Primary Causes of the 2008 Global Financial Crisis

GLOBAL FINANCIAL CRISIS 2008 RAZI SALIH

PRIMARY CAUSES OF THE 2008 GLOBAL FINANCIAL CRISIS The 2008 global financial crisis has been recognised as the worst recession since the Great Depression. It was largely caused by deregulation in the international financial services industry, leading to banks trading in hedge funds with derivatives. To support this, the banks needed more mortgages.

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Sub-Prime Lending

The Housing Bubble

To get the mortgages they needed to underpin the profitable trading of derivatives, banks began creating interest-only home loans. These were affordable to sub-prime borrowers. However, as the mortgage interest rate reset, the fed funds rate was raised by the Federal Reserve, causing house prices to plummet. Thousands of homeowners who had taken out an interest-only mortgage were left in a position where they could not afford their repayments but could also not afford to sell their home due to the huge decrease in value.

The housing bubble was created through a combination of easy access to mortgages and rising house prices, encouraging many people to take out a loan and purchase property.

However, by 2007 – following the rise in interest rates in 2004 resulting in house prices beginning to fall again – the housing bubble burst, with the resulting crash driving the global financial industry to its knees.

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The repercussions of the financial crisis have resulted in many changes to the financial services industry. You can read more about these by visiting the blog of Razi Salih.