These numerous theories, which have come up to explain the root cause of the subprime crisis. Numerous experts and economists believe that a combination of factors resulted to the crisis (Lynnley 13). This study intends to examine the housing bubble as a major cause of the subprime crisis. Housing Bubble This study reveals that the present mortgage crisis started with the bursting of the U.S. housing bubble, which commenced in early 2001 and ascended to its peak in the year 2005. Essentially, a housing bubble can be defined as an economic bubble whose occurrence in both the local and international platforms in real markets id characterized by almost similar features. The housing bubble is defined by express rise in the valuations of real assets until untenable levels related to income and affiliated affordability indicators are reached (Lynnley 11). This situation leads to the decrease of home prices and debts related to mortgages, which are higher compared to the value of the assets. It is imperative to note that the housing bubble was discovered at the aftermath of the market correction that happened in the U.S in 2006. In 2007, Alan Greenspan, the former Chairman of the Federal Reserve Board indicated that, United States has been having a bubble in the housing sector (Muolo and Padilla 3-7). This came upon the realization that the house prices appeared to be overwhelmingly overvalued. The sentiments were echoed by the Richard Syron, the CEO Freddie Mac and concurred with the Yale University economist Robert Shiller who warned that the necessary correction of the bubble would be done in many years to come wit trillions of dollars being lost. This situation would lead to a double-digit decline in the home values. The housing bubble in relation to the historically low interest rates This study reveals that the majority of the experts and economists believe that the housing bubble in the United States of American was partially caused by the historical low interest rates. It is imperative to note that the Federal Reserve Board had reduced the short-term interest rates by 5.5% (from 6.5% to as low as 1 %). This was a response of the collapse of the dot-com bubble (Muolo and Padilla 3-7). This happened in early the year 2000 and was followed by the ensuing recession in 2001; however, this response significantly endangered the housing bubble through the decrease in real long-term interest rates. It is essential to note that, the US mortgages rates are set in relation to Treasury bond yields of 10 years. These rates are influenced by the Federal funds rates. This study establishes that the Federal Reserve Board acknowledged the relevance of the connection amid lower interests’ rates, increased liquidity and the higher home values in relation to the general status of the economy. On the other hand, Greenspan disputes the claim that he engineered the housing bubble. Greenspan asserts that the Fed’s decline in rates contributed to the inflation of the bubble. In 2007, Greenspan argued that, the housing bubble was not in any way related or linked to the Fed’s policy on interest rates, however, Greenspan pointed out on the international surplus in savings, which pushed down the interest rates
Name Tutor Course Date LITERATURE REVIEW The unique situation Numerous experts believed that the crisis would have been controlled within the platform of mortgage issuers who had clogged on the subprime loans. In fact, majority of experts never thought that the subprime fallout would be so severe to an extent of threatening the economy…
As a result of this, the economic growth slowed down, unemployment level increased and subsequently government has to intervene in order to help financial system and the economy to survive one of the toughest economic recessions in the history of US. There has been lot of discussions on the factors which has actually created the crisis and how they further deepened it.
Accordingly, to ask whether real estate appraisers were to blame for the real estate crisis is one way of asking whether those appraisers bore some of the responsibility for ensuring that the system remained intact and, secondly, whether they defaulted on this responsibility.
Impacts of the recent mortgage crisis on the money supply in the United States and the actions of Federal Reserve take in response to the mortgage crisis Impacts of the recent mortgage crisis on the money supply in the United States and the actions of Federal Reserve take in response to the mortgage crisis.
Europe was the first place to receive the impact of subprime mortgage crisis, but the effect spread in the rest of world afterwards. Justin and Boris (2011) indicate that the East Asia would not resist the impact that was affecting most of a global economy.
Question 1 Subprime crisis is believed to have had a significant role in the occurrence of Global Financial Crisis in 2008. This type of crisis situation is a consequence of the subprime lending and not caused due to over-lending by banks. The credit status relative to the borrowers is referred to as subprime.
The reason for the inability of many economists to adequately judge what might have been had TARP not been instituted is due to the fundamental building block of logic that states it is oftentimes impossible to prove the negative. Therefore, to review TARP and say that had it not been done the economy of the United States and the banking system the world over would have rectified itself naturally is a nearly impossible premise to prove.
The market failure that led to the emergence of the Subprime crisis was characterized by a large inflow of foreign money, and a lower interest rate. These conditions made it easier for individuals to obtain credit, leading to an increase in demand of houses.
Thus subprime mortgage lending started out of the imprudent and relatively high risk high return lending decision making because bankers in order to earn more started to bet on something which had the potential of providing higher returns. Capitalizing on the exapnsionary monetary policy of the FED, banks and financial institutions started to look for other opportunities where the rate of return is higher as the prime rates in the country plummed to 4% only.(Murali, Muralikirishin & Yellavalli,2008).
It is not the interest rate corresponding to the loan itself. “Subprime” denotes any type of loan which does not satisfy the prime guidelines of a loan. Subprime lending is a process of making loans or lending money to the borrowers who are not qualified
7 pages (1750 words)Research Paper
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