Financial Crises And Its Effects On Global Economic Crisis

The 2007-2008 Financial Crisis- Its Causes and the Involvement of the FED The financial crises that occurred in 2007-2008 had such a big impact on the world that it is now considered a global financial crisis (GFC) or global economic crisis. It is commonly believed that it began in July 2007 with the credit crunch; U.S. investors lost trust in the value of subprime mortgages which caused a liquidity crisis. This had the effect that the U.S. Federal Bank injected a large amount of capital into the financial markets. By September 2008, the crises had worsened as stock markets around the world became highly volatile. This paper will examine the causes of the financial crises in 2007-2008, as well as the involvement of the FED in†¦show more content†¦Even though, they could not provide any assets, they wanted to realize their dream to buy their own home. Bankers who were willing to give them loans caused an increase in the number of home loans, and more people were able to buy their own house. As a result, an appreciation in home prices occurred. Easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgage look like a new rush for gold (Thomas, 2011). The Fed interacted by reducing interest rates in June 2003 to 1%, which was, at the same time, the lowest interest rate in the last 45 years. The concerns began when interest rates started to rise and home ownership on the other hand, reached a point of saturation. After June 30, 2004, the Fed started to increase rates at such a high level that two years later, the Federal funds rate had reached a much higher rate of 5.25%. Also by 2004, homeownership had peaked at 70%, and as a logical consequence, the majority of people were not interested in buying homes anymore. In the last quarter of 2005, home prices started to decline, which also led to a 40% decrease in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans (Chan, 2011). This had the consequence that two years later, in 2007, every month, several subprime lenders were filing for bankruptcy which