Causes of Economic Crisis of 2008 and its resulting Recession
The economic crisis of 2008 which began in the United States had great impact in the global economy. The economic crisis began slowly and grew into global economic crisis. It has affected the stock markets to the extent of stopping operations. In the US it is an issue which has been used as a campaign tool for presidential candidates to request for votes during their campaigns. Due to the crisis many US citizens have felt its impact and even lost their jobs. The crisis began with the United States housing market and gradually resulted ...view middle of the document...
Between the year 1991 and 2007 when the house prices decreased to correct the imbalances, it had a great impact on the consumers spending in which individuals could not remortgage to get the additional capital for spending. This as a result had impact on the economy as consumers could no longer spend as they used to do before.
Subprime Mortgage Burst
Prior to the 2008 economic crisis, there was no regulation of the subprime mortgage. This made mortgage industries to sell their mortgages to buyers without taking into account whether they could be able to pay back. As per the global economic research conducted in 2009, it was approximated that the value of the USA subprime mortgages was at $1.3 trillion by March 2007. This was in spite of the fact that the value of the outstanding first-lien subprime mortgages was above 7.5 million. From the financial results of between 2004 and 2006, it indicated that subprime mortgages increased considerably (Soros, 2008). A greater percentage of the subprime mortgages resulted in huge foreclosures, and therefore it greatly affected the independent mortgage brokers and institutions which were not outlined in the Community Reinvestment Act (CRA). Therefore, it was not directly affected by the slow growth or even began to affect the consumer spending and investment. This eventually resulted in economic crisis which affected the US and the rest of the world.
Low Interest Rate
According to economists, they argued that the monetary authorities in the United States had adjusted their interest rates at extraordinary levels. This led to a debt-finance consumption boom which contributed greatly in making housing bubble better. Similarly, there are some economists who claimed that the US interest rates remained very low for a long period of time and even stagnated at just 1% between the year 2003 and 2004, and this led to the economic crisis. Economists such as Verick and Islam, in their report, criticized the US monetary policy since it did not manage to deal with the overvalued asset bubble, and as a result it led into instant growth in the subprime mortgages.
The high subprime mortgage non-payments in the United States caused credit crunch. Credit crunch refers to an instant shortage of funds due to decrease in the loans available. According to some economists, numerous commercial banks and investment banks experienced huge losses because of the risky mortgage loans. As a result, banks were not willing to lend money to anybody including other banks resulting into shortage of funds available in the money markets (Steil, 2009). Whalen, one of the economists, argued that the liquidity shortages in the financial sector had made borrowing much more costly and difficult. This resulted in low investment as well as decline in consumer spending, and eventually led to slow economic growth in the United States.
National Debt and Budget Deficit
According to the...