Causes of the 2008 us recession essay

Money supply decreased considerably between Black Tuesday and the Bank Holiday in March when there were massive bank runs across the United States.

Causes of the 2008 us recession essay

Sub-prime mortgage crisis GAO Historical Data Based on the assumption that sub-prime lending precipitated the crisis, some[ who? Securities and Exchange Commission SEC to relax the net capital rulewhich encouraged the largest five investment banks to dramatically increase their financial leverage and aggressively expand their issuance of mortgage-backed securities.

Mortgage underwriting standards declined gradually during the boom period, particularly from to The quality of loans originated also worsened gradually during that period. The combination of declining risk premia and credit standards is common to boom and bust credit cycles. In other words, standards gradually declined but defaults suddenly jumped.

Furthermore, the authors argued that the trend in worsening loan quality was harder to detect with rising housing prices, as more refinancing options were available, keeping the default rate lower.

A low down payment means that a home represents a highly leveraged investment for the homeowner, with little equity relative to debt. In such circumstances, only small declines in the value of the home result in negative equitya situation in which the value of the home is less than the mortgage amount owed.

Causes of the 2008 us recession essay

Homeowners with negative equity have less financial incentive to stay in the home. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimatedstrategic defaults occurred nationwide duringmore than double the total in Such loans were written into mind-numbingly detailed contracts and then swapped for more expensive loan products on the day of closing.

This created negative amortizationwhich the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry Brown for "Unfair Business Practices" and "False Advertising" was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages ARMs that allowed homeowners to make interest-only payments.

This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender.

What is a Causal Analysis Essay?

Countrywide, according to Republican Lawmakers, had involved itself in making low-cost loans to politicians, for purposes of gaining political favors.

Risk-taking behavior[ edit ] In a June speech, U. President Barack Obama argued that a "culture of irresponsibility" [60] was an important cause of the crisis. He criticized executive compensation that "rewarded recklessness rather than responsibility" and Americans who bought homes "without accepting the responsibilities.

And a growing economy bred complacency.

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Formulas for calculating aggregate risk were based on the gaussian copula which wrongly assumed that individual components of mortgages were independent. In fact the credit-worthiness of almost every new subprime mortgage was highly correlated with that of any other, due to linkages through consumer spending levels which fell sharply when property values began to fall during the initial wave of mortgage defaults.

Causes of the 2008 us recession essay

Using technical terms, these firms were highly leveraged i. A key to a stable financial system is that firms have the financial capacity to support their commitments.

This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.

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They borrowed to improve their standards of living, buying bigger houses than they could afford and using those houses as piggy banks. Research by Raghuram Rajan indicated that:The Achilles tendon runs down the back of the lower leg and joins the calf muscles to the heel bone.

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It is widely agreed that the main cause of the recession was the collapse of the housing bubble that had been created, and as result, it is important to understand the initial causes of the bubble, the first of which being the deregulation of banks by the government.

Many factors directly and indirectly caused the Great Recession (which started in with the US subprime mortgage crisis), with experts and economists placing different weights on particular causes..

Major causes of the initial subprime mortgage crisis and following recession include: International trade imbalances and lax lending standards contributing to high levels of developed country. Nov 19,  · Mid-wage occupations, paying between $ and $ per hour, made up about 60 percent of the job losses during the recession.

But those . Essay on Causes of the US Recession - Many people today would consider the , United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of and to be the most devastating.

Great Recession of Introduction The U.S. recession was felt in nearly every country’s economy worldwide. Causes of the Recession Essay Over the past few years our country and the rest of the world has experienced an economic crisis.

In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but.

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