Causes of the Financial Crisis in 2008

The financial crisis of the year 2008 impacted negatively on the world economy, it was one of the most dangerous financial crises with devastating effects almost equal to those caused by the 19305’ Great Depression. The 2008 financial crisis started in the year 2007 when the hiked prices of homes in the US dropped to extremely low ends affecting the entire United States and then spreading to other parts of the world. The key factor was the attainment of a saturation point in the ownership of homes, however, the various players that led to the emergence of the 2008 financial crisis include the banks, credit control firms, politicians, academia and the employees in the treasury department.

Such perpetrators led to the emergence of derivatives investments and the failure of the expansively offered substandard mortgages. Moreover, they led to the leveraging of properties of various investment banks, massive insurance against risky investments, a huge decline in the stock market, and the poor management of the housing services

There were various economists who understood what would befall the world economy following the deregulation practices that were exercised.

Larry Summers, who many believe that he was part of the problem, suggests that the links between the Wall Street, the leaders in academia and the supine regulators were the key factors that contributed the disaster. Therefore, this financial crisis seems to have been a deliberate activity of some well—organized individuals who defrauded the American investors. The academic economists lacked accountability and integrity with theirjobs since they could encourage the relatively unimportant speeches that attracted huge payments as part of their bonuses.

Get quality help now
Marrie pro writer

Proficient in: Bank

5 (204)

“ She followed all my directions. It was really easy to contact her and respond very fast as well. ”

+84 relevant experts are online
Hire writer

For instance, Lawrence Summers was paid a hundred and thirty-five thousand US dollars for presenting a relatively insignificant speech to Goldman Sachs.

Furthermore, the academia were partly to blame since many of them could change their employers between both the government and the financial institutions Such persons could enact regulations and rules governing the operations of the banks that promoted illegal mortgage practices. Therefore, there could be a loophole where those individuals could enact laws that could favor them in conducting practices that led to the fraud (economistcom). The financial institutions were allowed to conduct various businesses by themselves. The banks insistently promoted the mortgages to various individuals, even those who could not manage to pay for them. Therefore, such banks could evaluate their expected profits before the actual payments there were never made. The Magnetar Trade that was conducted with the knowledge of various Wall Street participants was deliberately meant to defraud the investors. Such defrauders could gain a lot of money when mortgages failed.

Therefore, they promoted the bad mortgages and encouraged clients to buy them. Moreover, the subprime mortgages were subdivided into various derivatives that were difficult to manage and thus encouraging defaults. Nonetheless, the derivatives were pooled together and used to back the securities called collateralized debt obligations. Therefore, the banks could have lost certain mortgages since they could not track and trace them well. Furthermore, the banks created the CD05 with the intention of colluding with agencies including the Standard 8: Poor’s and the Moody‘s to defraud the investors, On the other hand, the substandard mortgages that failed were offered at relatively high costs and attracted high interests from both the mortgage companies and the consumers. Therefore, the banks facilitated the financial crisis by elevating their interest rates and the costs of the mortgages to the extent that the otherwise house owners were obliged to cover.

The resultant debts were too huge for the consumers to repay, I The Central Banks 0n the other hand, the central banks were also liable for the crisis since they did not control the poor practices that the credit firms and banks were exercising. It could be the central banks’ role to determine and manage the acceptable practices within the financial firms. However, the central banks failed to prevent the banks from imposing relatively low-interest rates. The central banks and other financial regulators failed to maintain an economic balance in the financial market, and thus leading to the bankruptcy of the Lehman and Brothers firm. Such a failure triggered a lack of trust between the financial firms and their customers ( Furthermore, the non-financial institutions could withhold their money to maintain their daily operations and pay their workers since the banks ceased to offer loanst 0n the other hand, the central banks were aware of the imbalances in the global economics and the possible effects of the excess savings by Asia.

Moreover, the central banks were expected to advise the government on the appropriate ways of addressing the previous recession incidences and avoiding similar incidences in the future. It is quite likely that various employees of the financial institutions contributed to the disaster by getting themselves huge sums of money. Such individuals include Richard Fuld, who received $480 million in bonuses from his Lehman Brothers firms Fuld was the CEO of the company and hence there are possibilities that he could have awarded himself such huge bonuses by defrauding. Moreover, various Treasury Department secretaries including Lawrence Summers, Robert Rubin, Ben Bernake and Hank Paulson encouraged the deregulation of financial institutions. As a result, the US government failed to manage its financial institutions. The government did not regulate the operations of its banks and other financial institutions properly, this deregulation led to the provision of huge credits to individuals who would like to acquire and own a home.

The US Government asked the various financial institutions to allocate its citizens the loans they had borrowed without prior guarantees of repayments. Unfortunately, the Federal Reserve had lowered the funds rate as a means of addressing the previous recessions and as a way of avoiding future incidences. Therefore, US citizens could obtain various credits and loans in relatively easier ways than before However, the persons who secured the easy loans could not repay them since there were huge interests attached to the loans besides the high costs of the homes, Moreover, those persons did not have adequate funds since most of them did not have jobs, assets or other sources of income, but they just wanted to pursue their dreams of owning homes. The other reason is that, the government allowed the various suspects to switch theirjobs between the US government itself, and the financial institutions. Such practices could offer a nice opportunity for those individuals to conduct their malicious act.

According to the Financial Crisis Inquiry Commission (25), the various insurance firms including AIG introduced certain strategies of gaining money unfairly from the mortgage holders who committed defaults. Therefore, they engaged in businesses that were traditionally not meant for them and thus exploiting the mortgage holders. Furthermore, such insurance companies deceived the ranking agencies that were meant to access and rate them, They could offer certain favors to the ranking authorities so as to facilitate a better ranking as opposed to the actual and uncompromised exercises that they were undertaking Therefore, more people would fall into the trap of the falsely high-ranking insurance firms and security packages (Britannicacom). According to Investopedia, the dynamic status of global markets contributed to the 2008 crisist New credit lines were developed to facilitate business transactions, but they eventually led to the drying up of various sources of money.

The negative impacts of such depletion of money facilitated a slower economic growth rate and decline in the exchange of goods and services Moreover, the inflation in the market led to the shooting up of mortgage prices and the eventual drop to the extreme, Therefore, the market instability is to blame because the mortgage holders could not expect such unfavorable outcomes since they bought more mortgages in credit to the extent that they could not afford to pay for them C unclusion Various factors including deregulation, market instability, malicious employees and the financial institutions facilitated the 2008 financial crisis, The devastating impacts of the financial shattering would be difficult to address Moreover, the various catastrophic impacts are spread very quickly and were felt in almost every corner of the world.

The failure of one financial market can impact greatly on other financial and non-financial markets. Therefore, the previous financial crises should serve to be the baseline from which financial firms and governments should learn the best ways to avoid similar crises in the future. Furthermore, the employees could be the riskiest threat for financial institutions if they collude with economists with malicious intentions including fraud. Therefore, every government should enact and implement various regulations and rules that govern the operations of its financial institutions. However, the previous incidences that have befallen the financial institutions have great significance in determining future operations and possible threats to such institutions. Finally, banks and other financial institutions should not be allowed to conduct their trades independently without a watch by relevant governments and economists.

Cite this page

Causes of the Financial Crisis in 2008. (2023, Apr 07). Retrieved from

Let’s chat?  We're online 24/7