Us Financial Crisis

US financial crisis:

Why happened?

1. Loose monetary policy- low interest rate:
2. New and complex financial product- MBS (Lehman Brothers Holdings)
3. The housing bubble burst

1. Loose monetary policy

• After and 9/11, FED reduces interest rates from 6.5% in 2000 to 1% in 2003
• Printed too many dollars – banks had too much cash
• Foreigners increased holdings of US Treasury bonds, increasing liquidity. Proceeds mainly went into housing market.
• FED increased interest rates to 6% in 2006, many householders not could not reimburse their mortgages.

1. New and complex financial product- MBS (Lehman Brothers Holdings)

• Mortgage backed securities (MBS)- bundle together disparate loans (such as suprime mortgages, car loans), and/or risky investments, create packaged securities and sell off the shares

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Lehman Brothers Holdings, which was resulted in bankrupt. As mortgage-backed securities is a significant portion of its revenue. And lots of people are suffered from this.

1. The housing bubble burst

• Not enough mortgages to satisfy Wall Street’s demands for derivatives, so riskier loans, second mortgages to finance consumers
• Interest rates increase suddenly from 1% to 6% so by August 2008, 15% of all mortgages had defaulted
• Mortgages as % US GDP increased from 45% in 1990 to 73% in 2008. US private household debt represented 127% of personal disposable income by end 2007. By end 2008, US private debt equals 290% GDP
• 6 million Americans lost their homes
• House prices fell by 30-40% in 2008, MBS and CDS shown to be worthless pieces of paper

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The main reason is subprime mortgage, which means bank giving loan to people who may have difficulty in maintaining the repayment schedule. The interest rate of loan is high. However, the bank also need to bear the risk of default.

Causes crisis:

1. Loosing lending regulation

Poor creditworthiness of borrows

1. Borrowers unable to pay
2. Failure of banks and financial instituations