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Primary Causes Of The 2008 Financial Crisis

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Opinions vary on what caused the 2008 financial crisis in the U.S. Some trace the origins to the housing bubble that arose earlier in the decade while others point to the deregulation in the financial industry as the driving force. In the end, it was a combination of events and issues, a 'perfect storm' as some have called it, something that was brewing for years and ultimately reached its breaking point.
Primary Causes
New government policies on homeownership - the stage was set for the financial crisis several years earlier with the adoption of new "government policies" related to homeownership. Rules for getting a mortgage were loosened under political pressure to make homeownership available even more borrowers than usual. The net affect …show more content…

Most of these mortgages had adjustable rates, meaning that the interest rate on the loan was set to the market interest rates. In effect, many new home buyers entered the market with initial mortgage payments that they could afford but with the 'tacit' understanding that buyers likely could not afford their loans if, and when, rates changed. In fact, a high percentage of the subprime mortgages at the time, for example over 90% in 2006, were adjustable rate mortgages. (Zandi, 2009)
Moving away from traditional lending techniques - traditionally, banks provided mortgages to homebuyers and would keep them on their 'own books'. Because they held onto their loans, stringent guidelines were in place to ensure quality loans were being written. There was obviously an incentive for banks to only provide secure loans since if something went wrong they would be ultimately accountable and potentially lose money.
A new phenomenon arose where banks and mortgage lenders would provide loans to a customer and then quickly resell them to investors in the form of securities on the secondary market (i.e. Wall Street). Hedge funds and banks created mortgage-backed securities and insurance companies covered them with credit default …show more content…

Federal Reserve pursued a policy of drastically sinking interest rates. Rising housing prices combined with the low rates prompted many in the country to use their homes as ATMs. Homeowners were allowed to pay off fixed interest mortgages early and refinance without penalty into cheaper loans. As well, many homeowners refinanced their homes in order to purchase more real estate, automobiles, and high-end goods (Boats, ATVs, etc.). The spending spree, fueled by an over-inflated dollar, pumped up the economy both in the US and abroad.
Mortgage brokers - the ongoing demand for more and more mortgages led to the increasing use of mortgage brokers. Mortgage brokers were the mediators between banks and the mortgage borrower. They earned income from each of the financial deals between the banks and borrowers. Brokers benefitted with more mortgage deals on the market. Incentives received by the brokers induced high-risk lending activities as well.
Greed - the more risk investments that bankers sold, the higher bonuses they received. They were not held accountable for losses, causing them to push for even larger

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