When the entire global economy was preparing itself to fight with poverty, inflation, global warming etc, little was it known that he would have to fight a much tougher opponent in the form of financial crisis. The world woke up to a new reality, in fact a mayhem which is affecting everyone all across the globe. Last couple of months, the world has seen several major and top-of-the-line financial institutions absorbed by other major financial institutions, outright crash or receive government or federal bailouts.

By the question is what caused the financial crisis? This financial crisis is just like a storm which was brewing for years and when touched its breaking point, destroyed that came in its way.

Market instability

Market instability was the most important reason behind the financial crisis. Many factors contributed for the same but the major cause was the change in the ability to generate new credit lines, which eventually dried the money flow and slowed the new pace of economic growth and above all selling and buying of assets.

The other main factor for market instability was cheap credit. This cheap credit made it easy for the people to buy real estate properties, houses or invest somewhere based totally on speculation. This created more funds in the system, but people were willing to spend that money and unfortunately they wanted to spend on the same thing. This caused an increase in the demand of the thing and as such inflation soared high.

Moreover, private equity organizations leveraged massive amount of funds to buy companies in debt and at the same time generate billions and billions of dollars by just shuffling papers. However, all this failed to create anything of importance and value. More recently, higher unemployment and oil prices speculations increased further inflation.

Bad lending policies

The property market was on a high during 2005-2007, the prices of which used to increase gradually and continuously. It was even assumed that property prices and that too residential ones would keep increasing, which made mortgage lenders to relax standard of lending. Huge amount of funds in the form of sub-prime loans were given to the borrowers with sketchiest of credit history.

More so, the lenders were not worried about the defaulters as they could easily get their money back from the property of the defaulters itself. However, contrary to this, the prices of the properties plummeted sharply leading to a large scale increment in the number of defaulters. All these events acted like a chain reaction and caused bankruptcies and bailouts all across the globe.

Though there are numerous points that rocked the world with the present financial crisis but the above said two forms the major reason.
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defaulters    increase    properties    bailouts    cheap    fight    form    lenders

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