Research Paper on The 2008 Financial Crisis in America

Introduction

In 2008, a financial meltdown gripped the US financial system with its effects felt across the globe. Next, to the Great Depression, it is considered the worst financial crisis to ever engulf the global economic and financial framework. Accordingly, this essay argues that the American financial crisis of 2008 occurred because of four key economic and financial indicators.

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First, banks create new money whenever they lend to individuals, corporations, or governments. In the day's preceding the 2008 financial crisis, American banks issued massive loans. As a result, the volume of money and debt in the American economy doubled. Moreover, a majority of the money created in this period went to real estate, residential property, credit cards, personal loans, and the financial sector (Subasat, 2016). Secondly, a combination of high-interest rates, high housing prices, and reduced personal incomes meant that most creditors could not offset their loans. As banks could not recoup loans from creditors, they were in danger of bankruptcy a situation worsened by investors in the American housing sector selling their assets to meet their debt obligations. Eventually, banks panicked limiting the amount of credit available to investors (Wallison, 2016).

Following a drop in the performance of the housing sector, the American financial markets experienced a decline in market capitalization, an indication of an overvalued market. Third, rating agencies also contributed to the financial crisis in rating underperforming securities as investment grade with most issuers manipulating the rating process (Subasat, 2016). Finally, ignorance of historical precedence associated with financial crisis' created conditions that predisposed the American financial system to a financial meltdown of this magnitude (Wallison, 2016). Over its more than 200 years of history, the US has experienced various economic and financial shocks. Therefore, shortsightedness and the inability of regulators to address the root cause of the past financial crises contributed to the meltdown of 2008.

Conclusion

In conclusion, this essay traced the four main factors that led to the collapse of the American financial system in 2008. Besides that, it documented the interrelationship between these factors and their impact on various elements of the financial and economic system of the USA.

References

Subasat, T. (Ed.). (2016). The great financial meltdown. Northampton, MA: Edward Elgar Publishing. Retrieved https://the-eye.eu/public/concen.org/The%20Financial%20and%20Economic%20Crisis%20-%20Collection%2031/Subasat%20%28Ed.%29%20-%20The%20Great%20Financial%20Meltdown%3B%20Systemic%2C%20Conjunctural%20or%20Policy%20Created%20%282016%29.pdf

Wallison, P. J. (2016). Hidden in plain sight: What really caused the world's worst financial crisis and why it could happen again. New York, NY: Encounter Books. Retrieved from https://books.google.co.ke/books?id=E0vxCwAAQBAJ&printsec=frontcover&dq=Wallison,+P.+J.+(2016).+Hidden+in+plain+sight:+What+really+caused+the+world%27s+worst+financial+crisis+and+why+it+could+happen+again.&hl=en&sa=X&ved=0ahUKEwjr_4C5zcDgAhWFx4UKHUuJAn8Q6AEINDAC#v=onepage&q&f=false