what caused the great recession of 2008

Faced with little regulatory restraint, banks overdosed on risky loans."[68]. Banks that created mortgage-backed securities often misrepresented the quality of loans. In such processes, the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt deflation." Mortgage risks were underestimated by every institution in the chain from originator to investor by underweighting the possibility of falling housing prices given historical trends of rising prices. It collapsed and was sold at a fire-sale price to bank JP Morgan Chase March 16, 2008. High levels of debt have long been recognized as a causative factor for recessions.

In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default." This caused financial institution losses to surge, deepening the credit crunch, thereby creating an adverse feedback loop. Several economists and think tanks have argued that income inequality is one of the reasons for this over-leveraging. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. About 45 percent of the largest firms had a large market share in three or four nonconventional loan market functions (originating, underwriting, MBS issuance, and servicing). These institutions had become so big that the failure of just one of them would pose a systemic risk. When concerns arose regarding its financial strength, its ability to secure funds in these short-term markets was compromised, leading to the equivalent of a bank run.
Big banks got the competitive edge they required by engaging in multiple sophisticated derivatives. However, as they say, those who forget history are condemned to repeat it. There are more causes of the great recession which started end of 2007 beginning of 2008. [119], Critics allege that the rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks was not adequately factored into the compensation of senior executives. lending, underwriting, servicing, and securitizing). If you are hoping to refinance your mortgage, but worry that you won’t be able…, When you decide to buy a home, it is major financial commitment because you lock…, If you’re facing an unexpected financial crisis or dilemma, it can be hard to decide…, Don’t let bad credit stand in the way of your ability to pay diamond and…, Your email address will not be published. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril... Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. Fligstein and Roehrkasse make the case that the integrated structure of financial firms into multiple sectors of the MBS industry, alongside the marketplace dynamics of increased scarcity and competition for new mortgages, led firms to engage in fraud. The theory of laissez-faire capitalism suggests that financial institutions would be risk-averse because failure would result in liquidation. "[96] However, this advice was not heeded by these institutions, which had used the boom times to increase their leverage ratio instead. Tips on How to Refinance a Mortgage When You Have Bad Credit. [103], The CDO in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. [156], This globalization can be measured in growing trade deficits in developed countries such as the U.S. and Europe. Catalyzed by the crisis in subprime mortgage-backed securities, the crisis spread to mutual funds, pensions, and the corporations that owned these securities, with widespread national and global impacts. (Spring 2003), p.13. Up to 9 million homes may enter foreclosure over the 2009-2011 period, versus one million in a typical year.

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