What caused the economic difficulties of 2008 and how can the current situation best be managed How long are the effects likely to last - Essay Example

82). As we had said earlier that the economic crisis has its root cause from United States, can be said to have resulted from the subprime mortgage loans. Many financial institutions before the start of financial instability offered cheap credit to people to buy homes and make other investments with the hope of getting higher returns (Barrel, 2008, 82). The availability of cheap credit stimulated an increase in demand of many people to spend money. However, people were only purchasing one thing, that is, houses which later resulted to inflation.

Many privately owned equity firms leveraged billions of money to buy companies and where in wealth they created a lot of money by shuffling paper without creating valuable things. Currently oil price speculation and increased unemployment level resulted to further increase of inflation. Therefore we can say poor checking or control of credit in united stated led to the financial problem (Barrel, 2008, pp. 83). The mortgage brokers on the other side worsened the situation by failing to determine correctly whom to be given and not to be given the loans.

The risky and exotic mortgage became commonplace, where the mortgage brokers who determined the credit worth of borrowers absolved themselves reliable of packaging the risky mortgages in exchange of other mortgages which they resold as investments (Barrel, 2008, pp. 84). People had hope that after investing in houses they would get much profit to refinance the subprime loans. However, this was not the case as many loan payments were defaulted. This led to slump of housing business which led to a series of economic reactions.

As reported by the financial analyst in United States, “investors and individuals could no more rely on their housing business for quick profit; ARM, that is, Adjustable Rates Mortgages were adjusted upward and people could no longer acquire mortgages for several homeowners, and