How the American Mortgage Crisis Spread to Europe

In: Business and Management

Submitted By skolebolle
Words 1711
Pages 7
During the 2000s, there were few national investment opportunities in Europe because of low interest rates that caused government bonds to produce low returns. The solution for European investors was to turn to America where they could buy mortgage-backed securities, an investment that was considered safe and that yielded higher returns than government bonds (Fligstein and Habinek, 2011). When the American mortgage market broke down it quickly spread to other countries, and the global financial crisis was a fact.

In this paper I will start off by explaining the background for the mortgage crisis in the US. Afterwards I will try to elaborate how this could spread across the world and make the crisis global. Finally I will discuss why this crisis has been so slow in resolving itself since many countries still struggle in the aftermath of the crisis. My thesis is that: The decline in investment opportunities in several countries in the European Union caused investors in some of the richest countries to buy mortgage backed securities from the US. When these mortgage backed securities defaulted, the crisis turned global. The American mortgage crisis:
When the American banking sector gradually got deregulated during the 80s and 90s, the banks came up with new and creative ways to reach out to new costumers. Basically it is conventional economic wisdom to not lend out money to people with bad financial credibility, but an innovation in financial alchemy changed this. By the early 1990s investment banks realized that mortgages could be gathered, packaged and sold as profitable bonds in an assumingly huge market. Securitization made consumers get mortgages cheap and easy, so the market for mortgage-backed securities grew at a fast rate alongside increased housing prices (Fligstein and Goldstein, 2010).

This lead the American housing marked into a dark circle;…...

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