Sub-Prime Mortgage Crisis - What Caused It ? How Can Us Recover from It?
Sub-Prime Mortgage Crisis - What Caused It ? How Can US Recover From It?
The recent financial crisis in the U.S. that spread to other countries and caused massive turndown in the global economy had its roots in the recent waves of globalisation. Since the developed countries’ production had shifted dramatically towards services, specially to financial services, and this in turn led to financial liberalizations, developed countries experienced massive capital inflows, lending booms, housing and / or stock market bubbles. Financial crises are usually followed by hard and sharp contraction in economic activities, which requires government intervention to bail out banks and restore banking stability. However, government intervention increases national debt, which will normally be paid later by increasing taxes. In this paper, we look at some of the causes of the U.S subprime mortgage and the resulting financial crisis. A point of departure for our analysis is to note that the potential losses from the U.S subprime mortgage were not indeed that large. As Fredrick Mishkin (the former Governor of the federal reserve) stated “The ultimate losses from the recent residential mortgage market meltdown have been estimated by Wall Street analysts at about $500bn- less than 3% of the outstanding $22 trillion in the US equities. Why did a relatively small amount of losses in subprime mortgage loans led to such broad-based financial disruption? ” We surely witness similar declines and losses in stock markets on a daily basis but such losses never lead to a financial meltdown, and have little impact on the economy. We will review the reaction of the market to the crisis and some of its consequences. We will further investigate how can the US economy possibly recover from it?
A multitude of factors seem to have contributed to the US subprime mortgage crisis, including the 1998 financial crises in the south East Asian countries, increasing globalisation and trade liberalisation,
The recent financial crisis in the U.S. that spread to other countries and caused massive turndown in the global economy had its roots in the recent waves of globalisation. Since the developed countries’ production had shifted dramatically towards services, specially to financial services, and this in turn led to financial liberalizations, developed countries experienced massive capital inflows, lending booms, housing and / or stock market bubbles. Financial crises are usually followed by hard and sharp contraction in economic activities, which requires government intervention to bail out banks and restore banking stability. However, government intervention increases national debt, which will normally be paid later by increasing taxes. In this paper, we look at some of the causes of the U.S subprime mortgage and the resulting financial crisis. A point of departure for our analysis is to note that the potential losses from the U.S subprime mortgage were not indeed that large. As Fredrick Mishkin (the former Governor of the federal reserve) stated “The ultimate losses from the recent residential mortgage market meltdown have been estimated by Wall Street analysts at about $500bn- less than 3% of the outstanding $22 trillion in the US equities. Why did a relatively small amount of losses in subprime mortgage loans led to such broad-based financial disruption? ” We surely witness similar declines and losses in stock markets on a daily basis but such losses never lead to a financial meltdown, and have little impact on the economy. We will review the reaction of the market to the crisis and some of its consequences. We will further investigate how can the US economy possibly recover from it?
A multitude of factors seem to have contributed to the US subprime mortgage crisis, including the 1998 financial crises in the south East Asian countries, increasing globalisation and trade liberalisation,
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