The Global Financial Crisis Of 2007-2008

The beginning of the crisis is rooted in banks giving out subprime loans to people who would have not otherwise been given these loans. The banks assumed that these loans could be bundled and the numbers proved that they were safe investments, because enough people would pay their loans back.

Because of this downfall of the housing market, the U.S. economy fell along with other markets across the country. Homeowners had mortgages higher than what their homes were valued at, the decline in housing prices caused many people to default on their mortgages which caused the values of mortgage backed securities and CDO’s to collapse, leaving banks and their financial institutions holding those securities with a lower value of

The housing market had started to decline in 2007, after reaching peak prices in 2006. There was an extremely high amount of subprime mortgages that had been issued in the early 2000’s. Homeowners could no longer afford to live in their homes, payments started going to default, and foreclosures started to rise. According to The Washington Post, there were five contributing factors to the housing market crash: low-doc loans, adjustable- rate mortgages, equity line of credit, more money down than needed, and mortgage insurance.

In this essay, I will briefly explain what happened during the financial crisis of 2007-09, and also discuss the contribution of the government to the financial crisis.

In 2008, a number of Banks, Financial Institutions and Non-Financial institutions failures sparked Financial Crisis or as some economist call “The Great Recession” that efficiently froze the entire world Financial institutions,

The cause was the uncontrolled number of sub-prime mortgages that were driven by historically low interest rates that flooded the market. Eventually many of these unsecure mortgages started to default due to the inability of borrowers to pay. Leading to a banking and credit crunch.( Holt J.(2009). A summary of the primary causes of the housing bubble and the resulting credit crisis: a Non-technical

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

The system had been rigged, it was clear, but even with attempts to keep the values of subprime mortgage bonds artificially high, values collapsed. The government allowed the Brothers to go bankrupt, which triggered more panic in the markets. Commercial lending froze, paralyzing businesses in American and across the globe. Many Americans lost their jobs, savings and retirement

When investors make large sums of money on investments that are not tied to the actual value of a tangible product a number of dangers can arise. During the financial crisis of 2008, investors were making money off of home owners who paid their mortgages. Because of leverage, the investors made more money than they should have because after multiple homes were foreclosed the home-owners that continued to pay their mortgage

Banks were also overvaluing some of the subprime mortgages making a false assumption that housing prices would continue to rise. Subprime loans are loans that are made to individuals who have complications in trying to maintain a more scheduled payment. Individuals who are going through certain hardships in their life such as divorces, unemployment, etc. Most of these investment banks preferred subprime loans because they carried higher interest rates which led to a massive increase in predatory lending. The reason why banks were creating such complex policies were so that anyone who planned to take out a loan would have difficulty translating the documents therefore allowing the banks the take advantage of homeowners without or if any repercussions.

The problem is deregulation. The definition of deregulation is the elimination of government power with in an industry. In this case banks and financial institutions of the world. Deregulation could be seen as greed, big corporations, monopolies, where the rich get richer. Deregulation is the cause of the financial crisis of 2008. Deregulation means no one is watching over the banks and CEO is saying no and stopping the gambling of people’s savings. The 2008 economy got to the point of a financial crisis due to speculation of savings, investor banks went public and in turn turned Wall Street became rich. Financial deregulation made for risky investments and looting companies. An example of this is the merger of two big insurance companies Travelers and Citigroup in the 1990 has violated the Glass Stele Act, but was ignored for a whole year by the SEC. The SEC is the Securities and Exchange Commission ho are supposed to be monitoring and making sure big corporations like this do not monopolize. The Gramm Leach Bliley Act cleared the merger and the way for future large corporations to

speculative investment. It a form of moral hazard, it a behavior that does not benefit the

Slumps in value made it difficult for banks to sell assets at almost any price or use them as collateral for short-term funding. Real estate prices also plummeted, and interest rates rose sharply from 1% to 5.35%. The devaluation of homes caused them to be worth less than their mortgage loan, giving consumers an incentive to foreclose on their mortgages. In addition, homeowners that were barely able to afford mortgage payments while interest rates were low were suddenly slapped in the face with the hike in interest rates, which also caused them to default on their mortgages. This phenomenon, dubbed the “foreclosure epidemic”, drained wealth from other consumers and weakened the financial strength of banks. Banks and investors that had borrowed and invested heavily in subprime mortgage-backed securities also incurred significant amounts of debt or losses with the burst of the housing bubble, adding to the severity with which the collapse of this credit driven bubble affected the world economy.

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.

The new lackadaisical lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. Now consider the housing market which had become a housing bubble, which had now burst, and now people could not pay for their incredibly expensive houses or keep up with their ballooning mortgage payments. Borrowers started defaulting, which put more houses back on the market for sale. But there were not any buyers. Supply was up, demand was down, and home prices started collapsing. As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth and some stopped paying. That led to more defaults, pushing prices down further. As this was happening, the big financial institutions stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans. By 2007, some big lenders had declared bankruptcy. The problems spread to the big investors, who had poured money into the mortgage backed securities and CDOs. They started losing money on their investments. All these of these financial instruments resulted in an incredibly complicated web of assets, liabilities, and risks. So that when things went bad, they went bad for the entire financial system. Some major financial players declared bankruptcy and others were forced into mergers, or needed