Question

Finance question

1. Historical overview - A brief overview and historical timeline with the key players contributing to the 2008 crisis. Provide bullet points with key factors / dates.
Full answer, please

Answer 1

In Points

1. Anti redlining laws in US forced lenders to give loans to borrowers who did not even have full time jobs.

2. In order to manage the risk this exposed them too, lenders packaged these sub-prime mortgages up with other ones and traded them as derivatives.

3.Due to high exposure much more than deposits made them to feel cash crunch.

4. Two possible policy responses emerge. One, motivated by the idea of moral hazard, says that banks must be allowed to fail. If government bails them out, they'll behave even more riskily in future. Plus, why should the taxpayers fund a welfare state for bankers? The other school of thought stems from the idea of systemic risk, that allowing banks to collapse would endanger the entire financial system (and, by extension, the capitalist economy).

5. This what happens when a bubble bursts. For years, the availability of cheap consumer goods from emerging economies like India and China kept down inflation. This meant governments and central banks thought they could flood the market with liquidity (i.e. cheap credit) and get away with it. They couldn't. With too much money chasing too few goods, an asset bubble built up. House prices, in particular, were hugely over-inflated. It got worse after 9/11 when, facing an economic downturn, the US and the UK both pumped even more liquidity into the market. With breathtaking arrogance, politicians claimed to have abolished the economic cycle. In reality, they had simply swapped an immediate and relatively minor readjustment for a much harder landing several years down the line.