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What Was the 2007 Financial Crisis?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 November 2016
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The 2007 financial crisis is considered by many to be the most significant financial disaster since the Great Depression. In some estimates, damage from the 2007 financial crisis far exceeds that of the 1930s trauma, as the modern crisis has a far greater effect on global economy. Though begun in the United States, the 2007 financial crisis quickly swept across borders like a tsunami, causing widespread financial devastation and damage that may require decades to fully repair.

Economists differ on interpretations of the 2007 financial crisis and its causes, but many agree that the single most critical factor in the initial crisis was the crash of the United States housing market. This occurred for several interconnected reasons, including a vast increase in subprime mortgages and severe over-extension of mortgage-based securities by financial institutions.

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Around the turn of the 21st century, a downward trend in federal lending rates opened the housing market to more home buyers than ever before. While this was a good way to increase home-ownership levels, it also meant that many people accepted mortgages with highly variable interest rates, under the impression that rates would not go up. Since home-ownership could not increase forever, the market started to slow down around 2004, leading a reduction in construction and gradually increasing interest rates. Homeowners found their mortgage payments increasing dramatically, often well beyond their ability to pay. This lead to a wave of foreclosures, as people began to default on their homes, leading in turn to the ruin of sub prime lenders.

The toppling of subprime loans lead to the beginnings of the panic many hold responsible for the 2007 financial crisis. Many of the biggest financial corporations in the market had taken advantage of reduced leveraging rates to take on debt that vastly exceeded their investments. The growing awareness of this precarious position shook market confidence, as investors, noting the decline in the housing market, began to fear that their retirement funds and investments were in serious danger of default. As it became more apparent that the most trusted names in investment banking were on the brink of insolvency, investors started to pull out funding, prompting many financial institutions to jump off the ledge into bankruptcy and pleas for government intervention by mid-2007.

The financial crisis of 2007 was met with quick action by regulatory agencies, many of which quickly cut interest rates, provided central bank support, and even seized some of the foundering institutions under government control. Nevertheless, panic had already gripped the market by this point, and no amount of intervention could restore investor confidence. By 2008, many national governments began a controversial process of providing “bail-outs” to large investment companies as a means of keeping the national and global economy from collapsing. Proponents of bailouts suggested allowing these institutions to fail would bring financial ruin on the entire economy, since so much corporate and individual money was tied up in their existence. Opponents suggested that bail-outs were tantamount to rewarding financial institution for making terrible decisions, and that bail-out money should be turned over to tax payers instead of foundering companies.

The 2007 financial crisis quickly spawned enormous unemployment levels, shrunken economies, and stagnation in the investment market. Governments, already under considerable strain from providing bailouts, now faced a citizenry with skyrocketing needs for jobs, health care, and financial assistance. The downfall of the American economy caused serious issues throughout the world, as many national economies lost US-based business, services, goods and non-profit programs. Even by 2010, when hopeful economists declared the period of economic recession ended, many nations continued to suffer from the aftereffects of decreased investor confidence and a changed US economy.

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