Question

1. In no more than 1-2 sentences, describe how each of the following contributed to the onset of the

financial crisis:

a. Bursting of the housing bubble

b. A global savings surplus

c. Subprime lending

d. Decline in lending standards and securitization

e. Sharp increases in oil prices

Answer 1

a. Bursting of the housing bubble refers to the US real estate bubble that created huge spike in prices of houses at first due to demand and speculation to finally crashing of prices of houses to the lowest leading to huge losses and household debt.
b. A global saving surplus or glut refers to excessive saving and accumulation of foreign exchange reserves which were then channelised into US market leading to fall in interest rates creating huge investment and increase risk taking behaviour ultimately leading to asset price bubble.
c. Subprime lending refers to the loans given to the people with low credit scores or a low income at a rate higher than prime. Subprime loans are offered to people who are conventionally not qualified for loans. Increase in subprime mortgages in 2006 with low funds rate led to crisis during housing bubble bursting.
d. Securitization of subprime mortgages into mortgage backed securities in order to redistribute risk and build risk was in fact led to subprime mortgage crisis. Lending standards allowed the lenders to give more subprime loans and back these to loans to investors.
e. Rise in huge speculation in the commodity based market led high and sharp increases in oil prices during 2006 and end of 2007.