Beruflich Dokumente
Kultur Dokumente
STUDENT NAME
DEGREE
PROJECT SUPERVISOR
PROJECT TITLE The Causes and equences of the 2008 Credit Crunch
DATE
Credit Crunch
Risk Management
Investment Management
2008 Credit Crunch 2
Table of Contents
Chapter 1: Introduction.....................................................................................................................
2.1 Introduction............................................................................................................................
2.4 Summary.................................................................................................................................
4.1 Introduction............................................................................................................................
4.2.1 Greediness.......................................................................................................................
Chapter 5: Conclusion......................................................................................................................
List of References.............................................................................................................................
2008 Credit Crunch 3
Chapter 1: Introduction
The economy of the world is facing one of the most drastic conditions due to the financial crisis
which started in 2008 from the financial sector of the United States and quite rapidly spread to other parts
of the world (Barbu 2010). Although the entire world has been affected by the financial crisis, the United
States of America and Europe have been the worst hit regions of the financial crisis causing many
financial services organisations and banks to either go bankrupt or merge with other organisations in
order to survive. The financial crisis has affected all countries of the world in one way or another either
directly or indirectly. The financial crisis did not appear from the no where it was building up since late
last century and many economists and experts were hinting that risky practices in the financial sector may
eventually lead to drastic conditions and a failure of the entire economic system. As the financial services
sector is the backbone of a country’s economy and serves as the barometer of the economy and
disruptions and failures in this sector eventually disrupts the entire economy and causes an economy wide
financial breakdown. There are several reasons for the financial crisis but the main trigger or catalyst of
the breakdown was the phenomenal decrease in real estate prices in United States which started in later
stages of 2007 (Friedrichs 2009). A major part of the financial sector was heavily reliant on the mortgage
industry and the decline in the housing sector made it difficult for banks and financial institutions to
refinance loans and mortgages which resulted in a widespread phenomenon of foreclosures and
bankruptcies. The mortgage crisis also referred to as the sub prime mortgage crisis emerged due to risky
and illogical decisions made by financial institutions and banks which financed and refinanced mortgages
without completely considering the financial stability of home owners. Most of the U.S. banks and
financial firms had invested quite heavily in mortgage backed securities earlier referred to as sub prime
mortgages due to the high risk of these securities (United Nations Publications 2009).
2008 Credit Crunch 4
The primary aim of this research is to analyse and evaluate the causes and consequences of the
2008 financial crisis and credit crunch which started in the United States of America and spread to other
countries and regions of the world. The aims and objectives of the current research will be achieved by
thoroughly reviewing the literature present on the issue and analysing the data collected from various
The aims and objectives of the current research will be achieved by analyzing data from various
sources and the research will also enable the researcher to answer the following research questions.
2. What were the main causes of the financial crisis and credit crunch which started in 2008?
3. How has the financial crisis affected various sectors of the economy?
4. What are the short term and long term implications and effects of the financial crisis and
credit crunch?
This dissertation report is divided in various chapters and the overall format and structure of the
Chapter 1: Introduction
The first chapter of the dissertation report is the Introduction chapter which provides the
background to context of the chapter, aims and objectives, research questions which will be answered
The second chapter of the dissertation is provides a comprehensive review of the literature found
on the financial crisis and the causes and effects of financial crisis based on literature and data collected
from sources such as books, periodicals, websites, journal articles and websites.
2008 Credit Crunch 5
The research methodology chapter is the third chapter of the dissertation which deals with the
explanation of the methods and techniques used for collecting, analysing and evaluating data in the
current research.
Chapter 4 of the dissertation presents the findings and observations of the researcher with respect
Chapter 5: Conclusion
The fifth and last chapter of the dissertation is the conclusion chapter which provides the overall
conclusion arrived at after performing research on the causes and effects of the financial crisis.
2008 Credit Crunch 6
2.1 Introduction
The last decade has seen organisations growing larger and stronger at a very rapid rate by
incorporating modernised ways of doing business and implementing various strategies. The situation of
banks and the financial services sector was quite similar as well as banks and financial institutions saw
phenomenal growth in a very short period of time. Although this growth was quite rapid is was based on
artificial means and the fundamentals were quite weak as a majority of these companies were
implementing window dressing strategies and boosting profits using risky and illogical strategies which
were beneficial were short term profits but were rendering these organisations quite weak for the long
term. The financial positions of the organisations were manoeuvred with unethical strategies which led to
short term benefits and the long term consequences of these practices were ignored and the bubble of this
financial mismanagement eventually burst in 2008. This chapter presents a review of the literature based
The financial crisis is commonly treated as the collapse of an economy where both specific
organisations and entire industries are affected severely in the short and long run simultaneously. The
financial crisis usually starts from a single industry or economical sector were almost all organisations of
that industry face severe financial problems and the resulting panic and havoc spreads to other sectors of
the economy creating a domino effect where each industry starts failing one after another (International
Monetary Fund 2008). Some financial crises are also resultants of significant crashes in the stock market,
bursting of financial and economical bubbles and entire countries going into default. As the financial
services sector of the economy is the most fundamental sector and termed as the backbone of the
economy any problems in this sector result in economy wide implications. The 2008 credit crunch and
financial crisis also started from the financial sector and quickly spread to other sectors of the economy as
well which is explained in the following section (Organisation for Economic Co-operation and
2008 Credit Crunch 7
Development 2010).
Hildebrand (2008) analysed how the credit crunch of 2008 evolved and examined the effects of
the sub prime mortgage crisis not only on the economy of the united States of America but on the entire
global economy as well. His research concluded that the vague characteristics and practices of banks,
improper risk and credit management and too much reliance on bad or sub prime mortgage securities led
to the financial crisis which the entire world is facing right now. He also recommends that government
and regulatory bodies like central banks need to formulate and implement policies which prevent any
future crisis similar to the 2008 credit crunch and need to provide a framework for investment planning
Bartram, Brown and Hunt (2007) also studied a sample of 334 banks which made up over 80
percent of the entire banking equity of the world and presented a fascinating empirical study based on a
cross sectional analysis of these banks. Their research provided an evaluation and examination of 28 large
banks doing business in various developing and developed countries of the world and how financial crises
of five different characteristics have affected the regulatory frameworks implemented in these banks.
Their research concluded that the reaction towards these policies was endogenous and may be deficient
Acharya (2009) examined the shifting of systematic risk among the financial institutions which
was mainly responsible for the credit crunch which started in 2008. His research explained that as there is
limited liability in banks any harmful externality of failure of a particular bank may cause aggregations
and chaos in the economy resulting in a risk to banks across the whole sector and economy. This
particular research also presented the regulations of a prudential bank which can be implemented
collectively for recommendations for regulation and policy formation in the future.
2.4 Summary
This chapter has covered the review of literature based on data collected from various sources
2008 Credit Crunch 8
such as books, articles and websites. The chapter explains that financial crisis should be considered as an
element which creates disruptions in the entire economy and organisations, institutions and banks are
affected in various ways as a result of the financial crisis. Then financial crises are caused by a variety of
reasons and different theorists have examined financial crisis in various ways. This chapter covered the
explanation of the financial crisis along with theories presented for the credit crunch while the next
chapter of the research presents the research methodology applied for the collection and analysis of data
In order for the research to be effective a research needs to devise and implement an effective
research strategy and methodology. This chapter of the research explains the research methodology
devised for the research along with the strategy for collecting and analysing data. The current research
implements an inductive approach of research where a research hypothesis is formulated based on the
data acquired and included from various sources and generalised conclusions are made at the end of the
research (Rodwell, Noblet, Steane, Osborne and Allisey 2010). The research is mainly based on data
acquired from secondary sources such as books, reports, journal articles and websites. The researcher has
implemented the qualitative approach of research to analyse and evaluate this data due to the qualitative
characteristics of this data as it cannot be measured or quantified by any means (Gelo, Braakmann and
Benetka 2008). This implies that the entire research methodology incorporated in the current research
includes a group of inductive and qualitative approaches to research which are implemented to analyse
data acquired from several secondary sources to find the causes and effects of the 2008 credit crunch and
financial crisis. This chapter of the research presented the research methodology while the next chapter
will present the findings and observations of the researcher with respect to the causes and effects of the
credit crunch which started in 2008 affecting not only on a single economy but at a global level and on
4.1 Introduction
This chapter presents the findings and observations of the researcher regarding the causes and
effects of the financial crisis and credit crunch which started in 2008 in the banking and financial sector
of the United States of America and eventually spread to other sectors of the economy and to other parts
of the world as well. The causes of the credit crunch along with the short term and long term effects of the
The credit crunch starting in 2008 did not just appear out of nowhere but was cooking for quite a
long time ready to explode and in the later parts of 2008 it erupted and caused significant damage to
economies throughout the world. There are several reasons for the credit crunch and financial crisis which
started in 2008 and some of these reasons including greediness, housing sector decline and poor
management of risk and credit which are explained below (Commission on Growth and Development
2010).
4.2.1 Greediness
Greed is the desire for more and more irrespective of the resources available at one’s disposal and
this characteristic has been found in human beings since the advent of time. The greed factor affects not
only a single person but entire nations as well where the greed for more eventually results in wars and
conflicts (Friedl 2006). It is a known phenomenon that the wants of human beings are never satisfied and
the satisfaction of one want leads to a birth of a new want. In order to satisfy their needs people start
spending more and more and if they are given a free hand to spend and worry about payments later they
tend to spend even more. The entire economy of the United States is based on plastic money or credit
cards where the people spend quite freely and generously without considering or realising how payments
on these expenditures will be made later (Zandi 2009). This mind set has evolved into companies and
2008 Credit Crunch 11
organisations where poor credit and risk management strategies were implemented which eventually led
to a financial breakdown as the entire economy which was based on this phenomenon collapsed. The
greed factor is rooted in the economy to such an extent that many experts have also challenged the
One of the main factors causing the credit crunch was a significant decline in the housing sector
of America. The housing sector which was one of the best performing sectors of the United States
economy fell to 5.25 million in 2007 while the average sales price plummeted to a level of 4.2 percent
with $211,700 (British Broadcasting Corporation 2007). This significant decline in the housing sector
resulted in an increase in mortgage rates and homeowners found it very difficult to acquire mortgages and
It has been explained in an earlier section that the entire economy of the United States is
based on plastic money and credit and people spend more than they can actually afford. This
mind set is also brought into organisations and is reflected in the decisions made by company
officials and executives (Mankiw 2008). The banks and financial institutions of the country did
not implement adequate credit and risk management strategies which eventually led to a credit
crunch. Many economists and experts perceive the credit crunch as more of a short term nature
rather than a long one and expect that the financial outlook for 2010 would be much better
(Eghbal 2008).
The credit crunch has severely affected several sectors of the economy not only in the
United States of America but other regions of the world as well. The United Kingdom is the
second worst affected country after the United States of America where many companies have
2008 Credit Crunch 12
either gone bankrupt or had to be rescued through government funding (Ambachtshee, Beatty
and Booth 2008). The credit crunch has created a situation where organisations in various sectors
find it quite difficult to obtain finances from banks and financial institutions to run operations
smoothly. As the credit crunch has affected consumers, retail companies are facing the worst
sales levels and are also running very low on profits or are facing huge losses due to which major
cutbacks and downsizing steps have been taken (Wei and Tong 2009). The organisations
functioning in United Kingdom and other parts of Europe are quite heavily reliant on
international trade with the United States and any problems in the U.S. economy directly impact
the U.K and European economies (Copsey and Haughton 2009). The financial crisis has deeply
impacted both the private and public sector as organisations are witnessing huge losses and
nearing bankruptcy and have to take drastic measures such as downsizing, cost cuts, salary
decrements, closure of branches and departments or even suspension of business and operations
(Gokhale 2008).
2008 Credit Crunch 13
Chapter 5: Conclusion
The findings and observations of the researcher in the previous chapter imply that the
financial crisis has been caused by several reasons and has affected the economy and
organisations functioning within the economy quite severely. The major causes of the 2008
credit crunch were found to be greediness, significant decline in housing prices and improper
risk and credit management while the effects of the credit crunch are quite significant for both
the short and the long run. The credit crunch has not only caused many banks to go bankrupt or
be acquired by other banks, but several other organisations from various sectors such as
hospitality, tourism, retail, airlines, services, manufacturing and transportation have also been
severely affected by the credit crunch. It is thus concluded that the causes of the credit crunch are
rooted in factors such as greediness, inadequate risk and credit management and decline in
housing prices and the implications may be seen well ahead in the future. The governments of
several countries like United States of America, United Kingdom, Germany, France and
Switzerland have devised different bailout plans to save their respective economies otherwise the
notion of failed capitalistic system will be confirmed. It is recommended based on the findings
and conclusion that the regulatory bodies and central banks of these countries should devise a
regulatory framework and a set of rules for best practices which should be implemented in the
entire financial and banking sector so that future cases of credit mismanagement can be avoided
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Financial Stability .
Ambachtshee, K., Beatty, D. and Booth, L. (2008). The finance crisis and rescue: What went wrong?
Barbu, C. (2010). Does The Economic Crisis Affect Oltenia's Environment? Journal of Applied
Bartram, S. M., Brown, G. W. and Hunt, J. E. (2007). Estimating systemic risk in the international
British Broadcasting Corporation. (2007, October 24). Sharp Decline in US Housing Sales. [Online]
Special Report of the Commission on Growth and Development on the Implications of the 2008
Copsey, N. and Haughton, T. (2009). The Jcms Annual Review of the European Union in 2008. New
Eghbal, M. (2008, October 24). Global Financial Crisis: Decline in Short-term but Recovery by 2010.
http://www.euromonitor.com/Global_financial_crisis_decline_in_short_term_but_recovery_by_2
Friedl, J. E. (2006). Mastering regular expressions. Sebastopol, CA: O'Reilly Media, Inc.
Friedrichs, D. O. (2009). Trusted Criminals: White Collar Crime in Contemporary Society. Mason:
Cengage Learning.
Gelo, O., Braakmann, D. and Benetka, G. (2008). Quantitative and Qualitative Research: Beyond the
2008 Credit Crunch 15
Gokhale, J. (2008, October 14). Long-Term Implications of the Financial Crisis. Individual Liberty, Free
Hildebrand, P. H. (2008). The sub-prime crisis: A central banker's perspective. Journal of Financial
Stability , 313-320.
International Monetary Fund. (2008). World Economic Outlook, October 2008: Financial Stress,
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Zandi, M. M. (2009). Financial shock: a 360° look at the subprime mortgage implosion, and how to