The Causes for Us Economic Crisis

In 2008, one of the biggest financial recessions of our time occurred. The blame that should be placed on the unexpected crash of the housing market should come from the shady business strategies used by banks and investment agencies, which caused millions of everyday people to lose their jobs and homes. The role of subprime mortgages, CDO’s, and illicit ratings caused the biggest financial crisis since the Great Depression. The culmination of these things led to the downfall of the economy and start of a recession.

The decade before the 2008 crisis, showed the development of a key factor that would later contribute to the crisis. It was the dramatic increase in aggregate households’ indebtedness that had become so severe in the United States. This large growth in household indebtedness was a direct result in large by the significant and sustained expansion in residential mortgage lending. With the growth in the residential mortgage

Now these financial markets have allowed many to become successful and live the “American Dream,” but have also caused many to suffer and lose everything. Back in 2007, the United States’ economy experienced a large financial crisis that almost paralleled the financial crisis during the Great Depression. Large financial institutions suffered a great deal and the stock market plummeted worldwide. The housing market took a huge hit as well, causing many foreclosures and evictions. This crisis stemmed from a major default in the subprime mortgage market. The bad credit records should have given some forewarning to the looming crisis, but the financial innovation for these mortgages gave investors a chance to succeed in the market. So as a large volume of cash flowed into the United States, the subprime mortgage market took off and became a trillion dollar market by 2007 (Mishkin 208). With prices rising in the housing market, subprime borrowers could simply refinance their houses by taking out even larger loans as homes appreciated in value. These borrowers were also unlikely to default because the houses could be sold off to pay back the loan. This benefited investors since the securities backed by cash flows from subprime mortgages had high returns. And this continued growth of the subprime mortgage market further increased the demand for houses and continued to fuel the increase in housing prices.

The current economic-financial crisis was indeed caused by the simultaneous occurrence of events in different parts of the world that all had a negative effect. These events are subtly different and therefore it is common that only one event is held responsible for the crisis. In reality, the world economy became critical due to the mix of four major events: 1) the unrestrained greed of financiers in the U.S. and U.K., which transformed bad mortgages into toxic financial assets 2) the habit of getting deeply indebted in the U.S. and U.K., 3) the excessive liquidity in Europe, 4) the real estate bubble in the U.S. and some European countries (Thomas, 2011) At the beginning of the financial collapse in the United States, many commentators, among which was the President of the Federal Reserve, hastily affirmed that the situation would only affect the United States and at most, the UK, where the banks,

The “Great Recession,” the name given to the financial crisis that occurred in the United States between 2007 and 2009, saw the biggest contraction of the US economy since World War II (Amadeo). Real GDP fell as sharply as a -6.4% annual rates and unemployment rose above ten percent in the aftermath of the crisis. The primary culprit of the Great Recession was the US housing market. New financial instruments that allowed for lending to subprime customers, along with deregulation of the banking industry, and asymmetric information produced by credit agencies all played significant roles in these happenings. Moral hazard on behalf of financial product providers ultimately led to the asymmetric information that allowed the housing market to collapse.

The United States was coming out of the most severe economic turmoil of its history at the time World War II began in 1939. The federal government was already in debt to the tune of around 40 billion dollars, more than doubling in since 1930, largely due to federal spending in attempts to ease the economic crisis of the great depression. Americans were in no way ready, willing or financially capable of supporting another war against the Germans. The ideals of the average American at the time, much like during the beginning of World War I, was one of strict neutrality.

The Great Recession, coinciding with the subprime mortgage crisis, lasted from the end of 2007 to the middle of 2009. This downturn became the biggest economic crisis that the United States had faced since the Great Depression. Causing high unemployment rates, a decline in consumer confidence and home values, the recession had a great impact on both Americans and immigrants in the United States. Since the 1990s to a few years before the recession, the number of immigrants entering the United States increased at a constant rate as more and more people came to the country in search for better job and education opportunities. This number dropped, however, when the country entered the economic crisis in 2007. The American Community Survey

“Lenders might choose to keep the mortgages that they originate in their own portfolios, or they might sell them to the secondary market. If a mortgage originator sells the mortgage in the secondary mortgage, the purchaser of the mortgage could choose to hold the mortgage itself or to securitize it in a pool of mortgages. Fannie Mae and Freddie Mac securitize mortgages that conform to their criteria. Ginnie Mae guarantees MBS made up exclusively of mortgages insured or guaranteed by the federal government. Other financial institutions issue PLS that do not have an implicit or explicit government guarantee. Depending on the type of MBS or mortgage purchased, investors will face different types of risks, including credit risk and prepayment risk.” (An Overview of the Housing Finance System in the United States Congressional Research Service)

Beginning in August 2007, cracks in the economic system led to the United States’ second worst economic and financial crisis in history. The biggest crisis of all being the Great Depression. Stock markets crashed and banks lost hundreds of billions of dollars. The economy plummeted and suffered traumatic loss. After two years of hardship, the recession ended in 2009. This time period, now being called the Great Recession, is still to this day taking an effect on our economy. A financial crisis is when information flows in financial markets experience a particularly large disruption, with the result that financial frictions increase sharply and financial markets stop functioning (Mishkin, 2015). Several factors can cause a financial crisis

This paper was written to examine the causes of the financial crisis and Great Recession which can be materially tied back to decisions made in the 1970s and set the state for the crisis to occur. The paper invites the consideration of the key drivers that led to the subprime crisis that occurred long before 2007 and the result of a series of Acts that were ratified and the subsequent reforms that came about from these Acts. The Act that fanned the fire was the Community Reinvestment Act, which addressed a civil rights issue and a credit lending tendency to shun people of certain socioeconomic classes. Under the Act, various reforms made it fundamentally easier for people to purchase large capital assets no matter what their background

In closing Wolff sees the economic crises from Kenynesian camp. He sees the 2008 economic crisis as a direct effects greed of financier’s , overproduction and the states pushing debt on the American public causing financial booms and bust till there are no new financial schemes or crises left and the next solution to the economic crisis is a pseudo socialist overhaul of the economy. Unlike Harvey and Block Wolff feels the economic crisis is not temporary.

Bank institutions as well as mortgage loan officers were encouraging homeownership with the interest of not only gaining a commission but due to the fact that lenders were not going to be responsible if the homeowners did not pay their mortgages. Mortgages were being packaged then sold to investment banks then later sold to investors. Borrowers were arranged in expensive subprime loans and numerous loans were given to people who were not able repay them. Once homeowners were not capable of paying their mortgages investors were the ones who were left with the problems allowing lenders and investment banks to escape through the loop. Banks that were overvaluing the

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

The subprime crisis that occurred during 2007 to 2009 is the first big crisis after the Great Depression in 1930s. This crisis had traumatised the World’s financial. U.S. Federal Reserve Board is the main cause of the crisis during the period of easy money and financial deregulation from mid 1990s till today. The unprecedented housing and consumer credit bubbles in the U.S. and other countries which share American’s policy orientation was due to over consumption and over borrowing. Till to date, the ripple effect of subprime crisis still linger in the financial market.