Credit Bubble The bursting of the housing bubble led to enormous losses, and homeowners suffered some of those losses, but in agreement with economist Jeff Holt, the financial system, and financial intermediaries incurred most of them. Large losses were mostly experienced by financial intermediaries like mortgage lenders, investment banks, foreign investors (mainly banks and governments) who had invested in mortgage backed securities, and insurance companies who had sold credit default swaps, such as mortgage-backed securities. The bursting of any housing bubble, of course, would be expected to have a negative effect on the economy, because home construction is an important economic activity, and the decline in home construction would reduce GDP; and because the decrease in home prices would also reduce household consumption due to the wealth effect. But the bursting of this housing bubble caused more severe and widespread harm than would be predicted from just these two reasons (Holt, 2090). As mentioned previously, most of the losses were suffered by the financial …show more content…
As a result of the credit crisis, real investment spending decreased by 32 percent from the third quarter of 2007 to the second quarter of 2009 (Holt, 2009). The end of 2007 confirmed the conventional view that the initial financial problems were concentrated in institutions exposed to mortgage securitization. Unfortunately the crisis channeled to other sectors because of the contraction in credit, of banks and other financial intermediaries. It will be analyzed above, how the entities involved in the origin of the crisis mentions above responded during the housing bubble creating a further contraction of credit