Question

Key learnings - Perform research and reflect upon what happened to include some ideas or recommendations on what could have been done to reduce the severity and global impact of the 2008 crisis. Consider some key risks and related impact. Consider who was responsible, or who should have been more responsible (i.e. financial institutions, government, central banks, households, businesses).

fullanswer please

Answer 1

The primary cause of the 2008 financial crisis was " Future Incomes were committed in order to purchase home". Well there is a difference between the housing loan and the others that it takes into account both the factors which are the current income and the value of the asset on which the loan is being taken.

While taking a housing loan one has to make a decision on the growth of future income , ability to service the loan etc and the similar judgement is required at the lender's end as well, but this is almost impossible . since it is extremely difficult to take a call on interest rates and inflation etc for a long term.

The problem some what started in US in late 90's when the lending started to shift from oncome as a base to the asset value as a base. This started to increase the lending which in turn fuelled the prices of the asset and thus the bubble started to form.

This difference in the way lending happened is key to this crisis and this trend continued and by 2003 the mortgages increased by 95% and the incomes in the same period increased by paltry 17%.

This kept on piling up as the short term economic indicators were still not signalling any defect , and thus by 2007-8 , bank decided to securitise these mortgages to outside investors .

Hence once the downside started , everything came down

I think a stricter mechanism of credit evaluation at the individual level was required to change things systemically and that would prevented the crisis

Reference- " how the US financial crisis could have been averted"- By Dr. Kees de Koning