The Role of Gold During the Financial Crisis of 2008 (Part 1)
The financial crisis of 2007–08, also known as the subprime mortgage crisis, was a financial and economic collapse that cost many people their life savings, jobs, and homes.
It began in the United States with the breakdown of the U.S. real estate market and threatened to annihilate the worldwide monetary framework, causing the failure of considerable investments, mortgaged many insurance agencies and reserve funds. The Great Recession (2007–09) was the worst financial slump since the Great Depression.
Although the reasons for the financial crisis are debatable among market analysts, there is general agreement that it can’t be boiled down to one or two root causes. The crisis of 2007-2008 was a result of a dozen of factors. Here is a list of factors that are generally considered as the cause by many economists.
1. Reduced Federal Funds Rate
The national bank of the United States, FED, having expected a gentle downturn that started in 2001, decreased the federal funds rate 11 times from May 2000 to December 2001, from 6.5% to 1.75%. That heavy reduction empowered banks to expand buyer credit at a lower prime rate and urged them to give loans to even high-risk customers, however at higher interest rates.
Consumers exploited cheap credit policy to buy durable goods such as cars, machines, and particularly houses. This exploitation led to the creation of a housing bubble created in the late 1990s.
2. Political Manipulation
Since the 1980s, financiers and government officials have formed an uncomfortable union. The approval of bank mergers was conditioned by which the politicians successfully extorted banks into giving loans to unreliable borrowers.
While banks and institutional financial investors had to bear the risks, politicians very conveniently declared how they had helped achieve the vision of homeownership for the people of America.
3. Securitization of Loans
Banks bundled hundreds of subprime, low-risk mortgages and obligations and traded them in capital markets as bonds to other investors and banks. Bonds comprising fundamentally of home loans became known as mortgage-backed securities or MBSs.
Selling these mortgages as MBSs was viewed as a decent way for banks to expand their liquidity and decrease their openness to risks. While buying MBSs was seen as a way for banks and financial backers to enhance their portfolios and bring in cash.
As home costs continued to increase through the mid-2000s, MBSs became increasingly popular among the masses, shooting up their prices in capital markets as well.
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