Reasons for Financial Crisis 2008:

Details about Financial Crisis 2008 & US Mortgage Subprime Crisis:
Analysis of Economic Crisis in 2008

The present finacial crisis in the world is attributed by the mortgage subprime crisis of US with large number of people turning into defaulters.

Before going into detailed root cause analysis of the crisis I will like to make you familiar with some of the terminologies:

  • Mortgage: Conditional transfer of a property as for security on a loan.
  • Subprime Loans: Loans which are issued with little or no downpayments.
  • Foreclosure:If a borrower fails to make timely mortgage payments to the loan servicer (a bank or other financial firm), the lender can take possession of the residence acquired using the proceeds from the mortgage, in a process called foreclosure.

Lets get to the roots of this crisis...

Though the subprime crisis became apparent in the year 2007 but it's roots lies in closing few years of 20th century. Due to faulty government policies, competitive pressure and greediness to show higher results banker's encouraged higher risk lending practices.

Many subprime mortgages were issued in USA to households with low incomes and assets, and with troubled credit histories. All such loans were issued for the purchase of residences ,to borrowers who do not meet the usual criteria for borrowing at the lowest prevailing market interest rate. Now with the decline in USA house prices in 2006-07 the financial firms who had issued subprime mortgages lost most of their value due to falling house prices..

This resulted in a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world and eventually resulted in the prevailing financial crisis across the world..

The main cause for the crisis could be attributed to a number of factors:
1. Inability of homeowners to make their mortgage payments
2. poor judgment by borrowers and/or lenders
3. speculation and overbuilding during the boom period
4. risky mortgage products,
5. high personal and corporate debt levels,
6. financial products that distributed and perhaps concealed the risk of mortgage default,
7. monetary policy, and
8. lack of proper government regulation

In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders of the Group of 20 cited the following causes:
"During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions."

The impact of this crisis could have been subdued if proper measures were taken on time.

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