Causes of Global Financial Crisis in the USA- Report
Added on 2019-11-26
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Running Head: The US Financial CrisisCauses of Global Financial Crisis in the USABy (Name)(Tutor)(University)(Date)
The US Financial Crisis2Causes of Global Financial Crisis in the USAIntroductionThe global financial crises origination was from the USA economy. This is the greatest recession that resulted in negative harmful impacts to many world economies. Some economies are still on the recovery process as the impacts still last to date. This paper will show the factors that contributed to the USA financial crisis which consequently resulted in the global financial crisis. The crisis can be argued to have been spread in a fast pace to the other world economies owing to the interrelatedness that has been raised by globalization (Rosner, 2013). There are a wide view of factors that major analysts has put forward to explain the causes. The major cause is argued to be the failure of the subprime mortgages that the mortgage lenders had introduced. According to Fisher (2013), there was a notable boom in the US housing market that later turned to be a painful burst. It was in the mid-2000s when the housing demand in the US started rising; the rise was facilitated by factors such as; the mortgage interest rate was relatively low, there was a recovery of personal income, in addition, the credit lending standards were lowered. These factors made it easier for the households to acquire mortgage credits. The banks also went forward and started lending to high-risk borrowers whose incomes were too low. There was an increased housing demand which caused a rise in prices. According to Fisher (2013), the gauge for the US housing market by the Federal Housing Finance Agency’s (FHFA) showed that the price rose by 67% in 2007. The low lending standards by the lending institutions is an indicator that there was limitedgovernment regulation. The recession triggered the attempt of many responses of which some were deemed successful whereas others did not result in significant changes. Most economists consider the actions of the US big banks to be the real origination of theglobal recession; there is a great support for the same. This paper will cover the performance of the US economy prior and during the crisis. The factors that contributed to the global recession will be determined whether they started showing up signs on the same year of the crisis or had shown signs for a period before. If we find out that the signs had been shown a long time before, we shall conclude that the crisis was avoidable. However, if the signs showed up closer to the crisis, it will concluded to have been unavoidable. It shall put more emphasis on the major factors that are commonly agreeable to have been behind the global recession. We shall analyze where the banks went wrong and also where the government failed to play its part well.
The US Financial Crisis3Contributing FactorsSubprime Mortgage crisis and the US Housing MarketThe US housing boom was stimulated by the deep involvement of the US government on its mortgage market through various regulations. Its main aim for the deep involvement was to facilitate the access of credit to the subprime borrowers. For instance, the 1977 Community Reinvestment Act prohibited the discrimination of borrowers based on their income levels. The 2003 American Dream Down payment Assistance Act provided closing cost assistance and downpayments to low-income communities (Malinen, 2017).The turmoil in the US financial market lasted from 2007 to 2009; it was caused by a housing bubble that was as a consequence of the expansion of mortgage loans to borrowers that were of high risk. Initially, the interest rate were very high and the potential borrowers were discouraged from borrowing from the lenders because servicing the debt was more expensive. When the interest rates were lowered by the federal government, the servicing costs fell and mortgages became less expensive to the borrowers, it attracted many less risk and high risk borrowers (Amadeo, 2017). Initially, the high risk borrowers wouldn’t be allowed an access to credit; the lenders were of strict restrictions. The only people who were allowed access to mortgage were those who had credit histories that were above average. The purchase for homes was thus low since many people had credit histories that were below average. Their requests for small down payments or on choosing high payment loans were always denied by the lenders unless they were backed up by the government insurance. The Federal Housing Administration (FHA) backed some high-risk families to enable them to acquire access to small-sized mortgagesfrom the lenders. Those who were not backed up by this government’s body were forced to depend on rentals. The stemming of the 2007-10 subprime mortgage was from the expansion of mortgage credit to even the high-risk borrowers. Since people had more mortgage credit, their demand for homes went up consequently resulting in rising home prices (Anderson, 2017). The availability of mortgage credit to those who couldn’t access them before contributed to a fluctuation in the homeownership by around 65% with low mortgage foreclosure rates.It was in the mid-2000s when the lenders made a decision to make credit mortgages available to the high- risk borrowers through selling them to investors while repackaged into pools. These risks were apportioned by the use of new financial products; most of the subprime mortgage funding was now provided by private-label mortgage–backed securities (PMBS)
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