Introduction The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector.
By examining the nation’s economic struggles during this time period (2007-2009), it will conclude that the current macroeconomic situation deals with unemployment, which is a direct result of the recession. It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates.
A great panic was caused in the Stock Market, resulting in job losses and companies going out of business. Mortgage was unable to be paid, thus causing foreclosure on many houses. The foreclosure crisis has not only caused the banking industry to lose Trillions of dollars; it has also played a role in decreasing home value on an international level. Despite the Obama Administration and Congress having taken many steps to stabilize the economy, like the Emergency Economic Stabilization Act of 2008, Wall Street Reform and the Consumer Protection Act of 2009, America has not seen many concrete results. But we must not lose hope.
The financial crisis of 2008, which has also been referred to as The Great Recession and the Global Financial Crisis of 2008, began with the downfall in the housing market in the United States. Thee were many factors that played into this housing market turn for the worst during this time. Some of these factors included: subprime loans, the housing bubble that peaked in 2005-2006, government policy and regulation, and faulty mortgages. This housing market turn affected more than just the housing market with all the personal and government additions involved. In turn the unemployment rate went down with this event, evictions and foreclosures of houses sky rocketed, faulty and risky loans were also issued that created problems in the banking system.
However, with or without human judgment, financial models of credit risk are subject to manipulation, both legally and fraudulently. The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these case however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
It was the eventual overheating of the housing market bubble that led to the financial crisis of 2008. The crisis ultimately led to a substantial rise in mortgage defaults and home foreclosures as well as large losses for both banks and shadow banks that owned mortgage-backed securities and higher volatility in the stock market (Mankiw 349). Mankiw provides an adequate overall analysis of the 2008 financial crisis as it occurred; however, Mankiw leaves out many key points in his case study in reference to factors that contributed to the financial crisis and its ultimate repercussions not only on the United States economy, but on the global economy as well. Mankiw correctly diagnosis many of the factors that led to the 2008 financial crisis and it is appropriate to address them and further elaborate the effects they had on the crisis. The first of these issues is the financial innovation that came to be known as securitization.
With the rapid retard of these industries, the unemployment rate developed into a full grown national crisis to finally result in individuals lacking the ability to pay their bills and primarily defaulting on their monthly mortgages (which led to the meltdown of the financial & banking industry). The mass media and general public associated most of the responsibility of the financial meltdown of the banking industry with the predatory lenders, whom allowed couples and individuals to purchase homes and properties they knowingly could not afford. These purchases were tolerated simply if these people were to agree to an adjustable mortgage rate. The financial crisis facing the banking industry was a direct result of hiking interest rates by banks on adjustable mortgages. These rates increased due to many of the banks experiencing the effects of the growing economic delay, which principally led to the forfeit of many monthly home payments.
It started not only because of the crash of the stock market, but also there were so many reasons that led to the eruption of the depression. The depression is called the “great depression” not the depression or the American depression because it later caused a great change in many countries politically and economically. One of the reasons of the depression was the crash of the stock market in 1929. Investors lost for about 40$ billion dollars in the market. Later on, some investors borrowed from the American banks so they can re-invest, and it’s said that from every 10$ only 4$ were used for investing.
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.
More specifically, the crisis has destroyed global financial systems and government budges, strike the confident and security of financial markets. It was universally recognized the worst global economic downturn since the Great Depression in the 1930s (Ciro, 2012). Before the financial crisis, the increasing food and oil prices had affected the non-producers and because of the developed economies are more integrated within the global financial systems and markets, they were the worst affected by the GFC in the short term. Developing countries were looking more optimistic in the short term as their economies were not as integrated into the global financial market system. Nevertheless, the escalated impact of the crisis did affect the real economy of developing countries especially on the export-orientated nations.