2008 Financial Crisis Analysis

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The Great Recession of 2007-2009 was one of the most economically disastrous events in American history. The housing market took a significant downturn during this period. People were not cautious when it came to their money and loans. Larger loans were given out to people, even to those with bad credit and low incomes. These large loans caused many homes to go through foreclosure since people were unable to pay off their mortgage debts. These debts were created by banks increasing the interest rates on the loans significantly in a short period. In 2008, foreclosures were up by eighty-two percent. This increase is significant because the previous percentage of foreclosures was at fifty-one percent from 2007. Unemployment skyrocketed, and people

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve including both the traditional and non-traditional measures to ease credit markers and stimulate the economy.

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

EXAMINE THE FACTS. The housing market was making huge financial gains by misleading buyers into buying home that were out of their budget, lenders and originator created unconventional mortgages to people who were at high risk for default.

During the early 2000 's, the United States housing market experienced growth at an unprecedented rate, leading to historical highs in home ownership. This surge in home buying was the result of multiple illusory financial circumstances which reduced the apparent risk of both lending and receiving loans. However, in 2007, when the upward trend in home values could no longer continue and began to reverse itself, homeowners found themselves owing more than the value of their properties, a trend which lent itself to increased defaults and foreclosures, further reducing the value of homes in a vicious, self-perpetuating cycle. The 2008 crash of the near-$7-billion housing industry dragged down the entire U.S. economy, and by extension, the global economy, with it, therefore having a large part in triggering the global recession of 2008-2012.

When housing prices began to drop and interest rates began to rise, borrowers couldn’t afford their monthly payment. When the loan amount became higher than the worth of the house, the borrowers simply walked away and defaulted on their loans (Conners and Gwartney 64). This caused the banks, as well as Fannie Mae and Freddie Mac, to have many default loans on their books.

In 2008, the US experienced the traumatic chaos of a financial downturn, whose effects rippled throughout Europe and Asia. Many economists consider it the worst crisis since the Great Depression, and its alarming results are still seen today, a long six years later. Truly, the recession’s daunting size and formidable wake have left no one untouched and can only beg the question: could it have been prevented? The causes are manifold, but can be found substantially rooted in illogical investments and greedy schemes.

After reaching its peak in 2006, the US housing market finally collapsed, since then average house price have drop more than 30% as of 2010. (Parsons, 2011) What caused the housing price collapsed, that ultimately led to the downward of US Economy, was that many mortgages were paid by adjustable-rate (Appendix), which increases in accordance with house price. Since the house price were picked up in an ascending speed from 2000 to 2006, so was the interest rate homeowners had to pay every month. Eventually, the interest went extremely high in 2006 and homeowners could not afford to pay their monthly mortgages anymore, and lost their home to the banks. That caused the chain reactions resulting in the dramatic price drop of mortgage backed securities because of diminishing house price. Dramatic security price drop could not have caused the house price dropped; on the contrary, had only the dramatic house price drop led to the securities price drop that ultimately cost investors billions of dollars. As a matter of fact, major banks and financial firms were only issuers of those securities; they have limited involvement and no direct control over price of securities. Thus, banks should not hold responsible for the house market collapse because it was simply market reactions.

As home prices continued to rise, lenders thought the borrowers would just default on the mortgage and then the lenders would just be able to sell the house for more cash. While prices and risks were rising, investors were notified by credit rating agencies that mortgage backed securities were safe investments by giving them AAA rating (Naude 3). These investors were told one thing and market investments were not showing high returns. Lenders started to create more and more investments because investors wanted to buy more securities, but in order to create more investments, lenders needed more mortgages (Erkens, Hung, & Matos 392). A way to create more mortgages was to widen their customer market. Lenders created less strict rules and regulations

There was misbelief over future market rates and home values by those looking to buy or sell their home. Banks were lending money irresponsibility, which allowed more people the ability to purchase homes who normally could not afford to enter the market. This increased demand in the market for homes, bidding up the overall price of homes. The value of these homes, however, remained the same. In addition to purchasing homes beyond the means of the consumer, existing home owners applied for equity on the false notion that their homes had increased in value. With far more money in the hand of the consumer, families began splurging and purchasing. To offset this increased demand for goods, firms raised prices. When the economy crashed, homeowners and those who had borrowed or took out equity against their homes were left with a massive amount to pay off. From the raised prices, there was inflation which burdened consumers even more. Instantly, households were left with massive amounts of debt that banks were demanding repayment for. When borrowers’ jobs could no longer support the payments for these debts, many households filed for bankruptcy. Many banks couldn’t cover their costs because payments were not being made, which led to the shutdown and take-over of many well-known banks overnight. This also impacted the auto industry, to some degree. Because auto manufactures rely on consumers purchasing the current year’s car model, auto manufacturers could not cover their costs and ultimately had to lay-off many workers, many of which also had massive amounts of debt to pay off. The economic crisis was not caused by any one entity, rather it was a combined problem of uncalculated risks, an overly optimistic market, household greed, and poor regulation of banks. The only solution to this problem is putting more regulation on banks (increase reserve

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

The 2008 financial crisis can be traced back to two factor, sub-prime mortgages and debt. Traditionally, it was considered difficult to get a mortgage if you had bad credit or did not have a steady form of income. Lenders did not want to take the risk that you might default on the loan. In the 2000s, investors in the U.S. and abroad looking for a low risk, high return investment started putting their money at the U.S. housing market. The thinking behind this was they could get a better return from the interest rates home owners paid on mortgages, than they could by investing in things like treasury bonds, which were paying extremely low interest. The global investors did not want to buy just individual mortgages. Instead, they bought

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary