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What Were The Cause Of The Financial Crisis Of 2008 And 2009”

1126 words - 5 pages

Rafael Puerari
FIN 358
Professor Kingshott
Midterm

“What were the cause of the financial crisis of 2008 and 2009”

The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking. Additionally, expert analysis on the 2008 financial crisis asserts that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed ...view middle of the document...

The role of poor housing policies in disgruntling the economy was by altering interest rates and asset prices. The outcome of changes in interest rates were wrong investments and diverted funds that can’t be lend out to individuals. 
The 2008 financial crisis led to numerous mortgage foreclosure rates. Many mortgage companies filed for bankruptcy and this because many of them were running under drastic losses. Financial institutions were unable to lend money because they were operating under losses and this slowed down the economic activities. This unease led central banks to take relevant action to provide funds in order to encourage lending and also to reestablish faith in the commercial paper markets. Not only did the central banks help in relieving the crisis, the federal government was involved in helping the financial institutions by assuming major additional financial commitments. Federal government funded financial institutions dealing with mortgage purchasing and repackaging, Fannie Mae and Freddie Mac were declared bankrupt. Alongside the two government funded institutions that were declared bankrupt, several other main investment banks, insurance companies, and commercial banks tied to the real-estate lending were declared bankrupt. Prices and trading degree in mortgage-backed securities grew considerably. 
Inflation is one of the key concerns for the financial crisis. The effect of inflation can affect the behavior of consumers and businesses, both are under pressure and that makes it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. The quick stock price drop and the severe credit crunch resulted in a sudden dramatic decline of stock prices across a significant cross-section of a stock market, and a significant loss of wealth. For example in late 2001, fears of global terror attacks after 9/11 shook an already struggling US economy, one that was just beginning to come out of the recession and interrupt the stock market crashes driving dramatic price declines and the loss of a shared stock market.
The subprime crisis called for both conventional and unconventional methods meant to counter the financial crisis. In an agreed move, central banks of several nations chose synchronized action to provide liquidity hold up to financial institutions. The scheme was meant to redeem the interbank market.
By November 2008, the federal funds and reduction rate had been reduced to 1% and 1.75%, respectively (Angelides et...

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