Review the U.S. housing market and other key financial markets or institutions.

Question

Review the U.S. housing market and other key financial markets or institutions. Review the U.S. housing market and at least two other key financial markets or institutions and use course materials or the Internet to conduct your research. Review the factors that contributed to the growth of mortgaged-backed securities in the run-up to the U.S. housing bubble. Step 2 Address the questions below. What additional financial markets did you research? How did these markets react to the changing economy? What notable factors contributed to the growth of mortgage-backed securities? What factors led to a decrease in supply of those securities, while increasing the associated default risk? How does the U.S. government's deficit impact both the supply of loanable funds in the U.S. economy and real interest rates? Despite high government deficits by historical standards, low nominal interest rates are also present. How can we explain this?

Explanation / Answer

The seeds of the crisis started in year 2004, The prices of property across many states have doubled, This led to wide speculation among investors.

The correction in prices has started in year 2007 and continued till market prices fall almost 30-40%, This has resulted in financial collpase of people who owned the property and also the lenders.

Every bank and financial institution which had exposure to housing market have virtually collapsed, Many banks got government bailout. Some of the largest mortgage companies have failed miserably which resulted in largest bailout in american history.

The real reason behind the bubble was credit boom that was bought in by mortgage companies. The unprecedented growth in finance industry also contributed to the problem. Finance did overtake economy which has landed everyone in great trouble.

The Chinese credit story is also very large, The construction boom in China that consumed most of the worlds steel and cement output in good days today looks so weak that China and United states had to negotiate to shut down some of China's steel factories or reduce their output.

Lack of regulation is one reason for the creation of mortgage-backed securities, Everyone were very much interested in debt. Mortgage is nothing but keeping some property as security with some bank to loan certain amount. This was interpreted in a different way and banks shown these mortgages as assets and loaned more money from other banks and issued debts. So when market collapsed everyone had these bonds which were useless.

US government esentially bailed out these companies. Right now federal reserve still maintains near zero interest rates. Debt is now issued by Federal reserve instead of these banks. US government securities are always in high demand. So Fed issues debt that is bought mostly by american savers and foreign governments. In return Fed keeps interest rates low in the US economy. Fed is afraid that any raise in interest rates would lead to further slowdown of the economy and in-evitable recession.

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