Definition of Financial Terms

Economics Essay on 2007-2008 Financial Crisis

2007-2008 Financial Crisis

The 2007-2008 Worldwide Financial Crisis was the greatest worldwide credit crunch that hit the world after the infamous Great Depression of the 1930s (Jickling 4). This crisis started in the United States after which it spread to other parts of the globe. It elicited fears that the recession would be prolonged the way that of the 1930s did. This crisis started in August 2007 with its intensity increasing in 2008. The attempts of the central banks and regulators to restore the balance that preceded it in the worldwide economy bore no fruits. There were several factors that combined to cause this crisis and its subsequent spreading. However, the US government finally rescued the financial industry and the worldwide industry.

The years that preceded this financial crisis had cases of loose lending standards of mortgage in the US. This flexibility caused an increase in houses’ prices at the beginning of 2000. However, these prices dropped drastically by over 30% (Jones 3). The explosion of the mortgage-backed securities’ insurance was the main factor that caused the explosion in the houses’ prices. The explosion was caused by securitization, which is a situation where debts are pooled together while assets are issued on the basis of these debts.

Therefore, investment banks were placed at the forefront in the purchase of mortgages, their repackaging and eventual sale to investors. Although mortgages were initially available, banks were compelled to repackage mortgage-backed securities before selling them in form of obligations of collateralized debts due to their scarcity. The banks offered them at interest rates that were lower despite having top rating. However, majority of them were subprime although the houses were bought by many people who thought that the increase in housing prices was to continue longer than it did (Jones 5).

Nevertheless, these houses’ interest rates increased all over sudden with concerns of increasing inflation rates spreading further. The increased interest rates softened the entire housing market which made borrowing costlier (Jones 6). The speed with which people rushed to purchase mortgages caused a spiraling impact on inflation rates. They became high and this led to increased oil prices. Oil prices are sensitive to shake-ups of the worldwide market. Therefore, oil prices were drastically falling and rising. This ripped its effects on the other industries (Jones 10).

The announcement of losses worth 3 billion by Bear Stearns despite the fact that the government declined to bail the organization out was the first indicator of a global crisis. There was a turn in the credit market after this event. The government of the UK bailed out the Northern Rock because the firm was no longer able to perform its duties. Therefore, this credit crunch forced governments to step in, more so when large financial investment institutions like Bear Stearns and Northern Rock failed (Jickling 7).

Bear Stearns was bailed out by JP Morgan via a $30 billion guarantee on its toxic assets that was backed by the government. AIG was the next firm that was bailed out under the

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