2008 Financial Crisis Of 2008 Research Paper

The Causes and Effects of the Financial Crisis of 2008 The effects of the financial crisis of 2008 have caused detrimental consequences on the United States economy. The result of this recession has lead to high levels of unemployment, made stocks and bonds crumble, and left the housing and real estate market at extremely low prices. This all could have been avoided if the introduction of subprime loans was never established. In 2008, it started with investors and mortgage brokers getting too greedy. Mortgage brokers would issue mortgages to as many people as they could in order to sell them to investors at a higher price for a nice profit (Dodd, R., & Mills, P., 2008, p.1). Here is how it played out:

Before the financial crisis, only people

First, the introduction of subprime loans was a major factor. If it was required to have proof of income, a down payment, and a good credit score, less and less people would have been able to purchase mortgages they would not have been able to pay back. Companies that lent these loans out had knowledge of the effects of what would happen. But, after they sold the loan to the next buyer, there is no more risk for them. When the bankers lend money to the mortgage broker, the bankers get there money up front, and the risk is no longer theirs. After the mortgage broker sells the “AAA” bonds as CDO’s to investors, it is now the investor’s problem, no longer the mortgage broker. It is like a game of hot potato, and after you pass the loan to another investor, it is no longer your problem. This was a factor that could have been avoided if investors would not have gotten greedy for more homeowners for more loans. Second, rating agencies could have been honest and not greedy again. Every time someone buys a bond from a rating agency, the agency gets a commission. Because of the hype from all of the purchasing housing bonds, many agencies would rate the worst bonds as AAA, the highest rating. Although most agencies denied this, saying they were “Personal Opinions”, most people say it was a “Get-Rich-Quick” scheme. Lastly, if interest rates were not so low, it would have been harder for lenders to lend as many bonds. This would have lead to a less catastrophic crash. If a bank had to pay 3% to borrow money, and inflation was roughly 2%, they would have to charge at least 5.1% to make any profit. With higher rates to charge, many more people would not have been able to purchase loans, making the downturn