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Financial Crisis of 2008

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Financial Crisis of 2008
Financial Crisis

Todd McTigue

INTRO In 2008, the United States experienced a major financial crisis which led to the worst recession since World War II. Both the financial crisis and the downturn in the U.S. economy spread to many foreign nations, resulting in a global economic crisis. In the months following the initial decline, the U.S. stock market plummeted, liquidity dried up, successful companies began laying off employees by the thousands, and it became apparent that a recession was upon the American people.

THE ORIGINS OF THE FINANCIAL CRISIS In mid 1990’s to 2006, the fundamentals of the housing market became distorted as increasing house prices across the U.S. formed a bubble. In 2003 a survey was conducted by Karl Case and Robert Shiller, it concluded that an overwhelming majority of people agreed with the statement that real estate is the best investment for long­term holders. Real estate was was a great investment and perceived as a safe investment. At the time people were oblivious to what was actually going on, as a result they assumed or even expected the prices to continue to rise. This occurred right up until the peak of the bubble in the housing prices. The problem was house prices started to grow much faster than real household income, a problem because home buyers were stretching themselves thin. Low interest rates only contributed to the increase in demand for mortgage­financed housing. The number of mortgage frauds, according to the Financial Crimes Enforcement

Network, went from 3,500 in 2000 to 53,000 in 2007. Mortgage brokers where helping potential buyers navigate the application process, sometimes encouraging lying or misrepresentation of information. Credit scores were being manipulated and overall deceptive practices by borrowers and lenders



Cited: Baily, Neil Martin, Robert E. Litan, and Matthew S. Johnson. 2008. The Initiative On Business and Public Policy, Brookings Institute, “The origins of the financial crisis” http://www.brookings.edu/~/media/Files/rc/papers/2008/11_origins_crisis_baily_lita n/11_origins_crisis_baily_litan.pdf Caballero, Ricardo J. 2009. MIT Working Paper, “The “Other” Imbalance and the Financial Crisis” http://www.iadb.org/intal/intalcdi/PE/2010/04930.pdf Ellis, Luci. 2008. “The housing meltdown: Why did it happen in the United States?”, Bank for International Settlements, Working papers No 259. http://www.bis.org/publ/work259.pdf Salmon, Felix. Wired. 02/23/09. “Recipe for Disaster: The formula That Killed Wall Street” http://www.wired.com/techbiz/it/magazine/17­03/wp_quant?currentPage=all

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