Beginning of the Crisis

The Global financial crisis has affected different countries in vastly different ways. However it is widely accepted that the beginning of the crisis arose as a result of the collapse of the US sub-prime mortgage market. Other countries also suffered housing booms and bubbles bursting, but it was this one which made it a global financial crisis. I intend on investigating the contributing factors which enabled the subprime market to expand to a level which was unsustainable and which resulted in the bailing out and collapse of various banks and credit institutions.

Looking back, it has to be asked, why did people and investors flock towards real estate? Sheila Crowley, president of the National Low Income Housing Coalition says that during the presidential terms of Clinton and Bush, “There was almost an obsession with getting the homeownership rate up”.

Home ownership was seen as the “American Dream” and programs implemented by those administrations made this dream a reality. This all sounds harmless, but as home mortgages became a huge source of profits for banks and investors, predatory lending became one of the primary factors in how the sub-prime mortgage market exploded so enormously and then collapsed catastrophically.

The increase in demand of financial companies for real estate assets was as a result of a combination of factors. Firstly they were hoping to move away from the volatile equity markets in which many of them suffered large losses due to the bursting of the dot-com bubble. Accounting scandals, such as Enron also made the equity market far less desirable for investors. These factors coupled with the Gramm-Leach-Biley Act ,signed into law by Bill Clinton in 1999 made investment in the housing market very attractive. Housing prices were increasing, interest rates were low and it appeared to be a safe and profitable investment. Even my old business studies teacher used to say, “Invest in land, God is not planning on making any more of it”.

Over the next few weeks I intend to investigate the sub-prime crisis, what factors are supposed to have caused it? and to what extent did each factor contribute to its collapse.