financial crisis of 2008 also referred to as the “global financial crisis”
might have been the worst financial crisis since the 1930s, the Great
Depression. Subprime lending means giving loans to people who might face
troubles in the future making payments on timeBP1 .
This can be due to a number of reasons ranging from medical issues, divorce,
and unemployment. 1 In addition to the subprime market crashing, to make
matters worse Lehman Brothers, a major investment bank, closed its doorsBP2 .
The purpose of this paper is to explore some of the causes of the financial
crisis of 2008 and also the consequences it had not only on the United States
but also the global economy. 2
there are many different reasons why the financial crisis of 2008 occurred, there
are three reasons that are highlighted in this paper. A more obvious reason and
one that was the immediate cause of the crisis was the fact that the bubble for
US housing burst into flames and caused increases in already high subprime
mortgages. 3 From the years 2000 to 2003, federal fund rates were lowered by
These low interest rates isBP4
what encouraged more borrowing and was another factor in the crisis.
first main reason must do with subprime lending. This was a time where the
standards set by banks for credit lending was extremely relaxed. This allowed
for people who would not normally qualify because of their financial situation
to borrow more money and take on riskier mortgages. 56 The second reason
was that there were easier credit conditions. For example, some researchers
think that this happened to dampen the attacks of September 11th.
Studies from other countries have also showed that rapid credit growth played a
crucial part in this crisis. The final reason, and the one of the most important,
was the inaccurate predictionBP5
of risk. Looking at history over the
previous 50 years, everybody including investors underestimated the chances of
failed housing prices. 78
There are many
consequences to what happen in the financial crisis of 2008. This did only
affect the United States, this effected the world. I would like to discuss the
outcomes this event had on financial markets, including the US stock and other
global financial institutions such as European banks. Although similar, I would
then go on to discuss the effects of the crisis by looking deeper into the
overall global outcomes. This will include information about the 2008 economics
and economic projections. To conclude, the paper would also include how the
government responded to the event in short-term fashion as well as long-term
specifically subprime is defined by customers with a credit history too risky
for Fannie Mae or Freddie Mac to accept.
went bankrupt because it help too many subprime mortgages and not enough
capital to cover the losses of such.
correctly, investors redefined what an acceptable risk was.