As for all monetary crises, a variety of things make a case for the GFC and its severity, and other people square measure still debating the relative importance of every issue. A number of the key aspects include:

Excessive Risk-Taking in an Exceedingly Favourable Political Economy Setting

In the years leading up to the GFC, economic conditions within the US and alternative countries were favourable. Economic process was robust and stable, and rates of inflation, state and interest were comparatively low. During this setting, house costs grew powerfully Theresa & Johnson (2016).

Expectations that house costs would still raise semiconductor diode households, within the US particularly, to borrow imprudently to buy and build homes. An identical expectation on house costs additionally semiconductor diode property developers and households in European countries (such as Iceland, Ireland, European nation and a few countries in Japanese Europe) to borrow too Jack (2008). Several of the mortgage loans, particularly within the US, were for amounts near to (or even above) the acquisition worth of a house. an oversized share of such risky borrowing was done by investors seeking to create short profits by ‘flipping’ homes and by ‘subprime’ borrowers (who have higher default risks, chiefly as a result of their financial gain and wealth square measure comparatively low and/or they need lost loan repayments within the past) Davis & Karim (2007).

Banks and alternative lenders were willing to create progressively massive volumes of risky loans for a variety of reasons:

1. Competition accrued between individual lenders to increase ever-larger amounts of housing loans that, thanks to the nice economic setting, perceived to be terribly profitable at the time.

2. Many lenders providing housing loans didn't closely assess borrowers’ skills to create loan repayments. This additionally mirrored the widespread presumption that favourable conditions would continue. In addition, lenders had very little incentive to require care in their disposal selections as a result of they didn't expect up-to-date any losses. Instead, they sold-out massive amounts of loans to investors, sometimes within the variety of loan packages knew as ‘mortgage-backed securities’ (MBS), that consisted of thousands of individual mortgage loans of variable quality. Over time, MBS product became progressively advanced and opaque, however continued to be rated by external agencies as if they were terribly safe.

3. Investors World Health Organization purchased MBS product erroneously thought that they were shopping for a really low risk asset: though some mortgage loans within the package weren't repaid, it had been assumed that almost all loans would still be repaid. These investors enclosed massive US banks, additionally as foreign banks from Europe and alternative economies that sought-after higher returns than may be achieved in their native markets.

Accrued Borrowing by Banks and Investors

In the originate to the GFC, banks and alternative investors within the US and abroad borrowed increasing amounts to expand their disposal and buy MBS product. Borrowing cash to buy a plus (known as a rise in leverage) magnifies potential profits however additionally magnifies potential losses. As a result, once house costs began to fall, banks and investors incurred massive losses as a result of they'd borrowed most. Additionally, banks and a few investors progressively borrowed cash for terribly short periods, together with nightlong, to buy assets that would not be sold-out quickly Iqbal (2010). Consequently, they became progressively dependent on lenders-including alternative banks-extending new loans as existing short loans were repaid.

Regulation and Policy Errors

Regulation of subprime disposal and MBS product was too lax. Particularly, there was meagre regulation of the establishments that created and sold-out the advanced and opaque MBS to investors. Not solely were several individual borrowers supplied with loans thus massive that they were unlikely to be ready to repay them, however fraud was progressively common like overstating a borrower's financial gain and over-promising investors on the security of the MBS product they were being sold-out (Karimi et al., 2020). In addition, because the crisis unfolded, several central banks and governments didn't totally recognise the extent to that dangerous loans had been extended throughout the boom and therefore the some ways within which mortgage losses were spreading through the national economy.

References

1. Davis, E.P., & Karim, I. (2007). Comparing early warning systems for banking crises. Journal of Financial Stability, 4, 89-120.
2. Iqbal, B.A. (2010). Global financial crisis: Cause, emerging trends and strategy. Business Review, 5(2), 35-50.
3. Jack, R. (2008). The deepening global financial crisis: From minsky to marx and beyond, critique. Journal of Socialist Theory, 36(1), 5-29.
4. Theresa, E.O., & Johnson, N.N. (2016). Impact of global financial crisis on Nigerian stock market. African Research Review, 10(1), 166-177.
5. Karimi, M., & Ghodratollah, E., & Baghani, A. (2020). Identifying path of global financial crisis contagion direction on industries of Iran stock market fatemeh sarraf.