Factors that Caused the US Financial Crisis of 2008 - 09
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BUS702 Economics for Managers (BUS702)
Added on 2019-10-30
Factors that Caused the US Financial Crisis of 2008 - 09
BUS702 Economics for Managers (BUS702)
Added on 2019-10-30
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Running Head: Causes of US Financial CrisisFactors that Caused the US Financial Crisis of 2008-09By (Name)(Tutor)(University)(Date)
Causes of US Financial Crisis2Executive SummaryThere was a great global recession whose origination was from the USA financial crisis. There are several factors that are behind the origination of this financial crisis; most of these factors are interrelated. For instance if we consider the accelerated money growth and the housing bubble and the credit defaults we can clearly see the interrelationship. The financial crisis originated from the accelerated growth of money supply as a way of government’s attempt to improve the economic performance. The government’s regulations were thus the major factorsthat influenced the causes of the financial crisis that ended up in causing the global recession. The growth of money supply stimulated the aggregate demand which raised the demand for assets. One of the most important asset that people bought was homes; the increased demand for homes raised their value and prices went up. Many investors found it very profitable to invest in the construction of new homes to meet the rising demand; a housing boom was created. The ability of households and investors to raise the housing demand was because it was easy to obtain capital; this created a housing market boom. This boom together with some other factors was the real origination of the financial crisis; it was followed by a hurting burst. The burst lowered the ability of the previous borrower to repay their mortgage loans and thus the financial lenders were suppressed. Great losses were made, some lenders became bankrupt, the lenders restricted their lending and acquisition of capital was tightened. Investors who needed capital to make investments could not obtain it and thus growth of the economy was limited. This is the financial strain that was felt both in the US and other nations. The stock markets fell due to uncertainty of further financial drain.
Causes of US Financial Crisis3Factors that Caused the US Financial Crisis of 2008-09Introduction Economies perform differently during various business cycles; there are two cycles; the boom (peak) period where there is an accelerated growth in the economy and the burst (recession) period where there is strained economic growth. Before 2008, the performance of the US was high. Pettinger (2017) pointed out that the US economy was stable from 2000 to 2007 with a strong growth, falling unemployment and low inflation. However, despite this economic stability Pettinger noted that there were rising concerns on the growing instability on the financial market and credit. There was a boom in the housing industry that resulted in an increment in the aggregate consumption component of GDP. Thus the GDP recorded before the crisis was high. This paper will analyze the changes in GDP before, during and after the crisis. During the crisis, many macroeconomic indicators performance was poor; these indicators include real GDP, Inflation, Unemployment, etc. The paper will consider the actual causes of the crisis which resulted from the money supply growth. It will cover the origination of the money supply growth. This research will showthat the financial crisis in the US was as a result of failure on the financial lenders and the government. Rosner (2013) pointed out that the government’s regulation on lending institutions was weak. It shall analyze how each of these parties failed and the impact of each of their failures. The impacts of the financial crisis were not only felt in the USA economy but was spread to other nations; there are just a few economies that wasn’t impacted by this crisis. Some of them that are financially stable were able to implement policies that led to a quick recovery while others are constrained up to date. The Factors Responsible for the Financial CrisisLoose Monetary Policy and Money GrowthIn the early 2000s the US economic growth was lower which stimulated the US Central Bank to lower its interest rates. Malinen (2017) argued that prior to the crisis, the US monetary policy was loose. The impact of a lower interest rate is an increased money supply since people are attracted to loans advanced by financial institutions owing to the low cost of repayment. There was thus an increased borrowing of loans and a greater growth of the money supply in the circulation. Since investors are always uncertain about the future, they decided to utilize this available capital to invest in assets that would give them returns in the future. The major asset
Causes of US Financial Crisis4that demand went up was that of the housing industry. Households and investors decided to utilize this availability of cheap capital to buy homes. Fig: Growth of money supplySource: Positivemoney.org (2017)The graph shows that there was a huge money creation by the banks prior to the crisis. According to Positivemoney.org (2017), money is created every time a loan is made by the banks; the money and debt amount in the US economy had doubled in a period of seven year from the advancement of the loans.Subprime MortgageAn increased demand for homes raised the demand for mortgages. Initially, financial lenders could only advance loans to prime lenders who had good credit ratings and avoided loaning the subprime borrowers. This is what had kept the housing market in a stable state. The increased demand for mortgages resulted in the financial lenders weakening their lending
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