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Factors That Influenced The Global Financial Crisis Of 2008

631 words - 3 pages

Since the years of the great depression in the 1930s, the global financial crisis of 2008 is arguably the worst to have hit the world. The crisis began with the escalation of prices in the property market creating a liquidity crisis. It had massive consequences in varying sectors of the economy. The financial, property and mortgage sectors were hit hard by the crisis. Large financial institutions collapsed while stock markets experienced downturns. The period was characterized by government bailout stimulus packages to collapsed institutions and the financially ailing sectors of the economy. Various arguments have been mooted as the causes that led to the escalation of the crisis that threatened to tear down the global economy. This paper looks at some of these factors and their influences on the crisis.
The mortgage originators could in fact be considered as the original creators or stimulators of the chain reaction and complex interplay that led to the crisis. Privatization of the government chartered and sponsored mortgage enterprises led to the creation of a liquid secondary market for mortgages, doing away with the fixed rate mortgage, which they held on their books of accounts. Financial institutions were able to trade the mortgages in the secondary market freeing up funds. They could therefore issue more mortgages from funds freed. As a result, massive gains were made in the industry positively increasing the rates of property ownership in the United States.
The government backed Fannie Mae and Freddie Mac monopolized the secondary market for mortgages. These companies were given the government sponsored enterprise (GSE) status. Under this, the Federal Reserve would exempt them from both local and state taxes. In addition, the Federal Reserve was required to purchase $2.25 billion worth of securities in the companies to promote their liquidity. They failed to recognize the risks posed to the world’s financial system. In addition, lowering of federal funds rate by the...

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