Ethical Dimensions in the crash of Housing Market





Ethical Dimensions in the crash of Housing Market

Financial Crises

In year 2007, financial markets of United States where shake first time. Many financial institutions faces hugs looses because of increase in the amount of defaulters of the mortgage loan. These defaults where mostly faced in subprime segment. The ownership of those loans were transferred to the investors and used in the guarantee for other assets which is also called securitization. This generated the high amount of risk and suspicions about the true values of the assets and lack of transparencies. Due to which doubts on the solvency of those institutions were also raised because many parties where involved in these operation as counter parties. Due to the liquidity crises the whole international market got affected and faced serious crises. All the entities stopped giving loan to the other parties due to which risk of solvency rise. The risk quickly spread in other parts of the world (Hoffman, 2007).

The central banks tried to provide liquidity to banks to stop this problem but the problem grew even larger then before and it was not possible for the central bank to solve this problem. Due to this the institutions also lost their confidence who were involved in such problems. Major steps were taken by the government of United States for this problem; one of the major steps taken was cleaning of balance sheet of banks and recapitalizing them. In 2008 the bankruptcy of Lehman Brothers hit hard the international financial markets and all investors went in to panic. Due to the financial crises deep recession was also faced. Government of United States tries best to overcome the situation (Hoffman, 2007).

In order to handle crises and solve banking issues Government made fiscal stimulation programs so that banks can recover their positions. To implement these programs large amount of public deficit was faced and Government had to take heavy loans from various countries of the world to get financial support. The overly lax monetary policy of United States created bubble in the creation of houses in United States. The financial crises were not only faced by those countries where these bubble where made but also by those countries who invested in toxic assets. The countries where bubble was created are United States, Spain and Iceland and the countries whose banks invested in toxic assets are Germany and Belgium (Hoffman, 2007).

It was also considered as currency crises in some cases like the depreciation of domestic currency, increasing of debts of households, institutions and firms. Such case occurred in Iceland during the financial crises. The third major crisis faced was of debt sovereign crisis. Debt sovereign crisis occurred when Governments made fiscal stimulation programs in order to give support to banking industry. Many governments did default due to which the wave of mistrust was also faced. The governments were forced to implement hard fiscal programs due to which banks had to face many difficulties. Many scholars argue that these crises ...