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Financial crisis of 2007

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Financial crisis of 2007–2010 The financial crisis of 2007–2010 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It was triggered by a liquidity shortfall in the United States banking system,[2] and has resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous eviction
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  Financial crisis of 2007–2010 The financial crisis of 2007–2010  is considered by many economists to be the worst financialcrisis since the Great Depression of the 1930s. [1]  It was triggered by a li!idity shortfall in the nited #tates ban$ing system% [&]  and has res!lted in the collapse of large financial instit!tions% the  bailo!t of ban$s by national go'ernments% and downt!rns in stoc$ mar$ets aro!nd the world. In many areas% the ho!sing mar$et has also s!ffered% res!lting in n!mero!s e'ictions% foreclos!res and prolonged 'acancies. It contrib!ted to the fail!re of $ey b!sinesses% declines in cons!mer wealth estimated in the trillions of .#. dollars% s!bstantial financial commitments inc!rred by go'ernments% and a significant decline in economic acti'ity. [3] (any ca!ses for the financial crisis ha'e been s!ggested% with 'arying weight assigned by e)perts. [*]  +oth mar$et,based and reg!latory sol!tions ha'e been implemented or are !nder consideration% [-]  while significant ris$s remain for the world economy o'er the &010&011  period. [/] Contents [hide] ã 1 'er'iew ã & +ac$gro!nd  o &.1 Growth of the ho!sing b!bble o &.& asy credit conditions o &.3 2ea$ and fra!d!lent !nderwriting practice o &.* #!b,prime lending o &.- redatory lending o &./ Dereg!lation o &.4 Increased debt b!rden or o'er,le'eraging o &.5 6inancial inno'ation and comple)ity o &.9 Incorrect pricing of ris$   o &.10 +oom and collapse of the shadow ban$ing system o &.11 7ommodities boom o &.1& #ystemic crisis o &.13 8ole of economic forecasting ã 3 6inancial mar$ets impacts  o 3.1 Impacts on financial instit!tions o 3.& 7redit mar$ets and the shadow ban$ing system o 3.3 2ealth effects o 3.* !ropean contagion ã * ffects on the global economy  o *.1 Global effects o *.& .#. economic effects o *.3 fficial economic proections o *.* &010 !ropean so'ereign debt crisis ã - 8esponses to financial crisis  o -.1 mergency and short,term responses o -.& 8eg!latory proposals and long,term responses o -.3 nited #tates 7ongress response ã / (edia on the crisis ã 4 #econd wa'e of the crisis: ã 5 #ee also ã 9 8eferences ã 10 )ternal lin$s and f!rther reading  [edit] Overview The collapse of the ho!sing b!bble% which pea$ed in the .#. in &00/% ca!sed the 'al!es of sec!rities tied to real estate pricing to pl!mmet thereafter% damaging financial instit!tions globally. [4]  ;!estions regarding ban$ sol'ency% declines in credit a'ailability% and damaged in'estor confidence had an impact on global stoc$ mar$ets% where sec!rities s!ffered large losses d!ring late &005 and early &009. conomies worldwide slowed d!ring this period as credit tightened and international trade declined. [5]  7ritics arg!ed that credit rating agencies and in'estors failed to acc!rately price the ris$  in'ol'ed with mortgage,related financial  prod!cts% and that go'ernments did not ad!st their reg!latory practices to address &1st cent!ry financial mar$ets. [9]  Go'ernments and central ban$s responded with !nprecedented fiscal stim!l!s% monetary policy e)pansion% and instit!tional bailo!ts. [edit] Background The immediate ca!se or trigger of the crisis was the b!rsting of the nited #tates ho!sing  b!bble which pea$ed in appro)imately &00-&00/. [10][11]  <lready,rising defa!lt rates on =s!bprime= and ad!stable rate mortgages ><8(? began to increase !ic$ly thereafter. <s  ban$s began to increasingly gi'e o!t more loans to potential home owners% the ho!sing price also began to rise. In the optimistic terms the ban$s wo!ld enco!rage the home owners to ta$eon considerably high loans in the belief they wo!ld be able to pay it bac$ more !ic$ly o'erloo$ing the interest rates. nce the interest rates began to rise in mid &004 the ho!sing  price started to drop significantly in &00/ leading into &004. In many states li$e 7alifornia refinancing became more diffic!lt. <s a res!lt the n!mber of foreclosed homes began to rise as well.#hare in GD of .#. financial sector since 15/0 [1&] #teadily decreasing interest rates bac$ed by the .# 6ederal 8eser'e from 195& onward and large inflows of foreign f!nds created easy credit conditions for a n!mber of years prior to thecrisis% f!eling a ho!sing constr!ction boom and enco!raging debt,financed cons!mption. [13]  The combination of easy credit and money inflow contrib!ted to the nited #tates ho!sing  b!bble. @oans of 'ario!s types >e.g.% mortgage% credit card% and a!to? were easy to obtain and cons!mers ass!med an !nprecedented debt load. [1*][1-]  <s part of the ho!sing and credit   booms% the n!mber of financial agreements called mortgage,bac$ed sec!rities >(+#? and collateraliAed debt obligations >7D?% which deri'ed their 'al!e from mortgage payments andho!sing prices% greatly increased. #!ch financial inno'ation enabled instit!tions and in'estors aro!nd the world to in'est in the .#. ho!sing mar$et. <s ho!sing prices declined% maor global financial instit!tions that had borrowed and in'ested hea'ily in s!bprime (+# reported significant losses. 6alling prices also res!lted in homes worth less than the mortgage loan% pro'iding a financial incenti'e to enter foreclos!re. The ongoing foreclos!re epidemic that began in late &00/ in the .#. contin!es to drain wealth from cons!mers and erodes the financial strength of ban$ing instit!tions. Defa!lts and losses on other loan types also increased significantly as the crisis e)panded from the ho!sing mar$et to other parts of the economy. Total losses are estimated in the trillions of .#. dollars globally. [1/] 2hile the ho!sing and credit b!bbles b!ilt% a series of factors ca!sed the financial system to  both e)pand and become increasingly fragile% a process called financialiAation. . #. Go'ernment policy from the 1940s onward has emphasiAed dereg!lation to enco!rage  b!siness% which res!lted in less o'ersight of acti'ities and less disclos!re of information abo!tnew acti'ities !nderta$en by  ban$s and other e'ol'ing financial instit!tions. Th!s%  policyma$ers did not immediately recogniAe the increasingly important role played by financial instit!tions s!ch as in'estment ban$s and hedge f!nds% also $nown as the shadow  ban$ing system. #ome e)perts belie'e these instit!tions had become as important as commercial >depository? ban$s in pro'iding credit to the .#. economy% b!t they were not s!bect to the same reg!lations. [14]  These instit!tions% as well as certain reg!lated ban$s% had also ass!med significant debt b!rdens while pro'iding the loans described abo'e and did not ha'e a financial c!shion s!fficient to absorb large loan defa!lts or (+# losses. [15]  These losses impacted the ability of financial instit!tions to lend% slowing economic acti'ity. 7oncerns regarding the stability of $ey financial instit!tions dro'e central ban$s to pro'ide f!nds to enco!rage lending and restore faith in the commercial paper  mar$ets% which are integral to f!nding b!siness operations. Go'ernments also  bailed o!t $ey financial instit!tionsand implemented economic stim!l!s programs% ass!ming significant additional financial commitments. [edit] Growth of the housing ule (ain articleB  nited #tates ho!sing b!bble
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