The 2008 Financial Crisis Research Proposal 1

The 2008 Financial Crisis Research Proposal

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 The 2008 Financial Crisis Research Proposal 2

The 2008 Financial Crisis Research Proposal

This research proposal will be aimed at establishing how the Financial Crisis of 2008

arose, its causes, and how the crisis transmitted to broader markets. Although financial crises that

are accompanied by the economic recession have occurred throughout history, the 2008 financial

predicament is said to be the biggest, worst, and scary financial crisis in the United States after

the Great Depression due to its devastation. The crisis, which later became global financial

devastation, was a period of extreme stress on both the global banking systems and also financial

markets. The crisis hit a wide range of countries all over the world, and the collapse of the

banking systems in the majority of these countries reshaped the economic sector, mostly the

finance and investment banking sector. The United States was one of the countries where the

government had to bail out banks that were facing imminent closure due to the high losses that

had rocked the country as a result of the crisis. This paper is a proposal that investigates all the

underlying causes of the 2008 financial crisis and how it spread to other parts of the world.

The US is considered to be the epicenter of the 2008 financial crisis, which is being dealt

with up to date. It is impossible to critically identify a single factor to have been the only cause.

However, the housing boom is the major factor that is associated with the financial crisis (Liu et

al. 2018). The mortgage sector in the United States is believed to have been booming in the early

21st century and had been a safe bet for most investments. This led to most investors and banks to

invest in the housing sector, and the eventual decline of their investments spelled doom for the

economy.

Subprime mortgage lending in the market is a significant cause of the financial crisis. The

mortgage lenders had, in the past, used rigorous and highly critical evaluations to ensure that

they were lending money to the right individuals. However, the lending policies relaxed, and the
 The 2008 Financial Crisis Research Proposal 3

mortgages were deemed as one of the best bets to generate better profits for the investors. In the

real estate market, realtors became incompetent to realize there were too many homeowners with

questionable credit or no credit at all. There was a high level of lending in the marketing as

financial institutions and banks were competing for the best rates in the markets as they looked to

increase the number of customers whom they believed would pay their loans. Banks also

permitted people to take out loans for 100 percent or more of the value of their new homes

(Financial Crisis Inquiry Commission 2011). This increased the level of risky loans and also

resulted in the lowering of mortgage standards by the people, a factor that detrimentally affected

the economy since some of the borrowers were not creditworthy.

The growth of the housing bubble is another major factor that led to the economic crisis

due to the shift in the levels of borrowing as a result of increased market prices for houses. The

market opened up, and the mortgage prices taken for houses in the United States had grown

significantly, with the rates being set at a 124% increase (Arroyo 2009, p.57). People, therefore,

saw this as an opportunity to capitalize and make more profits through investing in the housing

sector, and in some cases, some borrowers took a second mortgage on their houses to be financed

by loans. The banking and financial sector also disbursed loans in these indicators, and they saw

the housing sector as a safe investment given the level of increased prices. This did not

materialize, and by 2008 many Americans were facing foreclosure due to outstanding mortgages.

The rate of loan default increased that triggered the occurrence of the crisis.

The other contributing factors to the economic crisis in the United States were easy credit

conditions. This is because the government had allowed people in the region to loan money at

very low-interest rates. After the terrorist attack and other financial trends in the United States in

the early 21st century, the government lowered the interest rates on loans and credit conditions
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(Castells et al. 2012, p.95). This allowed the banks to lend too many people since the rates had

been lowered, and the banking sector had been allowed to set conditions for taking up loans. The

checks were therefore significantly reduced, and more people started having access to the loans

without the usual checks and controls that had been significant to ensure that the money was

loaned out to the capable individuals.

The weak and sham control practices were also a primary cause of the crisis. This is

because the financial and banking institutions started disbursing coinage to individuals without

following the proper procedures and guidelines that are required to be met by the systems

(Švajda 2012, p.191). This led to continued or constant losses by these financial systems as a

result since they were not in a position to control the level of loans and amount of capital for the

banks to stay afloat. The main causes of the crisis were, therefore, as a result of laxity and major

expectations in the economy that never transpired.

After financial institutions risked failure, became suspicious, realized that people were

defaulting loans, they reduced lending, which affected both investors, companies, and other

individuals since companies became bankrupt and the unemployment rate increased. People were

affected by the level of high unemployment and the amount of money reducing in the economy.

The financial crisis saw a dark spell in American history that even some European countries such

as Greece have not entirely recovered since then.

This financial predicament was transmitted from the US to the other parts of the globe via

linkages in the global financial system. Various financial organizations, such as banks all over

the globe, incurred huge losses and depended on government support to escape impoverishment

or insolvency (Liu et al. 2018). The GFC affected nearly all areas, not forgetting globalization.

Foreclosures became commonplace, prices of housing crashed, redundancy raised to 10 percent

 The 2008 Financial Crisis Research Proposal 5

in the US and complex in other parts of the world such as Europe, manufacturing, especially in

the automotive industry declined sharply, and a worldwide recession shaped prevalent hardships.

However, a wide range of developing or emerging states that adopted a prudent and sensible

approach to finance and also those that declined to adopt financial liberalization and

globalization were not severely affected.

To conclude, the epicenter of the crisis indicated the volatility of the economy due to

changes in economic trends, and instituting improper frameworks in the process was the United

States. The predictability of the market and the decision-making systems were put to question as

the crisis happened due to belief in more profits from the housing sector. The crises took a toll

and spread to other parts such as Europe. However, although the US government contributed

massively to the resolution of the problem, countries are still suffering.

 The 2008 Financial Crisis Research Proposal 6

References

Arroyo, G., 2009. Krugman, Paul: The Return of Depression Economics and the Crisis of

2008. Mensaje, 58(577), pp.57-58.

Castells, M., Caraça, J., and Cardoso, G. eds., 2012. Aftermath: The cultures of the economic

crisis. Oxford University Press.

Financial Crisis Inquiry Commission, 2011. The financial crisis inquiry report: The final report

of the National Commission on the causes of the financial and economic crisis in the

United States, including dissenting views. Cosimo, Inc.

Liu, C.C., Ryan, S.G., and Wu, S.J., 2018. The Impact of the 2008 Financial Crisis and

Regulation Reforms on Loan Growth: Evidence from the Effect of Capital and Liquidity.

Švajda, M., 2012. Paul Krugman, The Return of Depression Economics and the Crisis of 2008.

New York: WW Norton, 2009. 191 pp. ISBN 978-0-393-07101-6. AUC Studia

Territorialia, 11(2).