Subprime Mortgage Crisis Research Paper Example | Topics and Well Written Essays - 1750 words

Subprime Mortgage Crisis - Research Paper Example These numerous theories, which have come up to explain the root cause of the subprime crisis. Numerous experts and economists believe that a combination of factors resulted to the crisis (Lynnley 13). This study intends to examine the housing bubble as a major cause of the subprime crisis. Housing Bubble This study reveals that the present mortgage crisis started with the bursting of the U.S. housing bubble, which commenced in early 2001 and ascended to its peak in the year 2005. Essentially, a housing bubble can be defined as an economic bubble whose occurrence in both the local and international platforms in real markets id characterized by almost similar features. The housing bubble is defined by express rise in the valuations of real assets until untenable levels related to income and affiliated affordability indicators are reached (Lynnley 11). This situation leads to the decrease of home prices and debts related to mortgages, which are higher compared to the value of the assets . It is imperative to note that the housing bubble was discovered at the aftermath of the market correction that happened in the U.S in 2006. In 2007, Alan Greenspan, the former Chairman of the Federal Reserve Board indicated that, United States has been having a bubble in the housing sector (Muolo and Padilla 3-7). This came upon the realization that the house prices appeared to be overwhelmingly overvalued. The sentiments were echoed by the Richard Syron, the CEO Freddie Mac and concurred with the Yale University economist Robert Shiller who warned that the necessary correction of the bubble would be done in many years to come wit trillions of dollars being lost. This situation would lead to a double-digit decline in the home values. The housing bubble in relation to the historically low interest rates This study reveals that the majority of the experts and economists believe that the housing bubble in the United States of American was partially caused by the historical low intere st rates. It is imperative to note that the Federal Reserve Board had reduced the short-term interest rates by 5.5% (from 6.5% to as low as 1 %). This was a response of the collapse of the dot-com bubble (Muolo and Padilla 3-7). This happened in early the year 2000 and was followed by the ensuing recession in 2001; however, this response significantly endangered the housing bubble through the decrease in real long-term interest rates. It is essential to note that, the US mortgages rates are set in relation to Treasury bond yields of 10 years. These rates are influenced by the Federal funds rates. This study establishes that the Federal Reserve Board acknowledged the relevance of the connection amid lower interests’ rates, increased liquidity and the higher home values in relation to the general status of the economy. On the other hand, Greenspan disputes the claim that he engineered the housing bubble. Greenspan asserts that the Fed’s decline in rates contributed to th e inflation of the bubble. In 2007, Greenspan argued that, the housing bubble was not in any way related or linked to the Fed’s policy on interest rates, however, Greenspan pointed out on the international surplus in savings, which pushed down the interest rates