Causes of 2008 Financial Crisis Essay Example | Topics and Well Written Essays - 1000 words

Causes of 2008 Financial Crisis - Essay Example Ohanian (2010) explains the cause to be due to the fall in the value of asset-based securities and a let-down by financial institutions. There were reduced intermediary services in finance that had a connection to the rise in interest rates (Ohanian, 2010, p. 55). First, banks produced too much currency in the economy. Normally, if banks give out loans, there is the creation of new money in the economy. As Eakins and Mishkin (2012) confer, banks made too many loans, creating huge sums of money. By 2008, the amount of money in the economy had doubled compared to the amount seven years prior. As a result of this, huge sums of money were remitted to the public, especially the mortgage sector. Despatch of large amounts of loans happened, without consideration of the credit histories of the lenders.After creating a huge amount of currency in the economy, house prices went up since large quantities of money ended up in the property market. Arnold (2012) connotes that financial institutions largely used the currency created between 2001 and 2007 to finance the residential property. Thirty-one percent of it was loaned to the mortgage sector, 20% to profit-making real estates, while 32% went to monetary divisions. While 8% went to businesses external to financial segments, another 8% was given as personal loans (Arnold, 2012, p. 23). The above statistic shows that much of the money in the banks went to the mortgage and housing investors compared to other institutions.