what cause the financial crisis that occurred in 2008
The financial crisis of 2008 was primarily caused by a combination of factors that led to a collapse in the housing market and subsequent turmoil in the global financial system. Here's a breakdown of the key factors:
1. Subprime Lending: One of the main causes was the proliferation of risky mortgage lending. Banks were granting mortgages to borrowers with lower creditworthiness (subprime borrowers) who were at a higher risk of defaulting on their loans. These mortgages were then packaged into complex financial products known as mortgage-backed securities (MBS) and sold to investors.
2. Housing Bubble: The demand for housing grew substantially, leading to a housing bubble. As housing prices soared, many borrowers took out larger mortgages with adjustable interest rates, assuming that the value of their homes would continue to rise. However, when the housing bubble burst, property values plummeted, and homeowners were left owing more than their homes were worth.
3. Deteriorating Loan Quality: The quality of mortgages deteriorated as lenders relaxed their lending standards. Mortgages were often given with little or no documentation, high loan-to-value ratios, and adjustable-rate terms that became unaffordable for borrowers once interest rates increased.
4. Securitization and Financial Derivatives: The securitization of mortgages into complex financial instruments further exacerbated the crisis. These MBS were bundled together and sold to investors globally, spreading the risk throughout the financial system. Additionally, derivatives like credit default swaps (CDS) were used to insure against default on these mortgage-backed securities, but their complexity and lack of regulation made it difficult to assess the risks involved.
5. Banks' Risky Behavior: Some major financial institutions engaged in risky behavior, taking on excessive leverage and making large bets on mortgage-backed securities and derivatives. This increased their vulnerability to market downturns and left them highly exposed when the housing market collapsed.
When housing prices started declining, homeowners defaulted on their mortgages, causing the value of MBS to plummet and triggering significant losses for banks and investors. This chain reaction weakened the solvency of financial institutions and created a crisis of confidence, leading to a credit crunch and the near-collapse of the global financial system.
It's important to note that the financial crisis of 2008 was a complex event influenced by various interconnected factors. The above explanation provides a general overview, but further study and analysis of the crisis would yield a more comprehensive understanding.