Global Financial Crisis - Why?
The global financial crisis, which has been here for a while, really started to show its effects in the summer of 2007 and then into 2008.
Around the world stock markets experienced massive losses, large financial institutions have gone bankrupt or been bought out,
and governments in even some of the richest nations have had to come up with rescue packages to save their financial systems.
On the one hand many people think that those responsible for the financial problems are exactly the ones being bailed out,
while on the other hand, a global credit crunch will affect the lives of almost everyone in an increasingly
globalized world. Mahy expert think the problem could have been avoided, if ideologues supporting the current economics models weren’t
so vocal, influential and inconsiderate of others’ viewpoints.
Securitization and the subprime crisis
The subprime crisis came about in large part due to financial instruments such as securitization where banks
would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks,
millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities.
The security buyer gets regular payments from all these debts and the bank offloads the risk. Securitization
was seen as perhaps one of the greatest financial innovations in the 20th century.)
House Bubble
Between 1997 and 2006, the price of the average American house increased by over 120%. During the two decades
ending in 2001, the national median home price ranged from 2.9 to 3.1 times median household income.
This ratio rose to 4.0 in 2004, and 4.6 in 2006. This housing bubble resulted in numerous homeowners
refinancing their homes at lower interest rates, or financing consumer spending by taking out further loans
secured by the price appreciation.