Market Current Financial Crisis

As you are all probably aware the US is currently experiencing the biggest  financial crisis after the Great Depression. And just like this past worldwide economic downturn marked with massive bank failures and the stock market  crash in 1929 today we witness the unforeseen bankruptcy of big trusted banks and extreme market volatility.

When examining the causes for the financial crisis most people start directly with the real estate market focusing on the sub prime mortgages and unscrupulous lenders and casting the blame on the unsustainable real estate bubble which began to collapse. Whereas this is true it is not the whole story. The whole real estate bubble originated mainly as a response to the huge demand of financial assets. And since not many places can actually provide such assets naturally in such situations speculative bubbles come on the stage and become part of the supply response of financial assets to the demand of such assets. This was the case with the real estate bubble too and that was one of the main factors leading to the excess capital globally pushed an enormous amount of money into the US mortgage market thanks to the securitization and the fact that almost 80% of the US mortgage market is securitize And the idea of generating higher returns originated. Mortgages were now offered to high risk borrowers too at the cost of significantly higher mortgage rates. Those sub prime mortgages were put in big pools of assets from which the so called "Mortgage Backed Securities" were created. Often the mortgages were actually broken into pieces and grouped and packaged with other mortgage pieces of the same type. Thus financial instruments and vehicles like and etc. seemed like a great solution to the great demand of assets and the idea was that the yields on such securitized sub prime mortgages would also be higher. However the problem with securitization stems from the fact that it does not provide protection against systematic risk. And unfortunately such a systematic risk was also not priced into the sub prime mortgage pools not until things went wrong and sub prime borrowers started defaulting on their mortgages. As we already noted credit rating agencies didn't take into account the possible systematic risk and blessed the apparently low risk securities with rating. The sub prime lending increased the homeownership rate in the United States significantly and about 5 million people went from tenants to homeowners. As a result rents went down and house prices went up till they reached unsustainable heights relative to rents. However in contrast to the stock market in the real estate market when the asset prices raise more assets are created through construction. Instead in mid-2007 the losses in the sub prime mortgage markets triggered surprising turmoil throughout the international financial system given the presumed small size of the US sub prime market compared to the global financial markets. The crisis spread with amazing speed to other markets and even to financial institutions that had no direct exposure to the sub prime mortgage market. Confidence in many financial institutions was shaken and the stock market witnessed systemic weakness across financial sectors. The share prices for large small and investment banks all significantly dropped lost about a third of their value. What is more banks stopped trusting other banks and interbank lending was disrupted.