Financial Crisis 2007-09 Case Study Example | Topics and Well Written Essays - 250 words

Financial Crisis 2007-09 - Case Study Example Other factors include surge in subprime mortgages as an answer to high housing speculation and growth of the bubble. The main culprits were lenders, because they were responsible for lending funds without taking into consideration the risk of defaulting. After the central bank lowered interest rates and flooded the market with cash. The lenders, like investors, had ample capital to lend, and more willingness to undertake extra risk to increase their returns. The financial crisis commenced in the US and spread throughout the world. The failure of Lehman Brothers teaches us the importance of risk management because this institution had invested in risky securities loosing much value after the U.S housing bubbles. In addition, the crisis teaches us that it is important to retain the confidence of the financial market because once shattered, it becomes difficult to restore. When such confidence is shattered, it can lead to a full-blown confidence crisis in the entire word. The housing bubble resulted from the enormous savings from developed countries, and the low interest rates that existed in the U.S. Due to the available funds, there was demand for high-yielding investments leading to the housing bubble. Some small banks in the US reduced lending; therefore, governments and consumers could no longer borrow and spend before the crisis. Businesses also had to reduce their workforce because the recession meant less funds. The credit crunch deepened as the losses increased