Answer to Question #309208 in Macroeconomics for Comfort

Question

Explain the risks that contributed to the financial crisis of 2008?

Answer 1

Deregulation

Deregulation was the primary cause of the crises in the financial industry after the banks were permitted to trade with derivatives and engage in hedge funds. For these banks to earn profits from the derivatives, they demanded more mortgages. The loans became more affordable to subprime borrowers, and the demand for money was overtaken by the supply. Demand was lower than the supply resulting to financial crises.

Loan Securitization

Banks had little or no close monitoring of the loan under writing standards. This was after the policy of retaining most of the loans want by the wayside. The banks could no longer hold securitized loans thus financial crises arose.