FINANCIAL CRISIS

The factors leading to the 2007/2008 financial crisis in the U.K



The factors leading to the 2007/2008 financial crisis in the U.K

Research Brief

This paper discusses the factors responsible for financial crisis in U.K in 2007/2008. The boom and bust in the housing market precipitated serious strains in financial markets. These strains resulted in the onset of the financial crisis in August 2007 with the collapse of the asset-backed commercial paper market.

The current global financial crisis, are unlike those that arose in the 90 emerging countries (Mexico, East Asia, Russia), originated in the United Kingdom. The crisis started in subprime mortgages calls, and broke out August 9, 2007, although its causes arising from previous years. These mortgages are a special kind aimed at customers with poor credit, so they have a higher risk of default to the other credits (Cecchetti, 2008, pp.78-82).

Recall that following the bursting of the Internet bubble in 2001, many investors had turned to the properties, traditionally seen as safer investments. In the U.K. case, in addition, the purchase and sale of speculative housing was accompanied by high leverage, i.e. under mortgage with the sale were canceled to return to buy another home with a new mortgage, when both operations are not financed through a mortgage bridge. The market brought great benefits to investors, and contributed to a rise in prices of real estate, and therefore the debt. Thus, we began to create a housing bubble in the U.K in the early years of this decade. The scene begins to change by 2004, when the Fed starts raising rates to control inflation. A rate of 1% in 2004 passed to a rate of over 5% in 2006.

By 2005, housing prices in some regions of the U.K begin to fall and the housing bubble begins to deflate (without actually still explode). This increases the default rate, and the level of executions, and not just subprime mortgages. The crisis would be a typical of those read in textbooks: when the economy is good, investors are willing to accept some risk.  But when they begin to be evidence that the economy is slowing down, they realize they have too much risk in their portfolios, at which point they start to dump their riskiest assets, initiating the crisis (Capuano & Medeiros, 2009, pp.9-162).

For 2006, the housing crisis had reached the bag, and the index of the construction fell 40% this year. By mid 2007, the market began to realize that major banks and large investment funds were committed to their assets in such subprime mortgages. Although the subprime mortgages were in packages called CDOs (collateralized debt obligations for) that allegedly reduced the risk by being diversified and backed by physical assets, the market began to enter into mistrust during the first half of this year (Calomiris, 2008, pp.120-126).

Research Aims and Objectives

Aim of the Study

The financial papers have been reporting the doom and gloom the global economy is facing due to the financial crisis. Suddenly subprime crisis seems to be taking the blame for all the major ...