causes for the credit crises

The subprime crises was bank crises which started in July 2007 because the prices of house which were increasing all the time start to decrease and more and more credit users couldn’t pay back the money anymore. At the beginning there were only the subprime loans were affected which means they have a defective creditworthiness.

So on the beginning of the summer 2007 people in US were not able to pay the money back for these loans and this was the first time since several years and these caused a permanent increase of the interest rate but the prices for the houses decreased.
So the banks borrowed too much money and now they have liquidity problems. So the banks doesn’t really have earnings anymore and banks don’t want to lend money to each other anymore and this leads to a credit crunch, which means there is to less money supply which causes a recession.

To deal with loans or mortgage is really risky business and these were also the first ones who were affected when loan takers could pay back the money anymore. Banks and other financial institutions make losses in the amount of many billion US $.

Because of this investment banks also made loses and private or institutional investors got willingness to take risks. That means they took out there money from the capital market or didn’t make new investments. Because of the crises there was a high liquidity requirement and that led to an increase of the money market rate.

So the money market rate rose and the investors stop investing so banks didn’t get any money. The central banks from many nations had to offer billions of dollars to the money market so the market had certain liquidity so the central banks prevented a common credit crisis.