Economic Issues

Abstract

The financial crisis that erupted in 2008 eventually took the form of global recession which affected almost every country of the world. The reason for the financial crisis has yet to be determined as economics experts have highlighted multiple reasons behind the crisis. However, most economists agree that the housing bubble and banking crisis were one of the main factors that led to the crisis.

Economic Issues

Introduction

The financial crisis that occurred in 2007-2008, which later became the global financial crisis, is regarded by many economists to be the largest and worst financial crisis since the Great Depression in 1930s. The consequences of the crisis were faced in the form of the threat of total collapse of the financial institutions, bank bailouts, decline of stock markets around the world and downward trends in the housing market in many parts of the world, particularly in the United States.

Thesis Statement

The housing market and banking crisis were the main determinants behind the economic and financial crisis which occurred in United States and ultimately took the form of global recession.

Mortgage and housing crisis

Background of housing and mortgage crisis

The United States mortgage crisis was not a sudden incident. There were a chain of events and circumstances that ultimately resulted in a financial meltdown and the anticipated global recession. The main features of the crisis were seen in the form of an increase in subprime mortgage wrong-doings and foreclosures, consequently declining mortgage-backed securities (Dolezalek H. 2011). The collateralized debt obligations (CDO) and mortgage-based securities (MBS) has at start offered lucrative return rates because of the high interest rates. However, the lower condition of credit resulted in enormous defaults (Shrivastava P., et al. 2012). The symptoms of the crisis started appearing more visibly in 2007, and many main financial institutions suffered collapse in the fall of 2008. It was also marred by significant disruptions in credit flows to consumers and paved way for a deep international meltdown.

The crisis was triggered by the bursting of the housing bubble of United States that was at its peak in 2005 and 2006. The borrowers were encouraged by an increase in the incentives for loans with soft term offers and the trend of long term of growing prices for houses. The borrowers were attracted to assume high risk mortgages in the expectation that it would enable them to swiftly refinance on soft conditions. However, the interest rates started to increase and the price of housing began to decline at a moderate pace in many areas of United States in 2006-2007. Consequently, the borrowers were then unable to repay and defaults and foreclosures increased significantly as the easy initial terms faced expiration. Hence, the prices of homes declined and interest rates were reset on a higher rate (Bardhan A, et al. 2011). The global investor demand for mortgage-backed securities fell heavily as the prices of housing declined. There were several other factors as well that led to the rise and fall of housing prices and the mortgage-backed securities that were held by financial ...