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What Are The Cause Of The 2008 Financial Crisis

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The manias, crashes, and panics are mainly caused by a financial bubble in a financial market. Throughout history various countries have suffered from huge financial crisis and due to its soundness ends in worldwide crisis in the financial system. Finance can be considered as one of the mankind’s innovations that helped savers invest their savings in financial products, and helped borrowers find their means of borrowing. The financial market made the link between borrowers and lenders which created the demand and supply of financial products. However, having the demand and supply freely float in the open free financial market, this causes prices of stocks, real estate, bonds, or currencies to inflate over its real value. This is what is called …show more content…

It almost led to the collapse of the biggest financial institutions in the world which was prevented by the bailouts from their governments. The two main bubbles in this crisis were the housing and stock prices bubbles. The bubble occurred due to several reasons and ended up a deep collapse in the USA and most of world’s financial markets. First of all, the main reason was the supply of credit to non credit worthy borrowers. The mortgage loans were given out to borrowers without looking into their creditworthiness. This resulted in high risk investments and the collapse in the end. Another reason was the inflation of the housing sector where typical American houses prices increased by 124%. Furthermore, the Fed offered low interest rate in the market which encouraged borrowing and easy credit conditions. Another reason is deregulation in the Fed regarding innovated financial products such as financial derivatives and off-balance sheet financing. In addition, financial institutions became highly leveraged due to acquiring loans for the sake of supplying the high demand in the market. One of the important causes was collateralized debt obligations insurance (CDO) for sale to investors. It is an innovated financial instrument that was publicly listed by AIG Company and its price severely inflated due to its demand. When the housing bubble collapsed and bond underwriters went bankrupt, every CDO holder asked for their collateral and they bumped in the fact that

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