The global financial crisis of 2007 – 2008 was basically caused by the collapse of the housing bubble, the existence of which had been brought about with extremely easy credit conditions throughout the period preceding it. Mizen (2008) outlines some important factors of the 2007-08 credit crunch regarding the providers of conditions, which gave rise to it. The author points out that the recession was preceded by a period of exceptional stability. Interest rates were very low and long term, and the emerging industrialized economies were provided with those global savings glut that supported them. Due to financial innovations, new products emerged such as the mortgage-backed security. Mizen (2008) also states that the fall in the house prices was unexpected all over the US; this factor was simply not included in the risk assessing models. Due to the falling house prices, defaults increased in the subprime sector, thus providing a trigger for the crisis.
Larson (2009) adds that irresponsible mortgage lending and the trading with mortgage-backed securities were the first signs of the financial problems that directly preceded the crisis. According to Tatom (2008), problems had already emerged during the period between 2004 and 2006 when subprime borrowers were provided with a large share of mortgage loans, despite the fact that those borrowers were characterized by very low credit scores, meaning that they would actually have not met the conditions of credits with a normal interest rate. It was a natural consequence that due to these easy conditions, borrowing was increasing. This phenomenon began in the US; however, it was soon observed in other countries as well. It became obvious that credit fuelled housing more than business investments, which, according to economists, was necessary at the time in order to create the housing bubble, which replaced Nasdaq bubble (Krugman, 2002). Furthermore, empirical studies conducted in some advanced countries indicate that the extreme increase in credit largely contributed to the severity of the recession (Babecky et al. 2017).
Crotty and Epstein (2008) state that the main sources of investment banks were taken from advising and bringing IPOS to market. However, these institutions changed their activities and with the beginning of trading with mortgage-backed securities, they gained large income. Investment banks were able create MBSs, and either to sell them, or hold them in their own trading accounts.
The spread of the hazardous mortgage loans created confusion in the credit market as credits were provided even to those borrowers that could not afford it. Thus, the returns of these credits began to decrease causing uncertainty among lenders.