2.1. The Causes of the Subprime Credit Crisis
The reasons for this crisis are varied and complex. The crisis can be attributed to
a number of factors which emerged over several years and which were pervasive in
both, the housing and the credit markets. This includes the inability of homeowners
to make their mortgage payments, primarily due to risky mortgage products. Other
reasons were, e.g. overstrained lenders and speculation as well as overbuilding
during the boom period. High personal and corporate debt levels, financial products
that distributed and concealed the risk of mortgage default also played
a role.
Finally
monetary policy,
international trade imbalances and government
regulation,
or
the lack thereof,
also fuelled the crisis.
4 Cf.Federal Deposit Insurance Corporation, Failed Bank List, 2009.
5
Further major catalysts of the subprime
http://www.fdic.gov/bank/individual/failed/banklist.html (retrieved on 24 July 2009).
5 Cf. J.E. Stiglitz, Commentary: How to prevent the next Wall Street crisis, 2008, http://edition.cnn.com/2008/
POLITICS/09/17/stiglitz.crisis/index.html (retrieved on 19 March 2009).
crisis were the influx of huge amounts of money from the private sector, banks entering
into the mortgage bond market
and predatory lending practices of mortgage
brokers,
specifically the adjusted rate of mortgage loans.
Ultimately moral hazard lay at the core of many of the causes.
6
The credit crisis
can be seen as the consequence of aggressive risk taking by several financial institutions.
Banks increased their leverage
up to levels
indefensible in a severe
downturn
and thereby funded unsustainable economic growth.
The
reasons behind this
dynamic
were
several
widely held misconceptions: e.g. the strong creditworthiness
of borrowers,
reliable ratings and investors
sophisticated enough to efficiently
assess
and price the risks of complex
financial assets. Another underlying flawed
assumption
was
that prices for houses in one region would
be largely uncorrelated
to
prices of real estate in other regions and therefore the underlying risk could be
adeptedly
diversified.
8
7
In addition, it was widely believed that rating agencies used the right models
and correct assumptions and were able to produce reliable ratings reflecting the
true risk of default of the underlying assets. Finally, it was assumed that credit risk
was well distributed via innovative financial instruments to thousands of investors
all over the world. This bundle of severe delusion and flawed assumptions caused
the crisis by misleading regulators and central banks and by providing the wrong
incentives to banks and investors.
Source : Perguruan Tinggi Kedinasan
