Answer to Question #309206 in Finance for Comfort

Question

Did interest rate risk contributed to the financial crisis of 2008?

Answer 1

Yes, interest rate risk contributed a lot in the financial crisis of 2008. The Federal Reserve chose to reduce interest rates to very low levels, thereby expanding credit markets beyond what they would have been on their own. The combination of the artificially reduced cost of credit or lower mortgage rates and increased demand for homes, by moving along the demand curve, drove up home prices leading to a financial crisis.