The Causes Of The 2008 Financial Crisis

The US economy experienced the worst economic crisis in the last 80 years in 2008. The crisis has witnessed a depression in the financial markets that saw people count losses in terms of jobs and assets. The crisis has been attributed to a number of issues ranging from poor regulation of the financial and real estate markets to drive by the private players to make quick profits. Other causes examined below include the Reserve Bank low interest rates and lack of general financial prudence among major players in the industry. The effect of the crisis was far reaching and is still felt six years later. It led to massive loss of jobs and assets as many companies became insolvent.
The main cause of the financial crisis was excessive creation of

This involves the use of subsidiaries to reach a wider customer base even though the parent company reserves the right to alter the terms of operation. The derivatives were not regulated by the government and so had the risk of loss. For instance, the largest insurer AIG almost went under due to deregulation of its derivatives. It conducted its insurance business through subsidiaries, pledging to pay indemnity and nor reserving any finances for the possible crisis. When the investors in the CDSs could not pay the agreed quarterly premiums due to fall in the value of the CDSs, AIG underwent a crisis as it struggled to pay the indemnity. The company became insolvent and had to be bailed out by the government. If there was proper regulation in place the government could have made it mandatory that a reserve fund be established to protect the insurers from any

Just before 2008 the FRB charged an interest rate of 1% on all its lending. This meant that the private banks could borrow the money and lend it very profitable rates. This encouraged a lot of mortgages as private players in the financial market readily gave out money with immovable property being pledged as security. The results were dire when the borrowers could not pay off the loans and the prices of securities dropped significantly. The crisis was severe not only to the American economy but also to the whole world.
The effects of the crisis were devastating. First most financial institutions and insurers became bankrupt. For instance, the largest insurer AIG became insolvent all to the disbelief of many. The choice to undertake its business through derivatives failed when the investors in its CDSs could not pay up the quarterly premiums as agreed. The fact the derivatives were not regulated created loopholes and little protection for the parent company. When companies become insolvent, it has a ripple effect in the