The Financial Crisis of Written By:
Sub-prime mortgage crisis GAO Historical Data Based on the assumption that sub-prime lending precipitated the crisis, some[ who? Securities and Exchange Commission SEC to relax the net capital rulewhich encouraged the largest five investment banks to dramatically increase their financial leverage and aggressively expand their issuance of mortgage-backed securities.
Mortgage underwriting standards declined gradually during the boom period, particularly from to The quality of loans originated also worsened gradually during that period.
The combination of declining risk premia and credit standards is common to boom and bust credit cycles. In other words, standards gradually declined but defaults suddenly jumped.
Furthermore, the authors argued that the trend in worsening loan quality was harder to detect with rising housing prices, as more refinancing options were available, keeping the default rate lower.
A low down payment means that a home represents a highly leveraged investment for the homeowner, with little equity relative to debt. In such circumstances, only small declines in the value of the home result in negative equityCauses of global recession 2008 situation in which the value of the home is less than the mortgage amount owed.
Homeowners with negative equity have less financial incentive to stay in the home. Such strategic defaults were heavily concentrated in markets with the highest price declines.
An estimatedstrategic defaults occurred nationwide duringmore than double the total in Such loans were written into mind-numbingly detailed contracts and then swapped for more expensive loan products on the day of closing.
This created negative amortizationwhich the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry Brown for "Unfair Business Practices" and "False Advertising" was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages ARMs that allowed homeowners to make interest-only payments.
Countrywide, according to Republican Lawmakers, had involved itself in making low-cost loans to politicians, for purposes of gaining political favors. Risk-taking behavior[ edit ] In a June speech, U. President Barack Obama argued that a "culture of irresponsibility"  was an important cause of the crisis.
He criticized executive compensation that "rewarded recklessness rather than responsibility" and Americans who bought homes "without accepting the responsibilities.
And a growing economy bred complacency. Formulas for calculating aggregate risk were based on the gaussian copula which wrongly assumed that individual components of mortgages were independent. In fact the credit-worthiness of almost every new subprime mortgage was highly correlated with that of any other, due to linkages through consumer spending levels which fell sharply when property values began to fall during the initial wave of mortgage defaults.
Using technical terms, these firms were highly leveraged i. A key to a stable financial system is that firms have the financial capacity to support their commitments. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.
They borrowed to improve their standards of living, buying bigger houses than they could afford and using those houses as piggy banks. Research by Raghuram Rajan indicated that: Faced with little regulatory restraint, banks overdosed on risky loans.
To counter the Stock Market Crash and subsequent economic slowdown, the Federal Reserve eased credit availability and drove interest rates down to lows not seen in many decades. These low interest rates facilitated the growth of debt at all levels of the economy, chief among them private debt to purchase more expensive housing.
High levels of debt have long been recognized as a causative factor for recessions. This second default in turn can lead to still further defaults through a domino effect.The Great Recession was a period of general economic decline observed in world markets during the late s and early s.
The scale and timing of the recession varied from country to country. In terms of overall impact, the International Monetary Fund concluded that it was the worst global recession since the Great Depression in the s.
The causes of the recession largely originated in. May 14, · Measured by its impact on global economic output, the recession that had engulfed the world by the end of figured to be sharper than any other since the Great Depression. The two periods of hard times had little else in common, however; the Depression started in the manufacturing sector, while the current crisis had its origins in the.
The financial crisis of may seem unique, but it was only the latest in a series of eerily similar crises that have struck the U.S. economy since the country was founded more than years. The truth is, we are going through the most severe global financial crisis since the days of Great Depression.
Originated in USA, economic recession is affecting all the major players of world economy. The world recession of to was caused ultimately by global imbalances in trade and capital flows, globalization of financial markets, the trend towards a new finance-led capitalism and the related pattern of income distribution.
Jan 14, · Canada entered recession at the end of , and the outlook for is likely to be worse, with the economy contracting by an estimated % to 2% for the year.