Financial Meltdown caused by a series of events

The recent Financial Crisis can be traced down to a series of events, also referred to as "The Sub prime crisis"

It was characterized by a situation in 2007, wherein the financial sector comprising mainly of investment banks in US, collapsed. The investors lost all confidence in the mortgages resulting in a credit crunch. US government intervened in the financial markets through injection of capital into the economy. Slowly this crisis started spreading across the globe & took the entire world into its grip. The tremors are being felt across Asia & Europe & it can truly be termed as "The Global Financial crisis".

The causes of this meltdown are several.

Relentless sub prime lending led to a real estate boom in early 2001-02. Applying the simple macro-economics theory of demand & supply, with supply of real estate exceeding the demand, slowly the real estate prices started falling & inflation rose. This led to bursting of the housing bubble in 2005-06 with the housing prices crashing down. Since housing assets were mortgaged as securities, the fall in value of housing caused the value of mortgaged assets to fall drastically & people started to default on repayment of loans.
These loss assets were bundled up by retail banks & sold off to investment banks which had to directly face the repercussions of this financial breakdown. Their balance sheets were overflowing with loss assets.

This saw the collapse of Lehman Brothers, AIG, Merrill Lynch, Fannie Mae & Freddie Mac. Washington Mutual, Goldman Sachs & Morgan Stanley also came under great pressure. As a result The Federal Reserve had to immediately pump in billions of Dollars to save the economy from a massive collapse.
Deregulation by the Congress in USA was another reason for these crises. Congress emphasized on weakening the regulations with an aim of facilitating more money for issuance of housing loans & passed bills that resulted in proliferation of complex financial instruments.

Another cause of crisis can be attributed to over-leveraging by banks which underestimated the risks involved in collateralized debt & credit default swap markets.

All this caused the World Financial System to come crashing down to its knees.

Paul Robgher writes for debt-free.org.uk and takes great pride in helping people to be debt free