The Credit Crisis of 2008
November 22, 2008
Many factors have contributed to the 2008 financial meltdown. The details behind the credit crisis can be summarized as follows:
The major impetus behind the entire crisis can be attributed to the low cost of borrowing. Since the United States’ economy was lagging severely back in 2001, its central bank initiated a policy of lowering interest rates, with the intention of reviving a stalled economy. The FED reduced the federal funds rate, which is rate of interest that banks charge one another, to its lowest point in 2003. With low rates abound, this helped fuel the real estate market, and speculation in the real estate market. The end result was that home values saw a dramatic increase.
Banks and mortgage companies saw this as a time to make money. They jumped into a frenzied real estate market with both feet, and began lending to unqualified borrowers. This was the beginning of what we call the subprime mortgage market. To hide these subprime mortgages as much as possible, these subprime mortgages were bundled with more credit-worthy loans, and as a package, were sold to the investment community. Read more