The Financial Crisis Of 2007-2008 Fading

During the early 2000 's, the United States housing market experienced growth at an unprecedented rate, leading to historical highs in home ownership. This surge in home buying was the result of multiple illusory financial circumstances which reduced the apparent risk of both lending and receiving loans. However, in 2007, when the upward trend in home values could no longer continue and began to reverse itself, homeowners found themselves owing more than the value of their properties, a trend which lent itself to increased defaults and foreclosures, further reducing the value of homes in a vicious, self-perpetuating cycle. The 2008 crash of the near-$7-billion housing industry dragged down the entire U.S. economy, and by extension, the global economy, with it, therefore having a large part in triggering the global recession of 2008-2012.

The flow of funds within financial markets is stimulated by the money, bond and mortgage markets. A money market is the trading of highly liquid financial instruments with a duration of one year or less and includes the trading of Treasury bills. Furthermore, bonds are long term investments, with a duration greater than 1 year and are issued by corporations and the U.S. government. In addition, the mortgage market creates loans to finance the real estate market. Once mortgages are issued on a property, banking institutions securitize the mortgages and sell them on the secondary market (CSU Global, 2016). Due to the scale of these three markets they have an extensive impact on the monetary supply and economy.

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

The financial crisis that put our economy on a downhill rocky road is known as the Great Recession of 2008. The U.S. Governments resolution to one the biggest panics was revolved around multiple bailout and fiscal measures. The fight to pull our weakening economy out of a dark hole left the American people with hope of advancing what gets thrown their way. The many bailout programs implemented by the U.S. Government can only hold the economy together for so long until were up to our knees in debt.

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

After housing prices in the United States skyrocketed, Americans and foreign investors alike rode the benefits. However, most parties involved did not anticipate the impending bubble and could not have foreseen the outcomes of its sudden burst. The burst of the housing bubble contributed to a financial crisis and recession. It was one of the worst economic downturns since the Great Depression and affected many sectors of the economy. Several factors such as government policy, brokerage incentives, and securitization all played key roles in the bubble’s burst. A better understanding of the housing bubble is achieved through analyzing it, a comparison with that of Canada, and the effects of the financial crisis throughout the world.

In 2007, the bursting of the housing bubble of the U.S was at its peak. The bursting resulted in plummeting of security values tied to the U.S. real estate pricing. The complex interplay of policies that provided easier lending of loans, overpricing of sub-prime mortgages, on a theoretical basis that the prices would continue to increase, and inadequate capital holdings from insurance companies and banks to back their financial commitments contributed to the bursting of the bubble (Boatright, 2010). During 2008, securities suffered huge losses due to

1441-1442) mention that, in this model, shocks due to innovation and/or expectations can generate credit cycles and asset price fluctuations. Furthermore, they highlights three worth considering properties of this model related with the recent credit boom. First, loose monetary policy may not fully explain credit booms and asset bubbles because a decline in interest rate increase the money demand and the price of assets but the result on credit demand is ambiguous. The unclear effect on credit demand occurs because the positive effect of declining interest rate and the negative effect of lower cost of equity. Second, demand for credit and asset prices increase if expectation for higher future asset prices exist. In that case, the result in money demand is not certain. The higher asset prices influence positively money demand but the expected return of real assets negatively. Ultimately, the expansion of credit, due to for example financial innovations, to lead to lower interest rates and higher money demand and asset

With the looming threat of an economic recession, action needs to be taken to try to minimize the potential damage. Subprime loans to finance mortgage-backed securities have brought instability to the real estate market. Banks have had to implement tighter lending standards to residential mortgages to try to offset this instability (“FBR-Beige Book – Summary,” 2007). Though several banks have reported tighter credit conditions on the commercial real estate market, credit availability and credit quality remained promising for most borrowers (“FBR-Beige Book – Summary,” 2007). Besides the turbulence in the real estate market, uncertainty in other financial markets have had a minimal effect on recent economic activity (“FBR-Beige Book – Summary,”

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.

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

Besides, low interest rates and large inflows of foreign funds created easy credit conditions for years before the crisis and that simulated the boom in housing construction (Steverman and Bogoslaw, 2008). Moreover, easy credit and money inflow greatly contributed to U.S housing bubble and the rise of house’s price.

The three main ingredients of the crisis were the following: a housing bubble, the securitization of mortgages – or Mortgage-Backed Securities (MBSs) – and a credit expansion to leverage financial gains. In its most simple characteristics, the housing bubble was a long-term trend in US housing markets for loans below the quality standard. More precisely, people were buying houses with loans that they had a low chance of repaying, especially considering the unpredictability of markets. After the issuing of these loans, the mortgages as financial

In 2009, the world economy was marked by a very small recovery following the world crisis, the inflation, a slowing economic growth, a high unemployment rate, and the shrinking of the foreign direct investments, not only in the US, Europe but in other developed countries as well. In 2009, the real estate market was in state of equilibration after the shock caused by the financial crisis and the explosion of the housing bulb, which were the consequence of a careless banking system, as in the USA, Spain, Ireland, …, the instability of the stock markets, and a recession that required the resort to state budgets. The evolution of the real estate activity remained below the levels established at the time before the financial crisis. In France, the fall of the new real estate stocks and the value of the old property stabilized. Conditions for access to credits were toughened. Foreign investments shrank by 20% compared to their level in 2008. In 2010, the housing market showed different tendencies, rising, falling or stagnating in some countries, or a continuous regression in others. In the USA, the housing market continued its fall (the fall of the prices, the rise of the number of the seized houses, and the decrease in the construction expenses). In Europe, Spain was the country which suffered most from the crisis, and no recovery was expected before 2012. However, in France and the UK, there was a slow recovery, shown by a rise in the