The Great Recession

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Financial Crisis of 2008:
A financial crisis can be defined as a situation, where assets quickly and without warning begin to lose their value. The financial crisis of 2008 was no different, where value of houses began to fall, causing the housing market to decline. The crisis was titled “The Great Recession” and it has been marked as the second worst crisis over the last 100 of years. During this global financial crisis, millions of people lost jobs, thousands of businesses, numerous financial institutions got bankrupt and an enormous number of home owners lost possession to their houses.
Factors that led to The Great Recession of 2008
Root Causes:
1. Credit Expansion:
The foremost cause of financial crisis was credit expansion. The government …show more content…
When they again called the lender for purchase of more mortgages, they were informed that the broker could not find new mortgages as everyone who qualified for a mortgage, already had one. This gave an idea to the investment banks. As home owners defaulted on mortgage, the lender got the house back that had increased in value. The lender added further risks in lending by offering no down payments, no income proofs and no documentation. When this happened, houses were given to less responsible home owners (subprime mortgages) instead of lending to responsible ones (prime mortgages) and this was the turning point. The bank owners bought the mortgages of home owners. Although the investment banks benefitted from CDOs in the beginning, a time came when more of the house owners defaulted in the payment of mortgages and the banks had to get the houses in their possession. The monthly payments of the bank owners than turned into houses and there was greater supply of houses than their demand, causing the prices of the houses to drop vigorously. The home owners that continued to pay mortgages realized that the mortgage installment was much higher than the value of the house, so they too stopped the payments of their mortgages. This created panic amongst the banks and the lender who were left with no deals to make. The broker calls the investor bank for …show more content…
The reason behind this mismatch was accelerated mortgage lending by the banks. People borrow short-term for the benefit of the low interest while they invest long-term for higher returns. This creates challenges for lenders to find more short-term depositors till the long-term term loan is paid off. The maturity-mismatch involved the risk of rising interest rates and gave birth to rising liquidity risks which meant banks would not be able to payback their customers on time, hampering their image and repute and creating mistrust in the
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