2008 Financial Crisis
2008 Financial Crisis
The Financial crisis in the year 2008 affected globally. The onset of the recession started with the huge flow of money in the American economy. During the year 2001 U.S faced recession but for a short span of time. In order to recover the economy the Federal Reserve lowered the interest rate from 6.5% in May 2000 to 1.75 % in December 2001. Money was cheaper and investors invested more money in the economy. This was the beginning of the problem. The trigger of the crisis was the housing bubble.
As credit was easily available banks offered loan to the borrowers on easy terms. These loans were mortgage, credit and auto loans. The real estate thrived in the year 2004 and US citizen started purchasing more houses. The loan was provided even to the subprime lenders or undocumented immigrants. The credit agencies rated the subprime lenders high without investigating their background. The subprime mortgage increased to almost double between the year 2004 and 2006.
In this period there was rise in the financial agreements due to sharp rise in buying of houses. This was known as mortgage-backed securities (MBS) . The value of these securities fluctuated with increase or decrease of mortgage payment. The rise or decline of housing prices affected the mortgage payment.. But in the year 2006 Fed increased the interest rate , the borrowers were unable to pay the loan. So the housing prices fell sharply in the year 2007. Due to decline in the price of real estate the investors who invested in MBS also declined . Then the investors started selling these securities and the price of MBS fell further. This affected the US stock market. The US stock market crashed in the year 2008 .Many financial institutions invested their money in MBS became bankrupt. Defaults of various loan rose and the crisis effected the other industries of the country. Other financial tools like CBO and credit default swap were implemented by the banks and the insurance agencies. The investors started using credit default swap as insurance of their losses. The insurance agencies used these tools to gain profits so they also introduced derivatives by selling them to the speculators. The insurance agencies took huge risk during the crisis period.
The rise of debt in the country also caused the financial crisis of 2008. Debt increased due to MBS, credit default swap, collateralized debt obligation(CDO).The financial sector of US offered these types of options as interest rate was low during subprime crisis.
Relation with the movie
The Oscar nominated movie of 2015 "Big Story" explains the real life application of financial tools in the crisis period. The hedge fund manager played by the character Michael Burry somehow feels that the housing market is going to crash. So he uses the tool credit default swap . Though his clients became angry as their fixed income was swapped between two or more parties but they ultimately gained about 500%. The financial tool CDO is discussed in the movie. The movie focussed how use of these financial tools created the problem for the investors. At the end, the leading characters of the movie gained by trading against the housing market.
Effects of Crisis
The after effects of the financial crisis affected almost all the sectors of the economy. The decline in the housing sector created a decline in the consumer spending. So businesses incurred loss. The unemployment rate increased and the companies facing huge loss tried to cut down their cost by reducing the number of employees. Many big companies invested in US market became bankrupt. The fall of investment bank Lehman Brothers in 2008 , Merrill Lynch and insurance company AIG crashed the US stock market making millions of investors bankrupt. There were total of 81 public corporations who filed for bankruptcy in the last quarter of 2008. There was huge bail-out and the US taxpayers had to spent near about $9.7 trillion in these bail-out programs to rescue the companies from crisis. The banking sectors also lost confidence in lending loans to borrowers after this crisis. They implemented strict rules for borrowers. But this created problem for the borrowers. The debt to the bank increased as the unemployment rate increased along with the prices.
Conclusion
In order to recover the economy from the crisis the Federal Reserve, Treasury and the Securities and Exchange Commission came together to take some strict steps. They implemented Federal Deposit Insurance Corporation(FDIC) program to offer support to the insurance companies. Federal reserve also implemented various monetary policies like open market operations, discount window. This helped the troubled economy to recover from the crisis. The Fed reduced the interest rate to zero from 2009 and continued at that rate to 2014.The Congress also spend $700 billion to offer support to the mortgage assets. One of the costliest expenditure of the US residents is the heath sector. The government took steps to cut the cost in the health sector. Inflation was also reduced to fight recession. However, during the year 2010 the economy started recovering the unemployment rate decreased, the transaction with the bank increased, the value of the real estate started increasing. There were rise in consumer spending as income increased due to rise in high paying jobs.
Works Cited
The Big Short (HD) Movies. YouTube.N.p, 2015. Web. 3 June 2016.
What Caused The Financial Crisis & Recession? | Positive Money". Positive Money. N.p., 2016. Web. 3 June 2016.
Thomas, Bill and Keith Hennessey. "What Caused The Financial Crisis?". The Wall Street Journal. N.p., 2011. Web. 3 June 2016.
