Reversal of Banking Sector Regulation
The old law regulating the banking sector was reversed, leading banks to invest in derivative commodities and trade with financial markets. This allowed banks to demand more mortgage loans to support the sale of these derivative commodities, resulting in loans at interest rates that were only as much as subprime borrowers could repay.
Fragmentation of Contracts
Investment bodies and others began selling securities linked to mortgages and other bonds. Mortgages were bundled with similar loans and computational models were used to determine the value of the package based on various factors. The securities linked to the loans were then sold to investors.
Excess Mortgage Surge
In 1989, laws related to the National Cooperation Bill heightened the resumption of financing settlements and security blockades and other policies contrary to banking laws. These policies encouraged the banking sector to support intangible mortgage loans. At the same time, the Federal Reserve was reducing interest rates, making mortgages with low payments affordable to subprime borrowers surplus.
Raising Interest Rates on Subprime Borrowers
Banks heavily affected by the recession of 2001 welcomed new derivative products. In December 2001, the Chairman of the Federal Reserve, Alan Greenspan, lowered the federal funds rate to 1.75%. The body also cut it in November 2002 to 1.25%. This also led to a reduction in mortgage interest rates.
Source: https://www.thebalancemoney.com/what-caused-2008-global-financial-crisis-3306176
Leave a Reply