Question

what in your opinion really caused financial crisis in the united states? explain in 400 words(exactly 400 words please)

Please note its an opinion based question so backup data to support your opinion.

Answer 1

Assuming that question asked is regarding 2008 financial crisis:

2008 saw a recession started due to subprime crisis in USA. This led to many financial companies going down. US economic recessionary impacted world economy and overall growth rates were affected worldwide.

Real estate was considered attractive business in new milennium. Many USA banks which were having huge money available started to give loans even to those people who were no having financial credibility. There was an assumption that real estate prices will keep on going up. A customer will repay loan to best of capacity and banks will keep on getting equated monthly installments. If a customer defaults then house can be sold and higher money will be recovered. Customer paid money plus this additional money will make profits fr banks. This was an assumption.

Many banks converted receivable loans into derivatives and sold further t other banks/non banking financial companies. Now, there was the Gramm-Rudman Act in USA. Banks were allowed banks to deal in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. These derivatives needed more and more mortgages ad hence more loans were given by banks to complete the mortgage demands and hence a cycle was created. to meet an insatiable demand for more and more mortgages.

But when housing prices started to go down due to more supply and less demand then banks started to panic and wanted to sell any such liabilty further to avoid losses but as news spread the artificial housing boom bubble burst. These chain of events stopped lending to each other. Interbank borrowing rates went up and peoples confidence started to go down which resulted into even less purchasing and financial crisis started showing up.

Federal reserve had to pitch in to correct economy. Govt. gave bailout packages to many financial firms through expansionary fiscal policies. Federal reserve reduced interest rates to increase consumption in an economy as a part of expansionary monetary policy. Since then interest rates have been very low. Federal reserve had low reserve rates and also low discount rates.Through open market operations they bought many govt. bonds to increase liquidity in the market. This policy worked well and US economy is finding ways to grow. In 2018, unemployment decreased and economic growth rates also went up.