Credit Default Swaps and Their Role in the 2008 Global Financial Crisis - Essay Example

They contributed to the financial crisis, but they were not the sole cause. Banks as well adopted the wrong investment vehicles that increased their potential risks. Further more, the interconnectedness within the financial institutions made the risks to spill over to from one financial institution to the other. Also, the manner in which assets were valued was not effective. It disregarded depreciation and other market forces affecting the prices of assets. Risk management models were not effective in helping to minimize risky lending.

Changes in government regulation were also a major factor contributing to the crisis. The complexity of financial instruments and mathematical models for risk management made them ineffective. People had the wrong speculations in regard to the sustainability of high market prices for houses. The prices later dropped leading to enormous losses. Dishonesty was also a major failure in the operations of the credit rating agencies. On the other hand, there were few players in a large market, making their financial status a major determinant of the market strength.

The housing policies aimed at facilitating home ownership led to a housing boom in these years. People applied for mortgage that was easily accessible especially due to the low interest rates that had been lowered in order to ensure that the low income borrowers could acquire homes through mortgage. Many people invested in them instead of the original idea of residential houses. Many subprime mortgages were issued with most of them ending up with unqualified borrowers who could not repay. The current financial crisis in the United States began back in 2007.

This global financial crisis came several decades after the Great Depression that occurred between 1929 and 1941. Housing policies were put in place in 1937, with the housing act aimed at making houses affordable to the low income earners. This was to be achieved through offering long term loans at