Why do we have a financial crisis today? Apparently stable and profitable companies, banks and even markets begin to struggle. Where are the roots for this development? The financial crisis of today can be tracked back to the housing bubble and to the following
housing crisis in the USA. But who where the participants and what were their actions? The following chapters try to give some explanations and reasons for this.
The housing bubble in the U.S and the following financial crisis had got their own reasons and drives. It is important to know these explanations and mechanisms to avoid such developments in the future. Managers and leaders should know, which reactions
follow which actions.
The objective of this assignment is to explain the reasons for the U.S housing bubble and the mistakes made by the participants of this development. The work on the assignment started with a mind map of questions like: who are participants of the house bubble crisis, what are the connections between these participants, and what were their actions. All findings of this assignment are mainly Internet based and complemented by literature sources regarding topics like financial crisis, housing bubble, and subprime mortgage crisis. After providing a brief overview of the advance of the housing bubble, with a look to the Asia crisis, the premises of the housing bubble are explained. Following to that the housing boom is described in more detail. Afterwards, the focus will be changed to customer loyalty. Along with that the customer value and satisfaction is very important for a long term company-customer relationship. At the end of this assignment the conclusion sums up with the genesis of the housing bubble.
Table of Contents
1 Introduction
Problem Definition
Objectives
Methodology
2 The Advance of the Housing Bubble
2.1 The Asia Crisis 1997 – 1998
2.2 Fanny Mae and Freddie Mac
3 The Housing Bubble
3.1 Premises
3.1.1 The Role of the Fed and the Oversupply of Money
3.1.2 Lending Standards in the US
3.1.3 Prices of and Supply with new Houses over the last Decades
3.1.4 Securitization (ABS, MBS, CDO)
3.2 Housing Boom
3.2.1 Over financing
3.2.2 Consumption by Credit
3.2.3 Houses “Under Water”
3.3 The Final Crash
4 Conclusions
Research Objectives and Key Topics
This work aims to analyze the origins of the U.S. housing bubble and the subsequent financial crisis by identifying the key participants, their actions, and the systemic errors that led to this economic collapse. It examines how specific regulatory and financial mechanisms contributed to the instability, with a focus on drawing lessons for future management and economic policy.
- The role of the Federal Reserve and monetary policy in fueling the bubble.
- The impact of lending standards and the influence of Fannie Mae and Freddie Mac.
- The mechanics of securitization (ABS, MBS, CDO) and their role in spreading risk.
- The phenomenon of over-financing and its consequences for household debt and consumption.
- The collapse of house prices and the resulting "under water" mortgage crisis.
Excerpt from the Book
3.1.1 The Role of the Fed and the Oversupply of Money
The so called Federal Reserve System (informally The Fed) is the central banking system of the USA. The major motivation for creating the Fed was to address banking panics. Current functions of the Fed are to maintain the stability of the financial system and to contain systemic risk in financial markets. Nation’s money supply should be managed through monetary policy to achieve the conflicting goals of maximum employment, stable prices (prevention of either inflation or deflation) and moderate long-term interest rates (Wikipedia, The Fed, 2009).
In the past the thinking the Fed should rev up the printing presses if the economy is slowing down. This extra money should stimulate growth. In times the economy is growing to quickly, the Fed should tighten up money creation conversely. So things are slowed down and economy’s careening of the road is avoided (Forbes, 2008, p. 1). With this thinking in mind the Fed, with Chairman Alan Greenspan, tried stabilize the financial markets with “easy” money policy. The expecting was the housing market is boosted by “easy” money, consumers were expected to borrow against their home values and spend more, thus boosting the economy.
Summary of Chapters
1 Introduction: This chapter defines the scope of the study, outlines the objectives regarding the U.S. housing bubble, and describes the research methodology based on internet-based and literature sources.
2 The Advance of the Housing Bubble: This section provides a historical context by examining the Asia Crisis as a precursor and discussing the role of government-sponsored enterprises like Fannie Mae and Freddie Mac in relaxing lending standards.
3 The Housing Bubble: This core chapter explores the specific premises, the boom phase driven by credit-based consumption, and the eventual market crash when housing values fell below mortgage amounts.
4 Conclusions: This chapter synthesizes the findings, highlighting the failures of the Federal Reserve and the excessive greed of market participants, while proposing guidelines for future economic and financial policy.
Keywords
Housing bubble, financial crisis, U.S. economy, subprime mortgage, Federal Reserve, interest rates, securitization, Fannie Mae, Freddie Mac, credit boom, asset-backed securities, lending standards, mortgage, consumer debt, economic policy.
Frequently Asked Questions
What is the core focus of this research?
The study investigates the economic reasons behind the U.S. housing bubble in the early 21st century and the subsequent financial crisis.
What are the primary themes discussed?
Key themes include monetary policy, the role of government-sponsored enterprises, subprime lending, and the impact of securitization on financial market stability.
What is the ultimate goal of the work?
The goal is to explain the factors and participant mistakes that led to the bubble to provide insights for future management and leadership decisions.
Which methodology was applied?
The research is primarily based on a literature review and internet-based sources to map the connections between various participants in the housing crisis.
What topics are covered in the main body?
The main body covers the history of the housing bubble, premises like the Federal Reserve’s role, the expansion of credit, the housing boom, and the final crash.
Which keywords define this work?
Key terms include housing bubble, subprime crisis, Federal Reserve, securitization, mortgage-backed securities, and credit-fueled consumption.
How did Fannie Mae and Freddie Mac contribute to the crisis?
They faced government pressure to relax lending standards to increase homeownership, eventually bundling high-risk subprime mortgages into securities that spread financial instability.
What does the term "houses under water" signify?
It refers to a situation where a house owner owes more money on their mortgage than the current market value of their property, which became widespread after the bubble burst.
- Citation du texte
- Michael Kemmer (Auteur), Dirk Herfurth (Auteur), 2009, The Economics of the US House Price Bubble in the early 21st century, Munich, GRIN Verlag, https://www.grin.com/document/197109
