This “Giant Pool of Money” increased as savings from high-growth developing nations entered global capital markets. The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the ut markets forex review rated. 2007 and 2008 caused the equivalent of a bank run on the U.
This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. Financial Crisis Inquiry Commission reported its findings in January 2011. The immediate or proximate cause of the crisis in 2008 was the failure or risk of failure at major financial institutions globally, starting with the rescue of investment bank Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008. Many of these institutions had invested in risky securities that lost much or all of their value when U. Low interest rates in the U. Significant growth in savings available from developing nations due to ongoing trade imbalances.
These factors drove a large increase in demand for high-yield investments. Many institutions lowered credit standards to continue feeding the global demand for mortgage securities, generating huge profits that their investors shared. When the bubbles developed, household debt levels rose sharply after the year 2000 globally. Households became dependent on being able to refinance their mortgages. The failure rates of subprime mortgages were the first symptom of a credit boom turned to bust and of a real estate shock.
But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. Economists surveyed by the University of Chicago rated the factors that caused the crisis in order of importance. The majority report of the U. There are several “narratives” attempting to place the causes of the crisis into context, with overlapping elements.
There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. The economy was being driven by a housing bubble. GDP and consumption enabled by bubble-generated housing wealth also slowed. Government was unwilling to make up for this private sector shortfall.
Record levels of household debt accumulated in the decades preceding the crisis resulted in a “balance sheet recession” once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced. Government policies that encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness. This increase in money demand triggered a corresponding decline in commodity demand. During the two decades ending in 2001, the national median home price ranged from 2. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages.
The Economist described the issue this way: “No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better. Up to 9 million homes may enter foreclosure over the 2009-2011 period, versus one million in a typical year. Based on the assumption that sub-prime lending precipitated the crisis, some have argued that the Clinton Administration may be partially to blame.