The Consequences Of The 2008 Financial Crisis

The 2008 financial crisis is considered by many economists to be the most perilous crisis faced by the modern day world economy since the 1930s Great Depression (Krugman, 2009). The collapse of Lehman brothers, one of the world’s leading investment banks before declaring bankruptcy, in September 2008 almost took down the world’s financial system. Many factors such as U.S. Home ownership policies, poor risk management, irresponsible lending by banks and deregulations of banks were pointed out as major factors that precipitated the financial crisis. The 2008 financial crisis eventually resulted in an inevitable global economic meltdown despite aggressive bailout efforts by the Federal Reserve and Treasury Department to prevent the U.S. economy …show more content…
Lehman Brothers was initially on the beneficiary end of the from the housing boom that allowed for huge profits on mortgage loans, encouraging its practice of offering subprime loans to aggregate mortgages for securitization. However, this practice of offering mortgage loans to subprime borrowers fell apart when the housing bubble burst. Lehman Brother was incredibly overexposed to losses at the time of the financial collapse due to the drastic fall in value of MBS. (Lartey, 2012). Unable to swallow the losses, Lehman Brothers eventually declared bankruptcy on September 15 2008. The collapse of Lehman Brothers had immediate repercussions, frightening the global economy with share prices slumping around the world. Due to the high level of contagion among banks, Lehman Brothers’ bankruptcy triggered an economic turmoil and caused a worldwide economy meltdown. (McDonald and Robinson, …show more content…
The securitisation of subprime mortgages into MBSs and CDOs had led to banks engaging in irresponsible lending activities, driving up the housing bubble in the mean time. Furthermore, due to the high profits from subprime securitisation, banks took in almost no account of risk management in the process of offering loans to unqualified borrowers and securitisation of subprime mortgages. When the U.S. housing bubble deflated as housing prices started to plummet, mortgage delinquency skyrocketed and drove banks that had previously accumulated too many bad mortgages during the housing boom for securitization into insolvency. In addition, simultaneous payments of CDOs and CDSs by major investment banks and financial institutions put the economy under catastrophic financial pressure, pressuring the market around the world and driving the economy to collapse eventually. Banks and financial institutions had frozen all credit and loans overnight. As a result, global asset prices fall and liquidity dries up, tipping the economy into a downward spiral that eventually resulted in a subprime mortgage crisis, also known as the 2008 Financial

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