MacroEconomics Current Events Article
Imran Dumbuya
Rowan College at Burlington County
ECO-204
Dr. Larkey Mays
16 November 2021
Article Name: Causes of the 2008 Global Financial Crisis: What Really Caused the Crisis?
Article Authors: Written by Kimberly Amadeo, Reviewed By Eric Estevez
Publication Date: September 23, 2021
Publication/Source: The Balance
Article URL: https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176
Article Analysis/Description
First, the article describes how the deregulation of banking enabled banks to invest their customers’ money in derivatives, where the derivatives were established with the help of subprime home mortgages. Second, the article explains something about securitization; it demonstrates how hedge funds and other financial institutions traded mortgage-backed securities, collateralized debt obligations, and derivatives. Third, the article explains how more investors were ready to invest in derivatives since they were covered by credit default swaps, increasing derivatives demand. However, banks wanted more mortgages to back the assets, prompting banks and mortgage brokers to give loans to anybody willing to take the loan.
The article concludes by explaining how banking deregulation had a significant role in the 2008 global financial crisis. The authors demonstrate how deregulation enabled speculation on derivatives, which were backed by low-cost, hurriedly issued affordable mortgages to even those with poor credit. The article explains how the idea caused the growing value of real estate, and the availability of low-cost mortgages enticed many individuals to take out house loans. Furthermore, the authors explain that the Federal Reserve increased the interest rates due to the flourishing housing market. However, the result was more and larger mortgage payments that exceeded borrowers’ capacity pay. Finally, mortgage loans were intricately tied to derivatives, hedge funds, and credit default swaps. In conclusion, that was the quick downfall of the housing market that precipitated the United States of America’s financial crisis, according to the article.
I picked the article “Causes of the 2008 Global Financial Crisis” because it attempts to explain what caused the financial crisis in the United States. Furthermore, the article was easy to understand the concepts and general aim of the authors. The article’s primary objective is to describe the elements that led to the 2007-2008 financial crisis. It explains that the financial crisis occurred due to banking system deregulation, which permitted banks to partake in hedge fund trading via derivatives.
The financial institution needed more mortgages to fund the profit-generating derivatives sales, which resulted in the emergence of interest-only loans accessible to people with low credits. The Federal Reserve subsequently boosted the fed funds rate concurrently with the rise in interest rates on these new mortgages, resulting in homeowners unable to make mortgage payments. Thus, the article demonstrates how Federal Reserve’s and banks created the crises, which relates to our chapter 14 objective, “Identify and explain the main factors that contributed to the financial crisis of 2007-2008.”