Research Paper Sample: Financial Crisis of 2008 Causes and Consequences Analysis

Introduction

The financial crisis of 2008 was another of world dreaded economic nightmare since 1930 great depression. The financial crisis of 2008 was not only felt in the United States only but across the globe. However, the most significant blow was to the United States. The crisis was seen long coming, however, less attention was placed into preserving country economies. There are many factors said to have caused the crisis some of which were long term, while others were as a result of the misguided policies in the United States. This easy will explore the economic crisis peril before 2008, during the crises and after, whereby the causes and consequences of the crisis will be spelled.

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Past decades before the 2008 crisis, the US mortgage foreclosure rates hiked to the highest. However, the decline in the housing price was later realized and recorded in 2007, as time passed, the prices swiftly dropped and spread contagiously across the entire US financial markets before spreading internationally. The most affected sectors by the crisis in the United States was the banking industry, insurance companies, the two authorized enterprises by the government to facilitate mortgage Fannie and Freddie operations and loan and mortgage leaders among many others (Barrett, 2008). The crisis did affect not only the financial industry but also firms that depend on credits. The banks on realizing that there was no one to pay them they cut making loans. Many businesses were forced to regulate the financial cash flow which affected business performance.

Causes of the Financial Crisis

The crises were long coming, though not as soon as the United States were surprised. The crises were triggered in the United States after the mortgage dealers begun issuing mortgages with unfavorable borrowing terms. They offer a mortgage to all clients in the USA even those who did not qualify for conventional homes loans (Emmons, 2008). The mortgages had low-interest rates pinned to them in the years before 2008 which later increased to double rates in later years, of which some include the prepayment penalty rates that were outrageously offensive and expensive to finance. Many people who were not experienced and lacked a know-how of such future prospect were excited by the fact they could own homes but ignored the risks.

The insurance companies joined the business by trading credit default swaps. According to the insurance providers assumed the mortgage holder defaults caused losses. What begun as insurance turned into speculations because financial institutions sold and bought credit default swaps on assets that they did not own. Every financial institution was excited by the rising housing prices that left ever financial institution profited, ignoring the chances of financial risks involved. The mortgage holders who had no enough sources for regular income and hence they invested in borrowing against the increasing home equity. As the housing growth increased, more mortgage holders defaulted on their loans

The signs for Unite States economic decline were registered in 2006 when the house prices began to fall. This was a good thing to the realtors as they thought the declining housing market would stabilize to sustainable levels. What they did not know is that many house owners were on credit. The bank had given people loans that were up to 100% value of their homes. The companies that held mortgages begun to experience reduced cash flows, together with the corporations holding securitized mortgage bundles. The cash flow decline was reflected by the declining market value of their attached securities. The uncertainties surround the future company cash flow caused trouble for the business liquidity as they could not resale their securities. The stock prices for companies that had invested in the securities, and financial institutions that had bought huge mortgages and mortgage-backed securities begun to decline (Guina, 2016). Among the most hit investment agency was the Lehman Brothers and Merrill Lynch investment banks and the mortgage purchasers Fannie Mae and Freddie Mac. The two institution faced bankruptcy and to save the firms, and they had to search for last minted purchases. Money lenders were worried of the high bankruptcy cases reported, and so they stopped leading loans since they lacked confidence in any institution ability to payback (Kolb, 2010).

Consequences of the Crisis

The increased losses incurred after the great recession of 2008 caused the government and business to cut their costs of expenses. The projects underway were withdrawn, and they were forced to cuff some workers to sustain financial cash flow. For the American citizen, it becomes a nightmare to own a dream home. The house prices are no longer achievable. Home ownership today has declined and is challenged as creditors have tightened lending rules so as to minimize the mistakes done in the past. Between 2016 and 2011 statistics show that home ownership has declined by 15% (Kolb, 2010).

The government has slashed the spending cost since the great recession. Before the crisis, the expenditure in government was growing by 1.6% per year, but the state cut its spending to 3.8% in 2009, and in 2010, the government increased the cut to 5.7%. The government has gone to the extent of cutting public workers off, although not as much as the private sector. Over 5.5 million jobs were lost in the US because of the slowed economic growth rate after the 2008 crises (Guina, 2016).

Recommendation

As a remedy for such a crises never to occur again, the government should conduct a thorough such in the economic markets and shut down investment policies that are not up to standers. The US should remain vigilant on the common errors such as cheap money policies and shut down increased venerability to country economic failure. The government should create room for business and entrepreneurial ideas that add value to the financial markets. This can be an excellent basis for the United States market restructuring.

References

Barrett, W. (2008). Andrew Cuomo And Fannie And Freddie. Village Voice, 5.

Emmons, W. R. (2008). The Mortgage Crisis: Let Markets Work, But Compensate The Truly Needy. The Regional Economist, (Jul), 10-16.

Guina, R., (October 11, 2016). The 2008-2009 Financial Crisis Causes And Effects

Kolb, R. W. (Ed.). (2010). Lessons From The Financial Crisis: Causes, Consequences, And Our Economic Future (Vol. 12). John Wiley & Sons.