Instructor: Cause of the 2008 Financial Crisis The 2008 financial crisis also known as the Global Financial Crisis according to many economists is the worst crisis in the financial sector since the 1930s’ great depression…
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It played a striking role in the failure of key businesses. It also contributed to the decrease in consumer wealth estimated to be in trillions of US dollars and a downturn in economic activities that led to global recession of 2008 – 2012 and also contributed to the European sovereign – debt crisis. It led to the increase of the TED spread that reflected an increase in perceived credit risk. The TED spread is the difference between rates of interest on interbank loans and on short – term U.S government debt. The spread of TED increase is shown in the graph below: The spread (in red) increases significantly during the crisis. The spread size is usually denominated in basis points e.g. if the bill rate (T - bill) is 5.1% and ED trades at 5.5% then the TED spread is 40 basis points. The TED spread has fluctuated over time but generally has maintained the range of within 10 and 50 basis points except during the financial crisis. In general the financial crisis caused a very big damage to the world economy and many researchers have carried out studies to explain the causes of this crisis. We try to look into some of the causes below. Imprudent mortgage lending is considered a cause to the crisis as compared to a backdrop of abundance in credit, reduced interest rates, and over the roof prices for houses, lending standard became hassle free enabling many people to engage in the purchase of houses they couldn’t afford. ...
Competitive pressures contributed to the increase in the amount of subprime lending during the years preceding the crisis. Source: U.S census bureau, Harvard University. State of the nation’s housing report 2008 The graph shows the dramatic expansion of subprime lending in the U.S between 2004 and 2006. Another cause was the housing bubble where the Federal Reserve allowed housing prices to sour to an all-time high that was unsustainable. Once the bubble burst as it was bound to, it triggered the crisis. The Federal Reserve maintained interest rates artificially low, per month payments to mortgage were low too and housing prices went up. Home owners took equity loans to pay their initial mortgages and credit card debts until the home prices peaked and the house of cards started to crumble. Mortgage debts would not be increased to pay previous debts. Lack of transparency and accountability in mortgage financing also did contribute to the 2008 financial crisis. Many participants in the housing finance sector contributed to the crisis through the creation of bad mortgages and selling of bad securities with confidence that they won’t be held accountable. Lenders would sell exotic mortgages to home owners without considering the repercussions in case the mortgages failed. Similarly, a trader would sell to investors’ securities that are toxic with fear of personal responsibility in case the contracts failed. The system collapsed through the maximization of personal gains and passing of the problem down the chain from brokers, to realtors, to individuals in rating agencies, and to other market participants. The great promise of managing risk by the ‘originate – to – distribute’ model of finance failed with
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(The Causes of the Financial Crisis in 2008 Essay)
“The Causes of the Financial Crisis in 2008 Essay”, n.d. https://studentshare.org/macro-microeconomics/1476084-the-causes-of-the-financial-crisis-in.
The global economy was hit by a series of financial crises that, like a volcano, started erupting on August 9, 2007. For many years, business and economic factors have converged to this point, which is why this crisis had several causes that could not be reduced to a single individual, institution, nation-state or financial instrument.
The financial crisis refers to the situation in the financial economy, when the value of the assets and institutions goes on losing their value at an increasing rate all over the world. The study is also concentrated on the genesis of the 2008 financial crisis which involves the disastrous circumstances that occurred in the United States as well as in other parts of the world.
2008–2012 Spanish Financial Crises Introduction Most economists agree that the 2007-2012 global financial crisis was the worst since the 1930’s Great Depression. The crisis was characterized by the threat of complete collapse of large financial institutions across the world, downturns in stock markets across the world, bailing out of banks by national governments and general slow-down in economic growth and development around the world (Shiller 35).
Because of this, the international coverage of the crisis had also been remarkable. This paper discusses in detail the 2008 financial crisis focusing on the causes as well as, the final consequences. It is worth noting that poor financial policies were a major category of the probable causes of the 2008 financial crisis.1 Notably, major weaknesses were exposed within the national stretching beyond the international financial regulatory body frameworks.
As from 2007, maintaining financial stability, rather than taming inflation was the Federal Reserve's main goal (Jickling 1). Although the Federal Reserve tried to manage the emerging crisis, the issues present were so complex, such that they defied conventional solutions.
The elite had more disposable incomes, pumped credit into the markets, encouraged innovative credit instruments in the market and also helped keep the interest levels low. With their wealth, the financial bigwigs were able to influence ideology; and everyone, including the government was ready to follow their ideas.
ry Institutions Deregulation and Monetary Control Act of 1980 enabled financial institutions to influence the nature of monetary policies thus making the economy susceptible to non-factual policies, as was the case in 2006.
Thesis Statement: There are several fundamental
The artificial stimulation of the markets and businesses aimed at for overcoming the political instability in the form of global scenarios faced early in the 21st century was one of the factor which lead to an artificial environment creation and ultimately
According to Wallison (2009), key issues that led to the crisis included increment and sudden reduction in house prices as well as increases in default rates in 2006. Furthermore, the collapse of stock prices in 2008 speeded by Bear and Lehman’s failures fuelled the crisis (Wallison, 2009, p. 3).
4 Pages(1000 words)Essay
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