CBGE

About the financial crisis & how we cope with it

Causes of the global financial crisis

The current global financial crisis had a lot of causes and in reality nobody can say for sure why it happened. There were a lot of factors that combined to make it happen but there are few things that we can say for certain. One of those things is that the main cause was the easy lending conditions that existed for many years leading up to the crisis.

The primary cause of the global financial crisis is that money was being lent to people who really couldn't afford it. This was largely due to a policy in the United States that thought that it was a good idea for everybody to be a homeowner. The problem is that a lot of people really couldn't afford to buy a house. In order to keep their mortgage lending business going the banks had to keep finding new customers, this required them to keep taking on riskier and riskier loans. This became a problem when housing prices started to decline and all of a sudden there were a lot of people who were unable to make their payments.

All of the people who were not able to pay their mortgages was a serious problem but not for the banks that had loaned the money. They had found a way to bundle mortgages together and sell them as investments. The result was that a lot of investors were holding mortgages that were much more high risk than they had thought. This was where the crisis really started. All of a sudden these investors were finding that they were holding mortgages that would never be paid. This put the investors in financial difficulty and they were unable to pay their own bills. The result was that a lot of people ended up defaulting on their loans.

The problem with the bad mortgages could have been contained and not resulted in a crisis except that nobody knew who was holding the bad debt. In order to sell the risky mortgages the banks had hidden them in bundles with other mortgages. The result was that there was no way to know who now held them. Because of this nobody wanted to lend money to anybody because they were not sure whether or not the borrower was holding any bad mortgages which would make it difficult for them to pay their debts. The result was that it became almost impossible to borrow money.

Once it became impossible to borrow money the economy was in real trouble since this made it impossible to make large purchases. This was true for both businesses and consumers and it resulted in the economy slowing down dramatically. With fewer purchases businesses had no choice but to start laying off employees which just made the problem of people defaulting on their mortgages worse and the cycle continued.