2008 Financial Crisis
In February 2007 manifested the first indication of a global financial crisis when HSBC revealed massive losses on its Housing Finance mortgage program. In April the same year, a leading subprime lender, New Century, filed for bankruptcy. By August, credit markets went on a free-fall as many announced evaporation of liquidity. Later on, in September when BBC revealed that Northern Rock Building Society had received financial support from the Bank of England, savers started withdrawing their funds from the institution in large amounts. (Steve, p 3)
As the events unfolded, the U.S government and the European Union Banks were engaged in financial guarantees in a desperate attempt to rescue major private and corporate financial institutions at their merge of collapse. JP Morgan Chase bank saved Bear Stearns after U.S government lend it $30bn. Fannie Mae and Greddie Mac are rescued by the U.S government to cushion the effects of its losses on the dollar. Several foreign governments had invested with these giant mortgage financiers on their bonds, and the effect of their downfall would have been felt on the dollar. (Steve, p 8)
Insurance firm AIG, a player in the subprime mortgage lending, lend on 16 September with $85bn loan by the U.S government (Steve p7). Several financial institutions went bankrupt, and others sold other institutions at low values. On 13 October 2008, the US Congress approved 700 billion dollars to back up the plunging financial sector (Steve p10).
The trigger of the financial crisis can be traced back 2005-2006 when the default rates on the mortgages started rising. The need for housing loans went high, and the prices hiked at a high rate creating a “housing bubble” that would burst later in 2008 (Katzel and Russo 12). Demand for mortgage-backed securities and collateral debt obligations increased as more foreign investors around the world injected their money into the U.S housing market. Lending institutions introduced measures to deal with competition in subprime lending that included relaxation of underwriting standards.
The U.S government had previously in the 1970s had endorsed a policy that emphasized on less oversight and regulation of new bank activities that would encourage business. It was, therefore, hard for it to realize the important role of the investment institutions and the shadow banks had on the global financial market. They had gradually assumed large debt loads while providing the loans to a large number of prospect home owners (Katzel and Russo 15). They did not have enough financial cushions that would source them in the case there were many loan defaulters.
Loses that ensued made the credit institutions incapable of lending their customers and were unable to borrow from other financial institutions. The investors panicked amid fears of losing their money prompting to the large withdrawal of funds form the housing industry.Housing prices declined, and the global institutions including foreign governments accrued significant loses hence, the global crisis (Katzel and Russo 14).
A Report by the U.S Financial Crisis Inquiry Commission showed that the eventual crisis could have been avoided if the failures in the mortgage industry had been addressed early. It stated that the policy makers failed to understand the financial system they were obligated to oversee, hence setting a path to a dramatic breakdown of the financial systems. The U.S government has since put in place strategies and policies that will prevent such a crisis from happening again (Katzel and Russo 42).
Works Cited
Katzel, Aaron J and Thomas A Russo. The 2008 Financial Crisis and its Aftermath: Confronting the Next Debt Challenge. New York: Thomas Russo, 2010.
Steve, Hermann. BBC News. 5 April 2013. news.bbc.c.uk/2/hi/business/8242825.stm. 7 December 2014.
