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Causes Of The Financial Crisis Of 2007-2008

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The U.S. financial crisis of 2007–2008 is considered one of the worst financial crises since the Great Depression of the 1930s. It almost made large financial institutions collapse and stock markets declined in a dramatic way around the world. The consumer wealth declined in trillions of U.S. dollars and played a significant part in the failure of key businesses and declines in economic activities. All these factors led to the 2007–2008 global recession and played a major role in contributing to the European sovereign-debt crisis.

The easy availability of credit in U.S, Russian debt crises and Asian financial crises of late 90’s showed the way to a housing construction boom in the USA. The relaxed lending rules and increasing property prices along with the increase in foreign funds added to generate this real estate bubble.

There was an increase in housing and credit, mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which was due to the house prices and mortgages. The investors around the world invested in the U.S. housing market. The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily. In result of this the home prices started decreasing rapidly and it caused foreclosures. The foreclosure issue began in late 2006 in the U.S. and continued to drain wealth from consumers and the banking institutions. It affected the other loan types and default on those loans increased enormously and the crisis got bigger and started to affect other parts of the economy.

The basic cause of the financial crises falls collectively on debt and mortgage-backed assets. Since the Great Depression the property prices in the U.S. were always steadily incr...

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...t want more CDOs on their balance sheet in return. This panic caused the Crisis.

These crises brought the global financial system to the point of collapse. The U.S. Federal Reserve took steps to expand money supplies. The U.S. gave nearly 1 trillion dollars worth of two stimulus packages in 2008/2009. The reaction of the Federal Reserve was immediate. In the last quarter of 2008, the central banks purchased 2.5 trillion US dollars of debt and private assets from banks. This was the largest liquidity insertion into the credit market, and in the history of this world it was the largest monetary policy action. The U.S. and European governments raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. Governments also bailed out lots of firms by taking over their large financial obligations.
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