Question

11. What factors did bring about the financial crisis of 2008?

Answer 1

Even though the financial crisis of 2008 is mainly attributed to the bursting of housing bubble due to sub prime mortgage crisis,it's a result of culmination of various factors.The various factors are deregulation ,securtization and poor timing exhibted by the Fed in changing the interest rates.The bursting if the housing bubble due to sub prim mortgage crisis was a result of deregulation .de regulation which kicked off with the Gramm Leach Bliley allowed banks to engage in derivative trading.The Gramm Leach Bliley Act allowed banks to use their deposits for investing in derivatives.This allowed speculation on derivatives which had mortgages that had pretty much no value as collateral.This factor was at the heart of the 2008 financial crisis

Coming to the securtization factor the banks used to sell the mortgage backed securities(mortgage backed securities are financial assets where the value of the asset is dependent on the mortgage) and other derivatives.These derivatives were protected by credit default swaps making them seem risk free to the investors this in turn led to higher demand for derivatives resulting in loans being issued to even individuals with poor credit.

When mortgage backed securities were gaining demand the fed interest rate was as low as 1.75% this resulted in lower interest rates on mortgages which resulted in greater number of loans being approved but when the fed began increasing the rates after 3 years and the fed rate stood at 5.25% in 2006.Home owners who had made purchases at lower interest rates struggled to meet the higher interest payments,this resulted in the housing bubble.Since these mortgages where linked with the mortgage backed securities and other derivatives in which major investment banks like Lehman Brothers had heavily invested, this in turn culminated as the financial crisis of 2008.