Question

In your view, what were the main causes of the Financial Crisis?

Answer 1

I think there are several main causes of the financial crisis. Firstly, excessive deregulation led to the firms taking excessive risks. Excessive risk-taking resulted in the failure of many large firms, which exacerbated the crisis. Secondly, development of complex financial products like credit default swaps (CDS) made it difficult for investors as well as financial analysists to properly understand the risks and returns. This led to the crisis as well. Thirdly, indiscriminate lending increased the overall risk in the financial sector. People with questionable credentials were extended loans, who failed to return the same. Failure to pay mortgage loans initiated the crisis in the housing sector. Fourthly, over-optimism led investors to believe that asset prices will go up forever. However, when borrowers faltered on their mortgage loans, the housing bubble burst.