The Causes of Subprime Mortgage Financial Crisis
By Jessica Tian
The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play …show more content…
In fact, the risks of the housing loans are shared by the bond holders through the issuance and sale of CDOs.
2. Main Factors Leading the Financial Crisis
The crisis can be attributed to a number of factors in both housing and credit markets. Causes include the inability of homeowners to make their mortgage payments and speculation, inaccurate credit rating, risky financial derivatives products that distributed and perhaps concealed the risk of mortgage default, loose monetary and housing policies, moral hazard which people’s greedy, international trade imbalances, and deregulation of government.
2.1 The Changes of Interest Rates The loose monetary policy of the Federal Reserve Bank began in late 2001 when it is under the watch of Greenspan, which was aimed to stimulate the U.S. economy and help the U.S. economy out of recession contributed to the continuous boom in the housing market at that time. The interest rates were low to only 1%, so banks can easily borrow money from Federal Reserves and made them go crazy use with leverage which means borrowing money to amplify the outcome of a deal. There were an abundant of cheap credits at that time and in the meanwhile, the risks were existed in them. However, Fed increases the level of interest rates for 17 consecutive times from June 2004 to June 2006, which made the benchmark interest rate from 1% to 5.25%, in order to alleviate economy overheating. So, this led to a floating