Do you ever wonder what led to the 2008 global financial crisis? Read this article to know the top causes that caused such turmoil in a very stable industry. There is a multitude of things that transpired which led to the meltdown of various financial establishments. Its primary cause was the deregulation of the entire industry. This enabled the banks to engage in derivatives that are more unstable compared to other investment types.
As aforementioned, this is the primary cause of the financial meltdown in 2008. The primary event that happened is that banks were allowed to invest in derivatives. Banks framed it in such a way that this is a necessary step for their survival as institutions. They did say that they will only invest in low-risk organizations in order to protect the money of their clientele.
This works when hedge funds and other markets sell mortgage-backed entities. They may also sell collateralized debt and other derivatives. These will then be sold to another hedge fun belonging to a secondary market. Selling your mortgage enables the banks to make more money. Some smaller mortgages are grouped together to form larger ones which can get larger returns. This is performed by computer software which factors everything from risk-assessment to final cost.
There are so many similarities to the crash of the stock market in 1929 as well as the financial crisis of 2008. Another factor is the unexpected plummeting of housing prices during this time. That led to an incompatibility between the mortgage and these housing prices. Some mortgages dissolved which led to people being submerged in debt. The market panicked and the people developed a mistrust in the economy of the United States as well as banks. In the panic, people suddenly withdrew their life savings from banks which caused some banks to collapse. The banks also refused to lend each other money in an attempt to keep themselves afloat which then led to further crisis.