Causes of 2008 US Economic Crisis

Introduction

The Global Financial Crisis is an ongoing issue in the present day. This crisis led to a myriad of consequences in the years 2007 and 2008 (Gambacorta, 2009). This crisis is in line with the stock markets of the entire world that continue to diminish.

In addition, there were a great number of economic firms that collapsed and other companies that went into receivership in consequence of this problem. Many developed countries, ended up securing their economic structure on account of this international problem (Bhattacharya, 1982). According to Gambacorta (2009), a significant number of individuals believe that the parties accountable for this economic problem are living freely. This is even though an international economic crisis made a never-ending impact on the lifestyle of approximately everybody. On the contrary, economic experts and scholars believe that there was a way to evade this economic issue.

Causes of Global Economic Crisis

Credit bubble

In the year 1990, China amid other developing countries, as well as the leading oil generating countries, created a big capital oversupply. The spread of credit reduced, which implied that the expense of having a loan for investing in unsafe investments was low. Consequently, a credit bubble in America and other European nations developed. This was a significant sign of doubled investments in highly risky mortgages. On the contrary, the American financial policies could have played the main role in causing the credit bubble.

The credit bubble can be explained by global capital flows, re-pricing of risks and financial policy (Barrel, Davis, Karim, & Liadze, 2010). Global capital flows form the fundamental basis of the crisis and the greatest macroeconomic justification. Stable and huge development in investment inflows, in America and European finances, fostered crucial advancement in internal lending, in particular, in extremely risky mortgages (Barrel, et al, 2010). It led to reduced capital prices in America and other European countries.

In re-pricing of risks, low-cost capital may not essentially have to do with an advance in risky investments (Barrel, et al, 2010). For instance, developed capital flows in America and Europe may not distinctively describe the credit bubble. It is not clear if the credit bubble is the outcome of logical or illogical actions. In case investors had been logical, their first consideration could have changed, enabling them to consider reducing returns for extremely risky investment projects (Barrel, et al, 2010).

In case they had been entirely illogical, they could have embraced a bubble approach. At the same time as they could pay extremely high prices for risky assets, they could resell them later for an increased price. According to Barrel, et al, (2010), they could have wrongly believed that the world was safe and that the risk of terrible results, in particular, in America had reduced.

Monetary Policy forms part of a debate that has not been resolved in the present day. Free monetary policy does not essentially bring about minimal credit stretch (Ahrend, Boris, & Robert, 2008). According to Ahrend et al, (2008), there are direct issues on the subject of temporary interest rates. Therefore, it is true that monetary policy is a contributing aspect of the credit bubble and a significant element of the crisis (Gambacorta, 2009).

Housing bubble

In the early 1990s all the way to the year 2000, it is evident that America was experiencing a huge housing problem. This housing problem was in connection with a significant increase in housing prices (Aizenman, & Yothin, 2009). Many houses were beyond the normal house-pricing pattern. Many homeowners and business investors lost plenty of money from the consequences arising from the housing problem.

According to Aizenman et al, (2009), the housing bubble was in connection with two significant factors. They included homes and mortgages. These 2 aspects are valuable in the housing bubble, in America and Europe. This brought about an increase in the American mortgage prices beyond the average market advancements. This equally entails the nationwide housing bubble and additionally local bubble in four states of America, which include Florida, California, Arizona, and Nevada (Aizenman, & Yothin, 2009). Modern knowledge entails that a credit bubble is intricate to identify and significantly obvious when it has finally ruptured. It is apparent that still subsequent to rupturing of the American bubble researchers established limited causes.

According to Aizenman et al, (2009) the significant factors that led to the housing bubble included population increase, limits of use of land, over-expectation and readily available funding. An increase in population density in various states in America, above the typical nationwide population percentage, led to a demand for homes. On the other hand, strict policies on the subject of building and constructing houses made it difficult for individuals to own homes.

This implies that the prices of homes had to increase with the anticipation of the future flourishing home business. Finally, it was easy to receive funding from financing institutions for the goal of buying costly homes. This was since institutions were ready to offer loans to individuals irrespective of the affordability of the homes or the borrower’s capacity to repay the loans.

Non-conventional Mortgages

According to Barth, Gerald Jr., & Ross (2004), a decrease in the credit spread, excessive positive trust in the American housing prices, and huge mistakes in initial and the resultant mortgage market, set in motion unfortunate actions. This included joining hands to develop the stream of credit to American housing finance. Many companies ended up with highly risky mortgages that, on a number of occasions, were deceiving and further puzzling. This is because of the low-priced credits from companies such as Washington Mutual and Countrywide which could not finance the loans. Consequently, a huge number of home buyers and homeowners could not comprehend the conditions of the mortgages. Ultimately, these causes led to the housing bubble.

Conclusion

In conclusion, business productivity reduced in major countries as a result of the 2008 US economic crisis. In contrast, the price of goods, which were earlier on rising, deteriorated significantly by the end of the year. This led to an abrupt reduction in the size of international business. In this business industry, projectors had to reduce the projections for productivity development constantly. The ineffectual international macro-finance position indicates that borrowers turned out risky.

An increasing number of borrowers were possibly going to find it hard to pay for the outstanding debts. In addition to this, bad loans increased compared to the entire lending when finances declined, and the present-day international recession will not be left out in this trend. In the present day, industry, the 2008 US economic crisis can be considered the productivity of the previously damaged banking industry in main finances.

References

Ahrend, R., Boris, C., & Robert, P. (2008). Monetary Policy, Market Excesses and Financial Turmoil, OECD Economics Department Working Paper 27(2), 337-350.

Aizenman, J., & Yothin, J. (2009). Current Account Patterns and National Real Estate Markets, Journal of Urban Economics, 66(2), 75-89.

Barrel, R., Davis, P., Karim, D., & Liadze, I. (2010). Was the Subprime Crisis Unique? An analysis of the factors that help predict banking crises in OECD countries, National Institute of Economic and Social Research Discussion Paper 26(2), 15-26.

Barth, J., Gerald, C., Jr., & Ross, L. (2004). Bank regulation and supervision: what works best, Journal of Financial Intermediation, 13(9), 205-248.

Bhattacharya, S. (1982). Aspects of Monetary and Banking Theory and Moral Hazard, Journal of Finance, 37(5), 371-384.

Gambacorta, L. (2009). Monetary Policy and the risk-taking channel, BIS Quarterly Review, 87(3), 43-53.