Global Financial Crisis - Global Financial Crisis The...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Global Financial Crisis The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. In the aftermath of NASDAQ bubble and September 11, the Federal Reserve lowered the interest rate from 6.5% to 1% between 2000 and 2003 in order to stimulate the economy. Besides, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oil-producing countries. The combination of easy credit and money inflow contributed to the United States housing bubble. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. The U.S. Subprime lending (credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers) expanded dramatically between 2004 and 2006. The Fed raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate more expensive for homeowners and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing becoming more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and the ARM interest rates increased even more. The US housing and financial assets dramatically declined in value after the housing bubble burst: in September
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Global Financial Crisis - Global Financial Crisis The...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online