Question

What role did financial institutions play in the financial crisis of 2007/2008?

Answer 1

Answer:-

The financial crisis in 2007/2008 was primarily caused by lack of regulation in the financial industry. The banks were allowed to engage in hedge fund trading with derivatives. In turn the banks demanded more mortgages to support the profitable sale of these derivatives.

The housing boom led the financial institutions to lend more money to borrowers to buy homes as mortgage loans. The prices of the homes went high as the demand was high than supply. The financial institutions started lending without seeing the credit history of borrowers.

The fed raised the rates and the mortgages were reset.These caused the fall in the prices of houses and the borrowers started defaulting on the mortgage loan as they were not willing to sell the homes at lower prices. This causes the financial institutions to go bankrupt leading to collapse of many banks and financial institutions and some were lucky to be bailed out by Federal government.