subprime mortgages were major factors of the collapse of the 2007-2009 economy collapse. All of America suffered from the 2008 recession.
The Great Recession is the worst economic downturn since the Great Depression. Many people who are ignorant of economics have the tendency to blame financial institutions for the recession. Economists and writers, such as Robert D. Putnam and David Colander have adopted their own hypothesis as to why the recession occurred and have offered their solutions on how the economy is able to recover. The decline of the American economy was caused by specific aspects, such as gentrification and unemployment.
Based on this case study, it is clear that a plethora of reasons surrounding the U.S housing market led to the financial crisis, and consequently, the Great Recession of 2007. Most notable among the factors were subprime mortgage lending by mortgage lenders, poor risk management and investment choices by financial institutions and banks, and the ancillary agencies that were ready to transfer credit risk to other parties in order to make the most profit for themselves.
Subprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures. This led to the numerous failures in participating financial institutions that act as subprime or mortgage lenders. As if this was not crucial enough, all this also took a toll on investors who have played a role in facilitating subprime lending to the borrowers by buying mortgage-backed bonds. Although it has only brought visible attention in the year 2008, it started with HSBC who announced that they would be putting aside US$11 billion to cover costs due to rising losses and defaults in subprime mortgages in February 2007. Since then, major losses started to hit other financial institutions and the mortgage market started to collapse. The subprime crisis was caused by a few major factors and it involved several major parties in the US.
Although there has not been a consensus on an exact causation —due to its global nature—there has been unanimity on a number of factors. As in the case of its sister crisis (the Great Depression), many scholars acknowledge that before this cataclysm struck, the preceding economy did in fact experience a “boom” period. Most critics are also in accordance that the trigger of this crisis had to involve the subprime mortgage bubble—which collapsed in the United States—however, that alone could not represent the exact causality of this crisis. Just as in the Great Depression, there were a variety of contributing factors that resulted in this financial catastrophe.
The biggest financial issue that the United States is facing is the current recession we are in. By and large, a recession is a decline in any given country's Gross Domestic Product (GDP), or negative real economic development, for two or more consecutive quarters of a year. During a recession the economy stops rising and starts working in reverse. Instead of adding new jobs, there are jobs being lost. Instead of companies making a capital gain, suffer a loss. Consumers spend less because they have lost their jobs, and have nothing to spend. Companies are finding that their inventories are not going down and they are selling less. Therefore they are making less products, which is causing job loss across the US. The explanation is widespread and that could only mean one thing: Layoffs.
The 2008 financial crisis started long before the market crash of 2008. After the Great Depression, America enjoyed a time of “Great Moderation”(economist) named for the consistently low interest rates and steady growth of the economy following the Great Depression. Financiers took note of this and eventually started to make more and more risky investment decisions; financial firm’s profits would increase as long as low interest rates and stable economic growth continued. Financiers eventually grew blind with greed. They “claimed to have found a way to banish risk when in fact they had simply lost track of it”(economist). The financial crisis was a result of poor government regulation, lax policies and the housing bubble burst that caused homeowners to default on their mortgages.
Several things led to the 2008 Stock Market Crash, one being that there were the high subprime mortgages that were given. The Federal National Mortgage Association, better known as Fannie Mae began to focus on making home loans more accessible in 1999. By doing this, the borrowers are considered high-risk and their mortgages had unorthodox loan terms that caused higher rates and payments. This seemed to be a great idea in the beginning, but there were red flags. “Bob Prechter, founder of Elliot Wave International, consistently argued that the out-of-control mortgage market was a threat to the U.S. economy as the whole industry was dependent on ever-increasing property values.” (Kosakowski, 2008)
There are a vast amount of listed causes that lead to the 2008 economic collapse, but only a few really dealt the damage. The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens. Banks and hedge funds that invested big in sub prime mortgages are left with worthless assets as foreclosures rise. The damage reaches the top echelo...
The warrant for the financial crisis of 2007 was motivated by the subprime mortgage crisis. There was an increase in subprime lending which started in the early 1990’s and by 2007 all these loans totaled 1.3 trillion dollars which accounted for 20 to 25 percent of the u.s. .Housing market. During 2007 approximately around 6 million home owners could not meet there loan obligations. Borrowers took out loans that had a adjustable rate mortgage conjecturing they would buy a home with all debt financing then sell it in a couple of years assuming the housing prices would spiral up.The banks financed these loans using CDO’S and morgatge backed securities then selling these assets to other financial intermediaries letting the banks be the conciliator of these risky loans packaged into credit instruments.All though these loans were given out to grow and boost the economy it did the inverse.
What caused the Great Recession that lasted from December 2007 to June 2009 in the United States? The United States a country with abundance of resources from jobs, education, money and power went from one day of economic balance to the next suffering major dimensions crisis. According to the Economic Policy Institute, it all began in 2007 from the credit crisis, which resulted in an 8 trillion dollar housing bubble (n.d.). This said by Economist analysts to attributed to the collapse in the United States. Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy.