Th2.6: Causes of the Global Financial Crisis Flashcards
What are the three possible causes of the Global Financial Crisis?
mortgage lending
grouping ‘prime’ mortgages / ‘sub-prime’ mortgages
fall in confidence
ML: What happened in the early 2000s
relatively poor people were encouraged by the government and banks to take out mortgages to buy their own homes
ML: How was this an example of a moral hazard?
bank workers saw higher bonuses for selling more mortgages
ML: How did this go wrong?
they were given low interest rates on the loan for the first few years but many were no longer able to continue paying with higher repayments. houses were repossessed, demand fell and prices fell meaning the value of the houses were now less than the mortgage - negative equity
GM: At the same time, what had banks been grouping together and doing?
grouping ‘prime’ mortgages (those who were likely to pay back their loans) and ‘sub-prime’ mortgages (those who weren’t likely to pay back their loans)
and selling packages to other banks and investors as if they were all prime mortgages
GM: What was the aim and how did it backfire?
aim was to reduce risk since it meant no bank was highly dependent on risky mortgages but it increased risk as many were now holding assets worth less then they had paid for - spreading the effects of the housing crash and the unpaid loans
FIC: What happened when this was revealed?
there was a fall in consumer confidence and banks stopped lending between each other, fearing that they would lose money if the other bank were to collapse
FIC: Where did similar events occur?
UK, Spain, Portugal and Ireland
FIC: What happened in the UK 2007?
Northern Rock Building Society was the first affected with too many loans not being repayed and savers beginning to withdraw their money
FIC: What did the failure of Northern Rock Building Society and Lenham Brothers do in the UK?
caused panic as people believed bank after bank would be allowed to collapse, leading to losses for savers
