Explore the Causes of the Current Financial Crisis That Started in Essay

Explore the Causes of the Current Financial Crisis That Started in 2007 - Essay Example There are various causes for this crisis and this paper shall explore these causes as well as the theoretical views which seem to be relevant in explaining its causes. Body The global financial crisis which started in 2007 is considered one of the most disastrous economic issues the world has ever experienced. In so many ways, it is being likened to the Great Depression seen in 1929, as well as the Russian crisis in 1992 (Banking Law Committee, 2009). Most countries also seem to agree that the main cause of the crisis was the credit boom and the increase in housing prices. As the 2007 was starting to loom over the global market, the US ratio of debt to national income went up by 100% or from 3.75-4.75 to one (Banking Law Committee, 2009). At about the same time, the house prices also increased at a rate of 11% per year. Since 2007, the global market has been hit with various developments which were rooted on the earlier issues on the unfavourable performance of sub-prime mortgages in the US (Banking Law Committee, 2009). The housing boom was followed by a bust which then caused defaults and collapse of mortgages thereby causing financial turmoil. Financial institutions have been met with losses which amounted to billions of dollars and are still continuing to do so (Banking Law Committee, 2009). ... The gravity and the volume of negative financial outcomes at that time, coupled with the impotency of the remedies being carried out also forced the authorities to consider the origins of the crisis and the market tools by which the crisis could be contained and managed. The causes of the financial crisis which started in 2007 shall be considered below. Mortgage lending was considered as one of the main causes of the 2007 financial crisis. Before the crisis, abundant credit, low interest rates, and increased housing prices, the lending conditions were so relaxed that people started to buy houses they could not afford (Murphy, 2008). As prices started to fall and loans were being called in, the shock spread throughout the entire system. The housing bubble also made the crisis worse and the Federal Reserve allowed housing prices to increase at sustainable and impractical rates. As the bubble burst, the crisis was triggered (Labonte, 2007). There was also a lack of transparency and acco untability in mortgage finance. There were numerous bad mortgages throughout the system as well as selling of bad securities. Lenders could sell mortgages to home owners and not feel any accountability for it; this pattern was also seen among brokers, realtors, and individuals in rating agencies as well as other market participants (Jickling, 2010). The crashing housing prices impacted on household wealth, including the spending and defaults on loans by lending institutions. Housing prices from 2000 to 2006 doubled and later subsequently collapsed. The housing bubble was caused by a long period of low interest rates offered by the Federal Reserve and these monetary policies were too permissive for too