The Financial Crisis Flashcards
What was the financial crisis
In 2008, banks in America crashed due to an over lending of subprime mortgages to populates with poor credit history who could not pay back the debt. Banks sold these mortgages on in great quantities to investors. Demand rose far too high so housing prices became unaffordable for the people who took out subprime mortgages and so investors and banks were getting no money back, which meant that major banks such as the Lehman Brothers had to file for bankruptcy.
The crisis spread all over the world due to foreign investment in the U.S housing market and confidence was completely shot which lead to many forced bailouts e.g. Cyprus in 2010.
Structural issues which caused the crisis
- Over lending and risk taking by banks
- Low interest rates
- Speculative demand because subprime mortgages were seen as complete safe bets
What problems did the crisis cause
- Taxpayers were forced to pay huge bailouts
- Savings lost
- Creditors had unpaid debts
- Employees lost jobs
- Government spending deficits
- Fiscal austerity measures e.g Higher tax and less spending
Consequences of the crash
- Higher cost of credit - Higher interest rates
- Falling asset prices
- Fall in lending
- Banks made more rigorous checks on whom they were lending to
