Research Paper: Financial Crisis in the United States (2008)

Research Paper: Financial Crisis in the United States (2008)
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Research Paper: Research Paper: Financial Crisis in the United States (2008)
Introduction
The 2008 global financial crisis had a huge impact on the U.S. economy, posing numerous challenges whose magnitude had not been witnessed since the 1930s Great Depression. Numerous factors contributed to the crisis, including risky ventures by financial institutions, easy availability of unsustainable mortgages resulting in the housing boom, and rapid expansion of America’s financial system. These forces had been building up for several years, and they thus contributed to the crisis, which climaxed in 2008 September (Reyes, 2013). Huge financial institutions either collapsed, were forced to merge, or were bailed out from the government. Capital markets that enabled people to meet their daily needs were reluctant to give credit and investors lost trust in the country’s financial system. The federal government had to move with speed and implemented programs that would stabilize America’s financial system. This paper examines the cause of the 2008 financial crisis and the response of the U.S. government.
Causes – How it happened
The U.S. financial system was the main origin of the 2008 financial crisis since the interconnection, and the huge size of the country’s economy enhanced the contagion of the crisis, especially when Lehman Brothers were declared bankrupt. In comparison to the bank runs that occurred during the 1930s Great Depression, complex financial instruments that were difficult to re-price (Lin, 2009) facilitated the recent financial crisis. The financial instruments were internationally circulated in the balance sheets of different financial institutions. This provided an opportunity for developing new challenges of transmitting funds rapidly, and this financial boom was bound to collapse — this contribution to market instability, which was mainly caused by tremendous changes in creating new credit lines. It also limited the flow of money and reduced the rate of economic growth since people could hardly purchase or sell assets.
In mid-2007, the financial crisis started to unfold in America’s subprime mortgage market. Subprime loans are those loans that are advanced to risky borrowers at higher interest rates. Subprime loans started to play a central in the housing market since even with the increase in housing prices, there is still a huge boom in the housing demand. An increase in the prices of houses tends to reduce affordability, but subprime mortgages countered this through continuous relaxation of mortgage standards, thus ensuring the progress of the housing boom (Guina, 2018). The market instability hurt several people, business entities, and financial institutions, leaving most financial institutions holding mortgaged assets whose value had swiftly fallen. These assets did not bring the revenues that were required to advance new loans and even worse, the decline in the value of these assets led to the insolvency of these financial institutions.
Evidence also indicates that financial innovation that had occurred in the past whose aim was to minimize and dive...