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global economy has witnessed several financial disasters in the past. Many countries are
suffering from recession because of the devastating effects of the financial crisis. According to
the article Financial Crisis 2007/2008 Overview (n.d.), the 2007/2008 financial crisis is known
as the biggest and worst financial incident since the great depression of 1929, which has
restructured the modern economic system. The article explained about the severe effects of the
2007/2008 financial crisis on the global economy. Some of the consequences of the financial
crisis are the stock market crash, the collapse of the large financial organizations, the bailout of
the banks, high unemployment rate and severe downturn in economic activity in many countries.
So, what are the causes behind the 2007/2008 financial crisis? This is a very important question
which needs an answer because, finding the causes will give solutions to prevent the problem in
the future. There are several causes behind the breakdown of the highly sophisticated modern
economic system, but the three main causes of financial crisis in the modern economic system
are the real estate bubble and subprime lending crisis, conflict of interest and greed.
The housing bubble takes place when the price of the real estate increases for a specific
period of time and then suddenly declines astonishingly, thus eventually causes economical
crisis. Wilson (as cited in Rahn, 2010), argued that the main cause of the financial crisis was the
real estate bubble, driven by United States government in a pursuit to increase the
homeownership of the citizens. Here the author explained about the role of the housing bubble in
causing the financial distress in United States. The economy of United States was severely
affected by the housing bubble because a major part of their economy was based on housing
loans. The lenders were giving subprime loans to the people who were unable to pay the debt,
mainly because the lenders were selling those loans to the investment banks. Then the
Running Head: 2007/2008 Financial Crisis
3
investment banks packed all kinds of bad loans into something called collateralized debt
obligations (CDO) to sell them to the investors. The investment banks paid the ratings agencies
to rate their securities as good as possible, to motivate the investors to buy those securities.
Those securities were nothing more than a package of deception and junk. According to Ver
Eecke (2013), the lack of government regulation and control on mortgages and asset backed
securities is the key reason behind the subprime crisis. Here the author explained how the
government failed to prevent the subprime lending crisis. The government had reduced the
interest rate and circulated cheap money everywhere. As a result, people with bad credit history
were interested to take loans because they mistakenly believed that housing prices would never
go down. To make things worse, the prices of the houses plunged suddenly and many large
financial institutions had to file for bankruptcy. For example, the global financial system was on
the verge of collapse when Lehman Brothers filed for bankruptcy which was one of the largest
investment banks in the world. The fall of Lehman brothers made it clear that the financial
system was faulty and mismanaged. The government should apply strict rules and regulations on
the credit rating agencies and the investors need to be more risk-averse to avoid such problems in
the future.
Conflict of interest occurs when there are multiple interests between people or
organizations which lead them to misleading activities. The rating agencies are supposed to rate
securities such as, bond, mortgage-backed securities and collateralized debt obligations fairly.
But they often provide bias ratings because of having conflict of interest with the firms that
arranges and sells the debts. The consequence of the bias decision later makes the financial
market volatile. Many large rating agencies such as, Moodys and Standard & Poors were
alleged for giving AAA ratings to the poor securities because conflicts of interests were involved
Running Head: 2007/2008 Financial Crisis
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(Smith,2008). This means that the rating agency had conflicts of interest and their models were
faulty which eventually circulated very risky securities in the financial market. The rating
agencies had conflicts of interest because they also provide varieties of other financial services to
their customers. When the same customers buy multiple services, the rating agency gives them
favors by accepting their misleading requests. Rating agencies were also alleged for taking
additional money from the investment banks to give the best possible ratings to the junk bonds.
Investors are buying these securities and later facing huge losses which are reducing their
confidence. The lack of confidence from the investor ultimately slows down the economy.
Greed is probably the major cause behind all the incidents that lead to the financial crisis.
Both general people and financial institutions are ignoring ethics because of their extreme hunger
for money. Despite the lack of transparency, investors are taking higher risk to make larger
profits but most of the time it results in disaster. The financial institutions are engaged in
unethical activities to raise their profit and people are taking loans with bad credit history to
improve their standard of living. According to Reavis (2012), in the last 25 years people have
increased their standard of living by borrowing more money from the financial institutions. This
shows that the greed of general people is actually causing the financial instability. People who
are borrowing money are unable to pay their debt on time; as a result they are looking for another
loan to pay their previous loan. The lenders are not supposed to give loans to the people who
already have debt, but because of the hunger for money, they are giving subprime loans and
selling those subprime loans to the investment banks. That means the lenders do not have to
worry about anything because they sold those subprime loans to the investment banks. The
investment banks pay illegal money to the credit rating agency, to get good ratings for their bad
Running Head: 2007/2008 Financial Crisis
5
securities. The greedy investors invest on those securities without proper analysis and suffer at
the end. From the above consequences, it is clear that people are misusing the complicated
In Summary, 2007/2008 financial crisis is caused by many factors, but the three main
causes are, the housing bubble, conflict of interest and excessive hunger for money. The
financial tragedy began with subprime lending crisis and later engulfed the whole financial
system. Conflicts of interest inside the financial institutions and excessive greed for money
played significant role in the progress of the collapse. The investors have witnessed one of the
most terrifying and unstable markets of their life. To overcome such kinds of crisis in the future,
people need to apply the principal of ethics in their financial activities. The financial institutions
need to be more transparent and accountable to their customers and the government should apply
strict rules and regulations to prevent any kind of fraud by the financial institutions.
http://www.wallstreetoasis.com/financial-crisis-overview
Rahn, R. (2010, November 15). What Caused the Financial Crisis. The Washington Times.
financial-crisis/
Reavis, C. (2012). The Global Financial Crisis of 2008: The Role of Greed, Fear, and Oligarchs.
Crisis of 2008.Rev.pdf
Smith, E. (2008, September 25). 'Race to Bottom' at Moodys, S&P secured Subprime's Boom,
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax3vfya_Vtdo
Ver Eecke, W. (2013). Ethical Reflections on the Financial Crisis 2007/2008. New York: