Financial Crash of 200's

Financial Crisis of 2008

CRISIS SUMMARY

From 2000 until 2006 the United States real estate market was a driving force behind the growth in the US economy. Things seemed to be going great, people were being placed in homes, the prices of houses were rising, and financial institutions were using this to their advantage by bundling the mortgages in securities and selling them.

The US economy was growing, credit had a lax policy on approval and spending was at an all time high. The financial sector was producing handsome returns and backing the growth of the economy. Then, the unthinkable happened.

In 2006 the real estate market was correcting itself from its overvaluation. With the US having a sizeable amount of people in mortgages they couldn’t afford, the level of default started increasing putting the companies that had bought them in a high-risk state. Their assets were decreasing and they didn’t have the funds to answer margin calls creating a bankruptcy risk.

With the bankruptcy of Lehman Brothers and risk of for the other top tier financial institutions in the shadow banking system a run on the stock market and institutions occurred creating the financial crisis of 2008 (New York Fed).

The United States financial crisis of 2008 occurred from the over leveraging of financial institutions, fraudulent workings of ratings companies, and mortgage/credit lenders, and a lack of regulation by the Government.

When the S&P 500 fell over 20% and the Dow Jones Industrial Average fell 18% during the week of October 6, 2008 (Siburn) it was a crash of seismic proportions. It was a financial crisis.

The “popping” of the real estate bubble, which was blown up in the year’s preceding the crisis, set off the US financial crisis. In order to get to the “popping” of this bubble, an understanding of how the bubble was inflated is needed.

FACTORS BEHIND

The mortgage lenders were being given incentives by financial institutions to get sub-prime mortgages....