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Why did the 2007 financial crisis spread so quickly and so far - Essay Example

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It was the most catastrophic financial stress as it affected many financial institutions including banks, which had to be bailed out through monetary policy expansion…
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Why did the 2007 financial crisis spread so quickly and so far
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Download file to see previous pages The crisis also led to the global recession in 2008 following its effects on international trade (Acharya & Matthew, 2009).
The financial crisis is believed to be as a result of increased values of securities related to the United States of Americas in the stock market. The increase on the securities was as a result of the housing bubble which reached its optimum in 2006, affecting many financial institutions worldwide. Therefore, the crisis was a result of a complicated interplay between policies that enabled home ownership through the provision of cheaper loans to potential home buyers. Subprime mortgages were hence overvalued based on the presumption that real estate prices would continue to escalate. The global stock markets suffered heavily when real estate securities suffered large losses as a result of declining credit availability and dented investor confidence. Most economies globally slowed down during this period as a result of credit unavailability and a decline in international trade (Caballero, Pierre-Olivier & Emmanuel, 2008).
The financial crisis was primarily an internal problem in the United States of America. The crisis began as a subprime crisis in the country in 2007 and spread over to other advanced countries. The crisis commenced with an enormous real estate asset bubble. Housing prices dramatically escalated in the United States with mortgage rates lower than normal mainly because of the Federal Reserve lowering the federal funds. Federal funds are the rate at which financial institutions lend each other overnight (Ely, 2009).
In order to avoid losses, mortgage lenders have traditionally been very strict in scrutinizing the eligibility of a citizen in terms of repaying the loan. However, this did not happen in the United States of America when there was widespread securitization. Securitization allowed banks to lend mortgage loans to many jobless individuals with no income or assets at all. Loan regulators also authorized ...Download file to see next pagesRead More
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