housing price bubbles, Federal Reserve has to intervene to combat these issues.

In 2008 America was hit with a massive “mortgage meltdown” known as the Subprime Mortgage Crisis, a period from 2000 to 2005 where foreclosures on houses reached an all-time high. It was within this time that consumer spending fell, the housing market plummeted, and the stock market shook as foreclosures continued to increase. This crisis and its fallout created a sense of discord amongst consumers and urged debate over the causes and resulting after-effects between politicians and legislators. This report will look into some of those causes and the effects that were experienced shortly

The first and more important factor that lead to the subprime mortgage crisis was governments creation of Freddie and Fannie. This move by the government to intercede the private financial industry sector eventually lead to the US government being the largest lender of mortgages in the US. In addition to the flawed notion that government should determine who and how a borrow qualifies for mortgage loan is disconcerting in and of itself, but this also marked a fundamental change in banks models of originate and hold