The Subprime Crisis: Cause and Effect

Abstract

This research explains and analyzes how the Subprime Crisis happened in 2008 and how the crisis impacted the market and policy in America. The causes are unfolded from three perspectives. First reason is that government adopt a low interest rating, aiming at increasing the house affordability. Second, excessively innovative financial products, such as MBS, and credit rating agencies lead to even more unlimited loans with poor quality. Third, the complex commercial chain behind mortgage products enlarged the range of the crisis’s influence, which is triggered by government increasing the interest rate. The meltdown of subprime commercial chain brings a series damages: house market bubble burst, banks and businesses broken, rapidly decreasing employment rate, etc. To control the continuing damages from the collapse of mortgage market, the US government begins to intervene the market by promulgating laws, including Dodd-Frank legislation and Basel III to regulate and restrict businesses’ and banks’ behaviors.