Question

Why did the 2007 U.S. subprime crisis spread rapidly?

• A. The United States had a large current account surplus.
• B. The United States adopted the fixed exchange rate system.
• C. There was speculation against the U.S. dollar.
• D. Banks in other countries failed to measure the risk of real estate derivatives.
• E. The Fed failed to act at the right time.

Answer 1

D.Banks in other countries failed to measure the risk of real estate derivatives.

Solution: The fall of subprime crisis is multifaceted. There are multiple players in the setting and everyone was to be blamed for the failure of market and subprime crisis starting from lenders who couldn't estimate the replaying capacity of borrowers , buyers who were although unable to pay loans but borrowed anyways, investors , world banks , homeowners etc.

But the biggest culprits were the lenders , as lending to faculty borrowers caused the Market to default by housing bubble to burst , which was the final shot towards falling of economy in the 2007 crisis.