The rise in acceptance and popularity of securitized products in early 2000s resulted in a torrent of low-priced credit as lending standards fell. One of the prime reasons for the relaxation in regulations for loan seekers were public policies encouraging people to legally own their houses and hence improving security of the area. …
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As shown in the diagram underneath, this led to rising housing prices since decades. In 2000, the rate of increase of house prices was rising at unsustainable levels, much faster than they had in the last decade. Sub-prime mortgages (mortgages to high risk customers) began to rise due to availability of cheap credit (Mizen). The low interest rate environment stimulated upsurges in mortgage backed financing and hence considerable increases in house prices. It encouraged investors (financial institutions, such as pension funds, hedge funds, investment banks) to design instruments that offer yield enhancement such as subprime mortgages. The bullish attitude of Wall Street led to creation of complex structured products such as collateralized debt obligations (CDOs) and a lot of repackaging of high-risk mortgage backed securities. The credit and house price bubble led to a real-estate boom and eventually to a surplus of unsold homes, which triggered U.S. housing prices to peak and before declining and bursting in mid-2006. Subprime borrowers began to default on their loans as real estate prices decreased further.
The default on a significant ratio of subprime toxic assets produced cascade effects in financial markets via the securitized mortgage derivatives into which these mortgages were bundled, to the balance sheets of investment banks and hedge funds. The vagueness about the value of the securities collateralized by these mortgages spread chaos and concern over the soundness of loans for leveraged buyouts. That led to the freezing of the interbank lending market in August 2007, collapse of key financial institutions such as Lehman Brothers and triggered the credit crunch crisis. 2. Economists classify macro-economic indicators as leading, lagging, or coincident. Define each classification and give two examples of each, relating them to the recession that began in 2007 and the recovery that is now under way. ? Economic indicators are periodical statements by the government and private institutions that describe the health of a country's economy. Economist classify these indicators into leading, lagging or coincident kind that are described below in detail: Leading Indicators: Leading indicators are economic indicators that predict future events. They are foreign exchange indicators that change beforehand the change in the market or economy has occurred. Examples of leading indicators may include bong yields, inventory variations, stock prices and insurance claims. Economic establishments and central banks study leading indicators in expectation to fluctuations in expected interest rates. A forex-leading indicator is a pointer that advises the trader to buy or sell before a new trend in the market commences. Leading indicators, however, are difficult to recognize and could lead to misleading results or interpretations if not analyzed by an experience trader. Two examples leading indicators for the financial crisis of 2007 are stock prices (500 common stocks) that reduced by 8% in 2007 (The Conference Board) and Building permits that reduced by 16% leading to a 40% decline in US Home Construction Index. Lagging Indicators: Lagging indicators are indicators that follow an economic event. These indicators usually exist three to twelve months after the economy. Lagging economic indicators are the confirmation to outline the peaks and troughs that
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Banks and investors become wary of providing funds to financial institutions thereby forcefully increasing the cost related to debt products for borrowers. This also affects for individual borrowers as banks become more risk averse towards their loan portfolio.
This was because of the structural nature of the crisis which prompted responses from the countries in different manners since the economic structure of each country varies due to the way in which the economies are ordered (Vogt & Leuschel, 2011, 15). This paper considers the responses of two countries, Russia and India, which have markedly different economies, to the global financial crisis.
The result is greater market fluctuation, which can lead to negative effects, such as more expensive mortgages, problems for pension savers, and even bankruptcy. Apart from that, credit crunches can occur even without an evident recession.
"Credit crunch" has been the most commonly used new term over the past few years.
Credit normally contracts during a recession, but an unusually large contraction could be seen as a credit crunch. In their analysis, Bernanke and Lown compare the contraction in credit during the most recent recession to those in the previous five recessions.
Credit crunch is marked by decreased corporate cash flows that lead to an increased demand for funds to perform the expenditure of companies, as in the case of a decrease in personal savings that will lead to an increased requirement for funds to run a household.
The author states that the current financial problems are caused mainly because of the improper lending habits of banks. Banks were ready to satisfy all the customers who approached them for loans without any investigation about their financial abilities. Interest rates were cut down and the repayment periods were increased by the banks.
dwardian summer" of prosperity and tranquillity and the trench warfare of the credit crunch - the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit” (Special report: Credit crisis - how it all began, 2008). The major reasons for
There have been job cuts, firings and downsizing – all of which have hampered the basis of sanity within the world’s domains. It goes to show that credit crunch has played havoc with the world order and the people who have brought the globe
system had been increasingly deregulated in an attempt to achieve greater efficiency, but the increasingly liberal policies have progressed to a point when innovative contracts have been implemented with less than diligent study and with a disregard for risk in the face of
In such condition, the connection between the interests rates and the availability of credit has unconditionally changed in such a manner that either the loan is fundamentally less than any quoted formal rate of interest or there stops to be a precise
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