The Global Financial Crisis

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The Global Financial crisis, which is believed to have begun during July 2007 due to a credit crunch was caused because there was a large liquidity crisis due to lack of confidence amongst the US investors in judging the value of the subprime mortgages. (Davies, 2014)
Now let’s look at what happened at the 2008 global financial crisis. I am not getting into the details but just giving a simple overall picture of what went wrong. The years just before the crisis saw a flood of irresponsible mortgage lending in America. Loans were given out to subprime borrowers without proper evaluation on their credit history and repayment ability. These risky mortgages were then converted into low risk securities by government appointed (or funded) agencies to attract investors. Low rate for short-term funds led investors to borrow more money and invested in these securities. Now, these mortgages were collateralised against houses and land property. When the property value plummeted, the collateral value diminished making it difficult to liquidate (McKibbin, W. and Stoeckel, 2009). This is just one of the reasons leading to the crisis. The government lending money to people who have relatively low credit rating and not evaluating with strict standards, as one would do if they were private lenders led to a large pool of bad mortgages. The problem here is loans were sanctioned to people with poorer risks (low interest were made to promote borrowing) and resulted in higher failure percentage

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