Global economic crisis
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As early as 2007, there were signs that the crisis was spreading beyond mortgage markets. As banks began to take on heavy losses on their mortgage business, they were increasingly unable to engage in other forms of lending. As a result, businesses were no longer able to acquire capital for expansion or even ongoing operations. The bust of the housing market had also dented consumer capacity for spending. The combination of these effects began to have a damper on the economy. When the effects of the crisis began to hit the stock market in September 2008, the impacts were set to filter through the entire economy
The subprime crisis spread throughout the economy the way it did because the credit crunch spread beyond just the immediately lending institutions. Banks were able to sell the mortgage debt bundled in securities known as mortgage-backed securities (MBSs). These are complex instruments, with the risk of different mortgages spread over the all or some of the MBS. Each MBS was embedded with different levels of risk and then sold (SEC, 2007). The underlying principle was that there would be sufficient diversification to offset the default risk posed by any one mortgage. However, the
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