What Caused The 2008 Financial Crisis

With the last financial crisis being the worst recession since the one the world faced off in the 1930’s before World War 2, society has learned a lot on how to avoid these calamities. Getting to the root of the problem starts with a few catalysts that sparked the downfall of the global economy. One of the causes would be the real estate bubble housing prices. Another cause would be the banks meaning both commercial and Investment. And lastly we had accumulated debts that became unpayable when houses were being offered to people so simply without considering their credit or current financial assets. Prior to the financial crisis the price in houses were skyrocketing. The prices were increasing over 40% over the years leading up

Many of these countries were investing more than saving. Most of the investments these nations made were loans from the rest of the world. Their trades were making more profits than losses and their account deficits were up to date. At the time it was a tempting offer to borrow from rapidly growing countries since they will be richer in the future by loaning. The developing Asian countries would borrow in order to build new structures. The financial crises throughout the 90’s were experienced by a number of countries such as; Mexico in 1994, East and South Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina in 2002 that led to a decrease in loaning from the rest of the rest of the world. This made the currencies of suffering nations lose value as well as their stock markets and they experienced mini recessions. When their disaster was over these nations started to save and ceased borrowing foreign loans. These nations instead became the biggest lenders to the rest of the world and the United States became a huge client of them. Bernanke would argue that this reversal made the markets in fast developing nations become galvanized and become abundant with savings while searching for good

In 2006 the prices in houses rose and lending criteria became more docile, which enabled more people to borrow houses thus increasing the prices further. Since the interest rates were low the Federal Reserve raised its funds by charging overnight loans between banks. The Federal Reserve raised the interest rate from 1.25 to 5.3% owed to the fact that they were worried the inflation might increase. The Federal Reserve did this to combat inflation because higher interest rates heal the housing market since borrowing becomes more expensive thus giving the public initiative to purchase less homes. Once borrowers faced mortgages that were once a bargain becoming much expensive due to higher rates made the effect on housing prices more dangerous. Combining assets can help diversify someone’s portfolio and makes them prone to less risk of net losses. In the case of the house market putting only one subprime mortgage is risky but when you put several together and only a few of them default then your losses wouldn’t have been as huge. Going back to the subprime crisis, the mortgages were far more risky and investors had no idea about it. The banks were the last ones to bear the consequences as they sold them off, which is