Essay About Financial Crisis And Housing Bubble

Us Financial Crisis
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US financial crisis:Why happened?Loose monetary policy- low interest rate:New and complex financial product- MBS (Lehman Brothers Holdings)The housing bubble burstLoose monetary policyAfter and 9/11, FED reduces interest rates from 6.5% in 2000 to 1% in 2003Printed too many dollars – banks had too much cashForeigners increased holdings of US Treasury bonds, increasing liquidity. Proceeds mainly went into housing market.FED increased interest rates to 6% in 2006, many householders not could not reimburse their mortgages.New and complex financial product- MBS (Lehman Brothers Holdings)Mortgage backed securities (MBS)- bundle together disparate loans (such as suprime mortgages, car loans), and/or risky investments, create packaged securities and sell off the shares[pic 1]Lehman Brothers Holdings, which was resulted in bankrupt. As mortgage-backed securities is a significant portion of its revenue. And lots of people are suffered from this.The housing bubble burstNot enough mortgages to satisfy Wall Street’s demands for derivatives, so riskier loans, second mortgages to finance consumersInterest rates increase suddenly from 1% to 6% so by August 2008, 15% of all mortgages had defaultedMortgages as % US GDP increased from 45% in 1990 to 73% in 2008. US private household debt represented 127% of personal disposable income by end 2007. By end 2008, US private debt equals 290% GDP6 million Americans lost their homesHouse prices fell by 30-40% in 2008, MBS and CDS shown to be worthless pieces of paper [pic 2]The main reason is subprime mortgage, which means bank giving loan to people who may have difficulty in maintaining the repayment schedule. The interest rate of loan is high. However, the bank also need to bear the risk of default.Causes crisis:Loosing lending regulationPoor creditworthiness of borrowsBorrowers unable to payFailure of banks and financial instituations