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B) What Were Some Of The Major Causes Of The Recent Global Financial Crisis (Gfc), And What Have Been Some Of The Ongoing Economic Impacts, Either Globally Or Locally In Singapore, Of This Crisis?

3419 words - 14 pages

A period of economic difficulty that consumers and markets are experiencing world-widely is known as global financial crisis (BusinessDictionary, 2015). It occurs when there is an increase in asymmetric information coming from disruptions in financial system that is interrupting the funds from channelling efficiently between savers and households as well as preventing firms from having productive investment opportunities (Mishkin and Eakins, 2012, pp. 204).

The recent global financial crisis began in the year of 2007 and the intensity increased in the subsequent year. Global financial crisis in 2007 happened as result of a number of factors such as government mandated subprime lending, ...view middle of the document...

Low interest rates, together with loosening credit-underwriting standards are able to bring low-income borrowers into the housing market and that will fuel the demand. However, if the interest rates increased and the credit standards have been tightened, it can lessen the demand in the housing market that causes a burst in the housing bubble. In addition, some believed that they are able to make profit through the short-term buying and selling of houses and that further increases the demand of housing. Therefore, when the demand decreases while the supply increases, there will be a drop in prices that can cause the bubble to burst (Mishkin and Eakins, 2012, pp. 211-213).

When the houses of subprime borrowers appreciated in value, they are able to refinance larger loans and this also mean they are less likely to default their loans. However, when housing prices increase, the bad loans that were given to borrowers who were unable to afford the loans were having delays. In which, some of them will make another loan that is against the value of the houses that they own due to the increased prices. Thus, this resulted in the borrowers getting into more debts to pay off the debts they owed. The housing prices had been increasing since recovering from the recession in 2000-2001 until 2006, when the housing pricing started to decrease again. This causes the housing market to suffer as the subprime borrowers will not be able to finance larger loans and are likely to default their loans, causing an oversupply of houses in the market. And because of the unprecedentedly high rates of default from the loans, the financial system was weakened. The rate of risky mortgages increases from under-qualified borrowers who were imprudently fostered by federal government through federal mandates and subsidies. Furthermore, houses and lands that are repossessed by the banks were not as valuable and worth lesser than what the banks had loaned out as a result of housing bubble burst (Davies, 2014).

Securitization is also another factor that causes the global financial crisis, and through securitization, “originate-to-distribute” business model was fostered. Agency problem has been exposed through the business model due to the reason that the mortgage brokers who originated loans are not making strong effort in evaluating whether borrowers have the ability to pay off the loan in the future as they sell the loans in the form of security to investors as soon as they are able to do that. This raises the problem of adverse selection. Risk-loving investors tend to take loans to acquire property that will bring them profit if housing pricing is high while if housing pricing is down and does not worth as much, they will hand the property over to the lenders. This causes the rate of mortgages on default to increase. The agency problem provides opportunity for brokers to persuade households to take up mortgages that they are not able to afford. Falsifying information...

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