Conclusion

The primary reason of the 2008 financial crisis was housing bubble burst which was a result of
lowered interest rates , easily available credit, poor regulations and poor mortgage
management. The securities related to mortgages were sold to investors around the world
which were risky. The institutions which had borrowed against these securities were badly
impacted in the crisis.

When Lehman Brothers and American International Group nearly collapsed, the crisis was
heightened. This led to disruption in the stock market and the economy plunged into recession.
The debt of the financial sector had increased from $3 trillion to $36 trillion from the year 1978
to 2007 which almost doubled the share of gross domestic product.

1) Was the crisis unavoidable: Over the period of time, there were indications of the
upcoming crisis. There was abrupt increase in the sub-prime lending and securitization.
Also the housing prices soared up and the mortgage debts increased abruptly. But all
these indications were ignored and no concrete step was taken up to find the remedy of
these issues.
Despite observing these issues, Federal Reserve was unable to create strict mortgage
standards. Due to lack of stringent standards, financial institutions traded the mortgage
securities without verifying them. Therefore, the crisis could have been avoided if the
concerned authorities would have been more vigilant and observant.

2) Risky investments, excessive borrowing and lack of transparency: Over the period of
time, the households and the financial institutions stretched their borrowing to
maximum which left them vulnerable to financial distress in case of any slight decline in
the value. Also, the financial institutions were not the only one who were on borrowing
spree, even the households borrowed a lot during that period. National mortgage debt
increased twice and there was almost 63% increase in the mortgage debt per household
in US between the years 2001 to 2007.
Therefore, we can say that blind borrowings by both financial institutes and the
households were one of the major ingredients in the financial crisis of 2008.

3) Unprepared government and response: The treasury department, the Federal Reserve
Board and the Federal Reserve Bank of New York were not prepared for the crisis of
2008. Also, other agencies who were responsible for the financial outlook took the
situation for granted. These departments could not anticipate the fact that the housing
bubble burst could shake the entire economy.
 Apart from this, the response of the government during the crisis was inconsistent
which led to uncertainty and panic in the market.

4) Deteriorating accountability and ethics: The erosion of responsibility and the ethic was
one of the major factors that led to the crisis. The number of the defaulters on the
mortgages double within the span of a year. The loans were offered by the lenders
despite knowing that it can be defaulted by the borrower.
Therefore, it can be said that the crisis was a result of human misdeeds, mistakes and
misjudgments.

5) Failures of credit rating agencies: Credit rating agencies rate the securities based on the
risk involved in the return over the period of time. During the crisis, these rating
agencies one of the prime reasons for the mishappening. Investors rely heavily on the
ratings of the securities for their investments. Most of the risky mortgage related
securities were rated AAA by the agencies which boosted the confidence of the
investors to invest into these securities. 83% of these securities which were rated AAA
had to be finally downgraded.

6) Over the counter derivatives: Derivatives were used to hedge against the events such as
potential defaults on the debts. But, soon enough the derivatives went out of control
and the total amount on these derivatives increased manifolds. There was lack of
collateral requirements, transparency and the concentration of the risks in the market.
One type of derivative, known as Credit Default Swap was issued as a protection from
any decline in the value of mortgage-related securities. The losses from the crisis was
multiplied because of the synthetic CDOs which were the bets on the mortgage related
securities.

7) Corrosion of mortgage lending standards: The borrowers ability to repay the loan was
ignore while sanctioning the loan to them. There was no check on these lendings and
both the borrower and the lender entered the agreement without any background
checks and collaterals. Although, the government got the warning signal during this
period, but it chose to ignore these signals and do not act. This resulted in the defaults
of the loans in a huge numbers.