The Credit Crisis and Its Impact on the Financial World
The Credit Crisis &
the Resulting Effects on the Financial World
Introduction
The financial crisis of 2007 until present is a financial event that borders on what many say is as bad if not worse than the great depression. It has caused repercussions that cannot be afforded to be forgotten going into the future. One of the major events that kick-started the decline of the banking system as well as causing major liquidity issues in debt markets was the housing bubble burst. This forced many of the banking leaders in the U.S. to realize losses in the upwards of several hundreds of billions of dollars. At the same time, banks ' stock market capitalization was cut in half. This of course set off a chain of events that rippled through the financial realm. Financial Institutions were now realizing losses because of the defaults on mortgages which then when they tried to make claims on their credit default swaps (CDS) there was not enough liquidity by firms such as AIG to pay these claims. This of course led to the bailouts, however we will get to that shortly. All of these events are what has led to what analysts have said to be a recession. This paper will attempt to explain the causes that credit issues had on the financial crisis as well as show how liquidity played a major role in throwing debt markets into panic and in some cases failure. I will also give some insight into how the debt markets became inactive because of these issues. We will also take a look at how interest rates affected this crisis as well as how the stock market and initial public offerings (IPO 's) were affected.
The Beginnings of the Bubble Burst
After the internet bubble burst of 2000 the Federal Reserve Bank was worried about a serious deflationary period. Because of this fear they did not want to counteract the housing bubble. The Federal Reserve Bank actually lowered the federal funds rate from 6.5% to 1% in the period from 2000 to 2003. This was
the Resulting Effects on the Financial World
Introduction
The financial crisis of 2007 until present is a financial event that borders on what many say is as bad if not worse than the great depression. It has caused repercussions that cannot be afforded to be forgotten going into the future. One of the major events that kick-started the decline of the banking system as well as causing major liquidity issues in debt markets was the housing bubble burst. This forced many of the banking leaders in the U.S. to realize losses in the upwards of several hundreds of billions of dollars. At the same time, banks ' stock market capitalization was cut in half. This of course set off a chain of events that rippled through the financial realm. Financial Institutions were now realizing losses because of the defaults on mortgages which then when they tried to make claims on their credit default swaps (CDS) there was not enough liquidity by firms such as AIG to pay these claims. This of course led to the bailouts, however we will get to that shortly. All of these events are what has led to what analysts have said to be a recession. This paper will attempt to explain the causes that credit issues had on the financial crisis as well as show how liquidity played a major role in throwing debt markets into panic and in some cases failure. I will also give some insight into how the debt markets became inactive because of these issues. We will also take a look at how interest rates affected this crisis as well as how the stock market and initial public offerings (IPO 's) were affected.
The Beginnings of the Bubble Burst
After the internet bubble burst of 2000 the Federal Reserve Bank was worried about a serious deflationary period. Because of this fear they did not want to counteract the housing bubble. The Federal Reserve Bank actually lowered the federal funds rate from 6.5% to 1% in the period from 2000 to 2003. This was
Cited: 1. United States. Federal Reserve Bank of St. Louis. The Financial Crisis Timeline. Web 09 Dec. 2010.