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Financial Crisis Research Paper

660 words - 3 pages

The 2007 Financial Crisis is a result of two decades worth of failed economic responsibility that ranged from the housing market to business fronts. The housing market in the 1980’s- 1990’s was the start of the modern economic recession and financial crisis creating what is now know as the Housing Bubble. Economic Recession is when there is a significant decline in the economy lasting longer than a few months; while a financial crisis is defined as, when the value of multiple financial institutions and other valuable assets for said institutions decrease at a surprising rate.

The prospective cause of the 2008 Financial Crisis is the dramatic drop in the housing marker and the great risk of economic failure of major financial institutions around the world. The downturn of events began when governmental funds had to be used to bail out large investment bank Bears Stearns in March of 2008, followed by the complete failure of Lehman ...view middle of the document...

Between 1997 and 2006 the average price of an American home increased about 124% reaching its peak in 2006; with the typical house costing more than 2.9 to 4.0 times the typical household income. The Housing Bubble directly resulted in homeowners refinancing and re-mortgaging their homes at lower interest rates that would be secured by the price appreciation that they received year’s prior as a part of their bank funded loans. Typical U.S. housing pricing began to steadily decline so much so that soon after its 2006 peak the prices averaged 20% less than its previous high. Easy credit, and high faith that house values would continue to increase, helped many subprime borrowers to obtain an adjustable rate mortgage (ARM).

Easy Credit Conditions is one of the direct and main causes of the Housing Bubble of 2008. Starting in 2000 continuing through 2003 the Federal Reserve, in attempts to ease the burden put upon the American people from the 9-11 attacks by lowering the federal funds rate from 6.5% to 1.0%. Easy Credit Conditions can be defined as an ample supply of money in the banking systems across the nation making it easy for public lending to allow loans with lower interest rates; while the interest rates in which banks lends funds to be kept and maintained at the Federal Reserve until it is transferred to another bank is known as Federal Fund Rates. Though initially intended to fuel and drive along business markets across the country, it was quickly noticed that the credit that was given had been used to fuel the housing market instead. Following the United States economic downfall pressures were put onto the interest rates, that was created by the rising United States current account deficit (which lined up with the eventual peak of the Housing Bubble), the United States was then forced into having to borrow money from foreign nations.

Sub-Prime Lending also known as second chance lending was the basis for the Subprime Mortgage Crisis that was a given set of events signified parts of the financial crisis and consequent economic crisis of 2008.

Works Cited

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
http://en.wikipedia.org/wiki/Financial_crisis_of_2007–08#Easy_credit_conditions

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