Causes and Consequences of the 2008 Financial Crisis – Free Essay Examples

Causes and Consequences of the 2008 Financial Crisis

Introduction

The United States of America as well as other global economies went through a financial crisis. Many businesses could not perform well and banks lost funds due to changes in the interest rates. The level of unemployment was high and many families could no longer own homes because of foreclosure. During the year 2000, many Americans borrowed money to buy homes due to the low-interest rates. The high demand for homes led to increased prices making people believe that the price of real estate would continue to increase. Many investors were eager to make profits and purchased investment products that they tied to their mortgages leading to the sale of mortgages. Marketers from banks encouraged people to borrow even though they would not afford the low-interest rates. When the prices of these homes were reduced, many borrowers could not pay the banks. Several banks that offered securities backed by mortgages stopped their operations and several countries sought emergency funds from the International Monetary Fund (Soros 2008).

The causes of the 2008 financial crisis

The instability in the market resulted from changes in the ability to have credit, which reduced the supply of money and growth in the economy. This had negative effects on the financial institutions, individuals as well as businesses where the value of mortgages held by financial institutions had lost value leading to a lack of money to repay the borrowed funds that affected the supply of funds, and borrowers could not access loans. The other factors such as cheap credit helped people purchase houses and invested their resources based on speculation. The affordable credit facilities made people hold money that they were willing to spend. When people reached a point where they were willing to purchase similar items, the demand increased leading to inflation. Many private firms purchased companies creating a lot of wealth without having any value in the assets they purchased because it was only creating wealth by shuffling papers (Smick 2008).

The economy of the United States of America relied on credit, which was very useful if it was used wisely. For example, the credit could be used to start a new business, expand an existing business as well as create new jobs for people who were not employed. The brokers of mortgages were the intermediaries who received loans and offered them to other people in form of mortgages after getting a fee from them. These risky mortgages became common where brokers were not responsible to repay them thereby reselling them in form of investments. The loans borrowed were more than what borrowers could afford because they thought that after they sell their houses the profit would be high or the rates of interest on the loans would reduce allowing them to refinance it.

There was a decline in performance in the housing market where those who had invested could no longer sell them at a profit, and many homeowners could not afford mortgages. This led to the loss of securities that were backed by mortgages and the building of new homes was affected. The value of the already built homes became less than the value of mortgages and the owners decided not to pay for their mortgages. The banks as well as financial institutions were bought out, joined institutions, or crashed (Soros 2008).

The effects of the 2008 financial crisis

The 2008 financial crisis had long-term effects on the economy of the United States of America as well as the entire world. Many people lost the homes that they had bought and the rates of foreclosure increased. The individuals were affected due to lack of growth and their savings did not produce the income that they expected due to the drop in the rates of interest on the savings. The investors of stock in different companies saw them drop leading to losses for the companies as well as individual investors. The savings by individuals were affected by financial crisis through the funds obtained after retirement. The people who wanted comfort after retirement based on how stock markets performed as well as mutual funds did not retire according to their plan. This forced them to continue working for long periods or lower their retirement expectation (Muolo & Padilla 2008).

The government and private companies were affected especially the employees in those bodies. The citizens of the United States of America did not get the services that they required according to their preferences. When employers were affected, the individuals who depended on them for employment were also affected. The total amount of goods and services offered in the country was reduced in comparison with what was produced earlier. When the affected companies struggled to accept the crisis, many people lost their jobs leading to the growth in the rate of unemployment.

There was difficulty in borrowing money, the costs of loans increased and loan services decreased. There were challenges in obtaining a mortgage making it difficult for people who needed to buy a home. Some individuals reduced their household spending especially on food that was bought far from the residence. The amount of money spent on health services dropped compared to total spending, which affected the health care providers due to the loss of potential customers. There were some individuals whose response to the crisis increased their household borrowing and those that used credit cards reduced by 3%.

Conclusion

The financial crisis of the year 2008 could have been avoided because the rise in prices of houses was unsustainable, which made mortgage debt increase. The Federal Reserve failed to regulate the lending standards of mortgages. There was a failure by the financial institutions through buying and selling of mortgage securities without examining them. There was a failure in supervision to ensure that financial markets were stable. The risk managers, as well as corporate governors, failed to lead to the crisis. These institutions were reckless where they took a risk with less capital and their funding was short-term. The investment banks concentrated on high-risk high-return businesses where they made huge profits. They exposed themselves to subprime lenders where they sold securities related to mortgages as well as financial products without minding the risks involved (Phillips 2008).

Many of the institutions did not have strategies for effective management that could have reduced most of the challenges and losses. The excess borrowing, involvement in risky investments as well as lack of transparency led to the crisis in the financial system. Many households managers and financial institutions borrowed funds that later ruined the value of the money they invested leading to loss. The government’s response to the crisis was significant to reduce uncertainty in the financial markets. Lack of accountability and public trust affected the economy of the United States of America as well as other nations.

References

Muolo, P & Padilla, M (2008), Chain of blame: how Wall Street caused the mortgage and credit crisis, John Wiley and Sons, Hoboken.

Phillips, K 2008, Bad money: reckless finance, failed politics, and the global crisis of American capitalism, Penguin Group, New York.

Smick D 2008, The world is curved: hidden dangers to the global economy, Penguin Group, New York

Soros, G 2008, The new paradigm for financial markets: the credit crash of 2008 and what it means, Public Affairs, New York.

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UniPapers. (2022, June 2). Causes and Consequences of the 2008 Financial Crisis. Retrieved from https://unipapers.org/free-essay-examples/causes-and-consequences-of-the-2008-financial-crisis/

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"Causes and Consequences of the 2008 Financial Crisis." UniPapers, 2 June 2022, unipapers.org/free-essay-examples/causes-and-consequences-of-the-2008-financial-crisis/.

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UniPapers. "Causes and Consequences of the 2008 Financial Crisis." June 2, 2022. https://unipapers.org/free-essay-examples/causes-and-consequences-of-the-2008-financial-crisis/.

References

UniPapers. 2022. "Causes and Consequences of the 2008 Financial Crisis." June 2, 2022. https://unipapers.org/free-essay-examples/causes-and-consequences-of-the-2008-financial-crisis/.

Reference

UniPapers. (2022, June 2). Causes and Consequences of the 2008 Financial Crisis. https://unipapers.org/free-essay-examples/causes-and-consequences-of-the-2008-financial-crisis/

References

UniPapers. (2022) 'Causes and Consequences of the 2008 Financial Crisis'. 2 June.