I do not know - Research Paper Example

What exactly is a financial crisis? This is an important question to ask at the outset of this paper if we are to understand our subject. Generally speaking, financial crises arise in a variety of situations in which some financial institutions or industries suddenly lose large amounts of their value. For example, in the past, many such situations were associated with banking panics, stock market crashes and financial bubbles. The result is that country loses its wealth. Jobs are lost and people and companies go bankrupt.

These crisis are often unexpected and result in a great deal of wealth being wiped out. People suffer and it can take years for the economy to regain its balance (Williams, 23). All sectors of society find themselves set back and productivity and growth become very slow. In the most recent example, the subprime mortgage crisis was one of the first indicators of 2007 financial crisis. There is a clear line that can be drawn between the massive number of mortgage defaults and the consequent crisis.

High default rates on subprime adjustable rate mortgages began to increase very rapidly in this period. The long term trend of rising housing prices and better loans encourage borrowers to believe they would be able repay their mortgages quicker. They thought they had a good deal and would be able to refinance if they had a problem. However, this was not the case. “The first clear sign that the US housing bubble was bursting, the mid-2007 crisis in the sub-prime mortgage market (stemming from the significant increase in defaults), transmitted losses to a whole set of securitized financial products such as mortgage-backed securities” ( Lin, 32).

The truth is that the American dream of home ownership had gone into overdrive. People who were unable to afford to pay mortgage payments were given mortgages. People with bad credit or unstable employment were given