The causes of the economic crisis (Sofia Gustafsson)

The present economical crisis has been caused by sub-prime mortgages. In the U.S a financial crisis started to accelerate in the late 2006 which caused the crisis going global through 2007 and 2008.
Through the US Housing Bubble house prices peaked in 2005 and in 2006 the prices decreased. The housing bubble causes decreasing in house prices which resulted in many owners holding negative equity which made the mortgage debts higher than the value of the property.
The crisis began with a burst of housing bubble and high default rates on subprime mortgages. Loan incentives and the high prices of housing made Americans take subprime loans.
Subprime loans has a higher rate than a prime rate which can be taken by people with poor credit ratings or limited credit histories. The subprime loaners took these subprime loans in the belief of refinance more profitable items later on.

This gave the American banks the opportunity to use the borrowers money to invest globally. This is extraordinary desirable in the U.S because not many Americans has the habit of saving money which effects the banks.
Once the prices of housing went down in 2006-2007 refinancing became harder. The rates went up and houses were subject to foreclosure activity. The borrowers did not pay and caused a global effect and banks all around made enormous losses because the American banks could not pay back the investments they had made.
From the real estate sector in the U.S the crisis spread internationally with declining stock markets in many countries. The Northern Rock, a English bank had trouble raising liquidity, The Bank of China had $ 9.7 million in debt and the Korean market fell.
In other words the American crisis became a global crisis is a fact.

To avoid a crisis like this I think lending money to people without credit should be closely controlled. Also the public that lend money should be provided with education and information of how to barrow money in a wise way.


Sofia Gustafsson