The Central Role of Subprime Mortgages and Their Securitization in the 2008 Financial Crisis

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[...] Available at: https://www.ft.com/content/64a37773-b77a-3a75-9994-bcd917a2dbf2. Lioudis, N The Collapse of Lehman Brothers: a Case Study. [online] Investopedia. Available at: https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp. Malmendier, U. and Hamilton, C NEW LESSONS FROM BEHAVIORAL ECONOMICS. Finance & Development. Swan, P.L The political economy of the subprime crisis: Why subprime was so attractive to its creators. European Journal of Political Economy, 25(1), pp.124-132. [...]

[...] Hence, the massive number of subprime mortgages contributed to systemic vulnerabilities, demonstrating serious regulatory and market deficiencies. Deepening crisis The 2008 economic crisis was greatly amplified by mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), which packaged subprime mortgages into tradable bonds. These financial products were designed to mix different kinds of home loan debts into one entity with the aim of spreading risk. Rating agencies, such as Moody's and Standard & Poor's, erred by assigning AAA ratings to these instruments, thus indicating their safety comparable to government obligations (Fang, 2024). [...]

[...] Conclusion In conclusion, the collapse of the subprime mortgage market and the proliferation of mortgage-backed securities, in addition to regulatory failures, caused the 2008 economic recession. Subprime mortgages were not the sole cause of this crisis, but other system-wide problems, such as unregulated and complex financial connections, made it worse. In order to avert further turmoil, regulatory frameworks should be more flexible while risk management practices must be enhanced. The global financial system should, therefore, prioritize stability and resilience by learning from past mistakes and undertaking meaningful reforms. [...]

[...] The Central Role of Subprime Mortgages and Their Securitization in the 2008 Financial Crisis Introduction The burst of the subprime mortgage market in 2008 crumbled major financial institutions, thus causing an economic catastrophe that wiped out more than $10 trillion in household wealth within the USA (Lioudis, 2023). This traumatic event exposed serious weaknesses within the financial system, specifically in mortgage lending practices and the securitization of such loans (Malmendier and Hamilton, 2024). The aftermath of the incident emphasized the importance of comprehending financial instruments as well as their systemic risks, which makes it an important field to study for the soundness of financial markets. [...]