By Li Bin Chen
Starting in July 2007, the world economy is sliding into a downfall. Initially people refer to the downfall in 2007 as the “credit crisis”. It results from loss of confidence by investors in the value of securitized mortgages in the United States. Although the housing crash of the United States is often being marked by the cause of this global financial crisis but it is not the only reason. The high vulnerability of the financial system with its intricate and highly-leveraged financial contracts and operations allow no-asset investors to take out loan for its mortgage. Before 2007, there is a dramatic increases in the housing price which encourage people to take out mortgage loan with the confidence that the rising in housing will fuel their investment.
In 2007, the housing bubble burst. The housing boom led to so much over-supply that prices could no longer be supported. Banks were in trouble because people can no longer pay their loans. The failures of American and European banks to rescue distressed financial institution led the originally credit crisis into a global financial crisis as country are interdependent on each other’s economic stability. Loss of investor confidence and tight budget had resulted in the falling prices of the stock market which contribute to the financial crisis.
Sources:
"Financial crisis of 2007–2009" Wikipedia.
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
"The housing bubble has popped" By: Bill Fleckenstein
http://moneycentral.msn.com/content/P149596.asp
"Credit Crisis -- The Essentials" By: THE NEW YORK TIMES
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/
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