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The history of financial crisis and housing market collapse of 2008

Share Loading the player. When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August 2007 turned out to be just the starting point for big financial landslides.

Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of 2007-08 unfolded. Before the Beginning Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the U.

The 2007-08 Financial Crisis In Review

Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubbleand accounting scandals, the fear of recession really preoccupied everybody's minds. To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6. Cheap moneyonce out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers - and even more restless borrowers who had no income, no job and no assets.

These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices. It wasn't long before things started to move just as the cheap money wanted them to.

This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite the history of financial crisis and housing market collapse of 2008 interest rates.

The Financial Crisis of 2008

The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. Unfortunately, no one was there to warn about the tummy aches that would follow. For more reading on the subprime mortgage market, see our Subprime Mortgages special feature. But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to the history of financial crisis and housing market collapse of 2008 candy loans into collateralized debt obligations CDOs and pass on the history of financial crisis and housing market collapse of 2008 debt to another candy shop.

Soon a big secondary market for originating and distributing subprime loans developed. MS - which freed them to leverage up to 30-times or even 40-times their initial investment.

Everybody was on a sugar high, feeling as if the cavities were never going to come. The Beginning of the End But, every good item has a bad side, and several of these factors started to emerge alongside one another. The trouble started when the interest rates started rising and home ownership reached a saturation point.

From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5. Declines Begin There were early signs of distress: Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.

This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy.

During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy. Investments and the Public Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out. But even this large move was only a small affair in comparison to what was to happen in the months ahead.

The Landslide Begins It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the UnitedState's borders.

The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.

Multidimensional Problems The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide.

In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions.

The Crisis Unfolds.

The idea was to put the interbank market back on its feet. The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown. Different governments the history of financial crisis and housing market collapse of 2008 out with their own versions of bailout packages, government guarantees and outright nationalization.

Crisis of Confidence After All The financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored.

In an interconnected world, a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions, a balance of payment crisis for sovereign countries and a full-blown crisis of confidence for the entire world. But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings. Get a free 10 week email series that will teach you how to start investing.

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