Many economists refer to the current housing crisis in the United States as the worst since the Great Depression. The housing crisis This paper will discuss the causes and effects of the United States mortgage banking crisis, as well as possible ways to prevent such a crisis in the future.
In order to better understand the factors that led to the mortgage crisis, it is important to obtain some background information about the housing market. The U.S. mortgage crisis is often referred to as the subprime mortgage crisis. A subprime mortgage is simply a loan made to someone with a poor credit history. This has typically been a narrow market and has involved a fairly small portion of borrowers. However, when these borrowers were unable to pay their mortgage payments it created a major financial shock and pushed the housing market to the floor.
Many of the factors that led to the mortgage crisis took their roots shortly after 9/11 and the invasion of Iraq. After the attacks on the World Trade Center, the Federal Reserve cut interest rates to an unprecedented low. Under normal circumstances, this action would cause many economists to fear a rise in inflation. However, this was not the case, mainly due to China joining the World Trade Organization in November, 2001. This new arrival in the global market led to the introduction of many Chinese-made products in the United States. This caused prices to fall, and many began to fear deflation.
The introduction of China to the global market led to major growth in the demand for oil and other products. The rise in demand caused a rise in price, which in turn led to an increase in the U.S. trade deficit. The rise in the U.S. trade deficit caused billions of dollars overseas to the Middle East, Russia, China, and other countries. Many of these countries took the new cash flows received and invested this money in the United States, mainly in the form of U.S. Treasury bonds. However,... [continues]
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(2008, 11). Subprime Mortgage. StudyMode.com. Retrieved 11, 2008, from http://www.studymode.com/essays/Subprime-Mortgage-180017.html
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