Question

One of the factors that contributed to the financial crisis of the late 2000s was the credit boom and bust. True or False?

Answer 1

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Question:

Answer:

'True

Financial crisis of the late 2000s:

The major reason of late 200s financial crisis was subprime loan and housing bubble. That time Fed has reduced the Fed fun rate at very low level that made the money more cheaper and increased the demand for money. Other side trade deficit was also high .

Because of cheaper money, bank started lending to those people or organization who may have difficulty maintaining the repayment schedule or have lower credit rating .Its increased the default risk. Bank was lending money at higher cost to cover the default risk or other associated risk. Normally bank charge more for subprime loan compare to prime loan. Increasing lending reached the housing market at sky. Most of the subprime loan was Adjustable-rate Mortgage or flexible with changing interest rate.

During 2004-2006, the Federal Reserve raised the interest rate over a dozen times to reduce and control inflation that increased the burden on debtor. Other side economy had been enter into the recession phase that created more problems for the debtor. Because of both of the reasons (Increasing interest rate and recession) borrowers found themselves unable to pay it off.

So, answer is TRUE

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