7 pages 2008 financial crisis.doc - Running Head FINANCIAL...

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Running Head: FINANCIAL CRISIS OF 2008Financial Crisis Of 2008NameInstitutionLecturerDate
FINANCIAL CRISIS OF 2008Financial Crisis Of 2008IntroductionThe 2008 financial crisis was the worst crisis that the United States had faced since the Great Depression of 1939. What made the crisis even more several was the fact that it took an international angle, with economies of traditional trading partners, especially in western Europe were also facing a recession. Therefore, the impact of the crisis became much more severe. The domino effect of the crisis saw various firms closing down, and millions being rendered homeless. Another feature was the fact that millions of people who had saved in various investments vehicles, saw these investments losing value much rapidly. Life savings in pension funds evaporated, condemning millions into a life of poverty. Hansen (2015) notes that the Federal Reserve also appeared to have been caught off-guard with no clear sense of direction. On one hand, it was trying to make sense of what was happening, while on the other hand, an angry public was demanding answers as to why it had missed the signs of the crisis in the first place. In the midst of all these, a number of monetary policies were adopted by the fed to calm down the situation and stabilize the financial markets. These included a combinationof cutting down of interest rates, as well as bailing out some of the depressed organizations. It was not until 2013 that the recession was officially declared over. However, the economy still was faced by a long and arduous journey back to health. Causes of the Financial CrisisThe 2008 financial crisis was caused by the fall in the housing sector of the
FINANCIAL CRISIS OF 2008United States. It is important to appreciate how this problem started so as to see where the financial sector eventually found itself in the beginning of 2008. Ordinarily, the arrangement for a mortgage is that one approaches a lender for a loan, and the house funded is held by the lender a security. In this way, the lender is covered in the event of a default. Securities were also fashioned from the mortgages and sold in the stock market. Hence, investors could make money through a rise in prices, and their investments were safe (Amadeo, 2017). This was referred to as mortgage backed securities (MBS). Additional safeguards were inbuilt in the process of securing mortgages and this includedrequirement that the borrower pays a down payment, normally of between 3 and 20 percent, or gives a private mortgage insurance to insure the expected payments (Thakor, 2015). Then the lender does due diligence, which involved verifying employment status and income to ensure that the borrower was in a position to meet repayment requirements(Thakor, 2015). The structure of the mortgages therefore meant that default rates were low. Incidentally, a huge number of citizens were locked out of home ownership because they could neither afford down payment nor show proof of regular income sufficient to cover mortgage repayments (Amadeo, 2017).

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