Financial Crisis 2008-2009



Financial Crisis 2008-2009

Introduction

The collapse of American economy came as a devastating shock to the entire world. America was never a lonely sufferer in its problems and crises. Thus, the world suffered the brunt of the collapse of its economy in 2008, on an equivalent basis. The Loan Mortgage scandal played havoc with the economy, while resulting in great many economic, social and inflationary pressures for the entire world. The consequences of the crises have still not subsided, despite the concerted efforts of the world as a whole. The collapse was owed to excessive borrowing patterns in addition to faulty financial modeling which was due to a false perception that housing prices would only be high. This pattern and mistrust between different sectors of the American economy produced a great deal of financial turmoil and upheaval across the world, while its shook the economy in the most evident forms. In the early 2000s, interest rates on mortgaged properties were substantially low. This served as an incentive for more people to buy a house on their own, thus, fulfilling their “dream” of personal property ownership. Hence, people started borrowing more money in lieu of low interest rates and monthly payments. Housing prices increased drastically, thus, encouraging the banks (lenders) to think of homes as profitable collaterals. They participated to a large extent. However, a crisis deepened in the economy when this situation gained momentum.

The crisis of 2008 and its affect on financial market

The mortgage market became a huge source of toxic assets. The bankers bundled good debt with bad debt and sold the securities to the world. The rating agencies, Moody's, Standard & Poor's (S&P) and Fitch, attached triple A ratings; as if there was zero credit risk (They had been intimately involved in the creation of the securities, e.g. the composition of pools of loans.). In retrospect, the ratings look like a deliberate fabrication (Yet, the conflict of interest was always in plain view.). At first, debt investors had faith that the likelihood of losses was low. Only after disaster struck did they find out the truth. Hundreds of billions of triple A rated mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) proved anything but bulletproof. A big chunk of the subprime debt ended up in Western Europe and in oil-exporting countries, causing massive write-offs (Howard, 2010).

In October 1939, Winston Churchill said that “Russia is a riddle, wrapped in a mystery, inside an enigma.” Perhaps, that quote can be profitably recycled as we analyze the details of the contemporary world economic crisis, a breakdown of a magnitude not seen since the Great Depression. The crisis, still in progress, has been blamed on so many causes that it helps to list them alphabetically: accounting rules, bankers' bonuses, bank leverage, Basel II, business education, business ethics, consumer protection, corporate governance, credit rating agencies, deposit insurance, financial concentration, financial engineering, financial globalization, financial illiteracy, government bailouts, hedge funds, lobbying and influence peddling, macro-economic imbalances, misaligned exchange rates, modern finance, monetary ...