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Everything You Need to Know about the 2007-2008 Financial Crisis

The 2007-2008 global financial crisis also known as the great recession is the world’s worst financial downturn for years after the great depression in the 19^th century. The great recession or the subprime mortgage crisis was an American-based financial crisis that emerged from the housing sector, affecting the entire world. The crisis threatened to shut down the global financial system as third world countries felt the impact as well. The failure of the housing market in the united states of America took a toll on financial lending institutions, including banks, insurance companies, big investment companies, and microfinance due to the increased borrowing. Several commercial banks across the world were affected heavily as they mitigated their losses by depending on government support to avoid going bankrupt. The crisis was followed by people losing their sources of income and jobs leading to poor living standards in America and across the world.

Below are the things you need to know about the 2007-2008 financial crisis:

1. The American Housing Market Led To People Borrowing More Than What They Afford

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The housing market in America was the origin of the 2007-2008 financial crisis that led to the great recession affecting the global financial system. The crisis was traced to the housing market bubble that began forming in the base year 2007. The bubble started building up in the housing sector when commercial banks and other financial institutions began lending money to house owners at a lower interest rate. The lower rates attracted people to borrow money with the dream of owning a house in America. However, the problem was that most of the borrowers did not have a good credit record, which lenders overlooked. Eventually, borrowers were unable to pay back the loans leading to high default rates in a short period.

Learn more about Top 10 Facts about The Financial Crisis of 2007–08 here

2. The Lenders’ Response To Defaulted Loans To Recover The Lost Money

Financial institutions, lenders, and commercial banks attempted to recover the money lost in the housing market by creating mortgage-backed securities. They hoped that giving mortgages with less risk would be the solution to avoid loan defaulting. The loans were backed with credit default swaps that would ensure that borrowers did not borrow what they could not afford to pay back. However, the clever idea to pass the risks to the borrowers did not work for the lenders. Lenders failed to do better underwriting and therefore the mortgage-backed securities did not reflect the actual value leading to the loss of more money in the housing market.

3. Bursting of the Bubble Accumulated For Years Due To Low Rates

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The need for the people of America to own houses pushed them into borrowing money from lenders who offered at lower rates. Reckless lending by financial institutions created an overload of loans in the market. Unfortunately, these loans were not properly followed by the lenders which led to easy defaulting by lenders. A high rate of defaulting plunged banks and lenders into a financial crisis. A lot of money was lost in the market and was never traced back to the banks and lenders leading to a temporal global financial crisis in 2007 and 2008 which continued for some years.

4. Banks’ Contributed To The Crisis Through Excessive Lending At Low Interest Rates

Ordinarily, banks make profits when they lend loans and earn interest upon payment of these loans. However, there are other ways through which banks earn money from loans which are called securitization of loans. Banks give loans that are put together forming a package that would attract more interest, called a mortgage-backed security. The problem was when the MBS were further divided into smaller packages that had different credit ratings and earnings. The confusion came when different banks started interchanging the credit ratings on these small packages leading to misspellings and the spreading of wrong information. The lack of information in the market led to a continued default on loans causing the bubble to burst.

Check out: Top 10 Facts about The Credit Crisis of 1772    

5. Non-Complicated Credit Conditions And  Processes Encouraged Borrowing

The national bank and banks in the United States of America played a major role in the starting of the financial crisis that almost crippled the financial system in the world. The lowering of interest rates in the early 2000s contributed largely to the crisis when rates dropped massively from more than 6 percent to 1 percent. The reduction was aimed to enable people to access money to invest and inject money into the economy to prevent a possible deflation. However, people saw an opportunity to borrow massively to buy houses which led to the economic crisis in America and the world.

6. Predatory Lending By Law-Breaking Lending Firms Flooded the Market with Liquid Money

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One reason and cause of the financial crisis includes the unnecessary lending of money to American people by lenders, banks, and financial institutions. These lenders enticed the clients to borrow from the after offering very low-interest rates on bank loans and less complicated procedures to acquire the same loans. By the end of 2007, several homeowners had borrowed unimaginable amounts of money from lenders and used the funds to purchase their dream homes. Some firms such as Countrywide Financial sued for engaging in unfair business practices that attracted people to borrow money as loans. However, these malpractices led to a global financial crisis that would be remembered for years to come.

7. Fannie Mae and Freddie Mac’s Contributed to the Crisis

Some government institutions such as Fannie Mae and Freddie Mac largely contributed to the crisis. These firms had been given the responsibility to make housing affordable to Americans by providing liquidity to lenders and financial institutions. However, after the banks and lenders ventured into over lending, they led to a subprime crisis creating a shortage of funds in the financial sector. The organizations also played a role in creating and selling collateralized mortgage obligations which were later on downgraded leading to loss of money.

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8. The Crisis Spreading Globally Paralyzing Financial Systems

The financial crisis spread across the world despite starting in the United States of America. The U.S. is considered the best place to invest and therefore several nations and investors had used their money to gain profit in the American market. Therefore a financial crisis emerging from America is likely to affect every country that has ties with the U.S. The 2007-2008 financial crisis was an example that led to several countries’ markets declining. Furthermore, several countries across the world use the American dollar as their currency and primary source for their national reserves. The crisis, therefore, took a toll on such countries forcing them to venture into different currencies.

9. American Government Intervention And Solution To The Financial Crisis

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As the crisis continued, the government of the United States of America made a serious intervention to mitigate the financial crisis. The government used congress to approve some funds to inject into the markets to increase liquidity in the markets. The Bailout Bill approved by congress in 2008 helped to provide more than 700 billion dollars to the American market to enable banks to access funds. The government also applied the Asset Relief Program to provide more funds to inject into the economy. Ultimately, the government managed to inject money into the market through the above methods and buy equity in commercial banks.

Also see: Top 10 Facts about The Asian Crisis of 1997

10. Prior Prediction Of The Crisis By Expert Economists That Was Ignored

The 2007-2008 global financial crisis is considered the most devastating in history after the great depression in 1929. This recent global crisis was however predictable by some of the experienced economists in the world. However, despite the early warnings, several economists and institutions failed to recognize the danger from afar. An article published in the New York Times revealed that most economists did not have enough knowledge to determine the future economic conditions in the world. Nouriel Roubini was the only reported economist that predicted and reported on the dangers of a possible financial crisis two years before the occurrence. However, Roubini was ridiculed and rejected by other economists for making such predictions.

The 2007-2008 global financial crisis will be remembered for many years because of the effects it had on the global financial system. The crisis began in America when banks and lending institutions lowered interest rates attracting people to borrow money to buy houses. Several borrowers accessed the funds that they could not pay back leading to a high rate of defaulting that created the global financial crisis.