Causes Of The 2008 Financial Crisis

The precise causes of the 2008 financial crisis is still a debated topic. However, back in the 2009 article “Financial Crisis American Style” by Barry Bosworth and Aaron Flaaen, it was said that “much of the recent analysis has emphasized the role of developments within the U.S. housing and financial markets” (Bosworth and Flaaen 2009, 147). The U.S. housing bubble has continued to be emphasized as one of the main causes of the financial crisis: According to Economics of Social Issues, which was published in 2016, “Most experts agree that problem in the home real estate market sparked much of the turmoil that became the financial crisis” (Register and Grimes 2016, 336). The primary cause of the financial crisis of 2008 was the U.S. housing

In the years leading to the crisis, there were many subprime mortgages, which are loans “granted to individuals with poor credit histories who do not qualify for a conventional mortgage,” and these subprime mortgages caused an influx of “this new demographic group into the housing market [which] stimulated demand and helped fuel the run-up in housing prices” (Register and Grimes 2016, 337). The majority of those subprime mortgages were structured as adjustable rate mortgages, which are loans “whereby the interest rate changes over time based on prevailing market conditions. If market interest rates rise, so too will the interest charges on an ARM” (Register and Grimes 2016, 337-338). Consistently low interest rates seem to have made people overconfident in the persistence of low interest rates. So, while everyone enjoyed low interest rates at first, when interest rates began increasing dramatically, “more people began defaulting on their loans because they could no longer afford the payment” (Register and Grimes 2016, 338). If people had not been overconfident that interest rates would remain low, they perhaps would have exercised more caution in choosing subprime mortgages and the collapse of the housing market could have been