The Financial Crisis Of The Housing Bubble

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The Financial Crisis that started in 2007 The 2007-08 financial crisis that started in the US is often dubbed as the housing bubble. Although, the burst of the housing bubble is the tipping point of the crisis, the true causes have building up slowly and steadily for almost over a decade. The burst of the housing bubble was merely a reflection of the built up baggage. This crisis is a classic example of how dangerous derivatives can turn out to be if not properly managed. Causes of the crisis and the sequence of events Succinctly, several macroeconomic factors laid the foundation and primed the field for a downfall and rash attitude of borrowers, the sub-prime lending, the greed of bankers and their shadow banking system, complacency of…show more content…
Bingo borrowers – the reckless borrowers Since, loans were offered easily and at cheap cost, borrowers started borrowing recklessly beyond the point of their earnings capacity as there is now no disincentive to default a loan as one can get another loan at relative ease. This subprime lending, increased the demand for housing and thus increased the prices. In effect, sub-prime lending slowly became the cause of the high property prices rather than the effect. The ever greedy Bankers With the promise of building of Chinese wall between investing and commercial banking division, the Glass- Steagall act is repealed and this made it easier for the investment banks to make money out of thin air. I banks that were selling CDOs were constantly nudging the commercial banking division to shun their traditional conservative philosophy with more of a gamble as they can now spin off the risks pretty efficiently . Also, the capital regulations weren’t so tight and allowed the banks to spin the assets off the balance sheet into special purpose vehicles that were subject to weak capital requirement standards and were funded by the raising money
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