Causes of Financial Crisis in the U.S. and a Comparison with Canada

Introduction:

The Financial Crisis also called as the Global Recession, Credit Crunch or Global Financial Crisis, happened in 2008 and majorly evolved in the U.S., which is considered as the worst financial crisis since the Great Depression happened in the 1930s. During the crisis, many financial institutions and bank went bankruptcy, like Lehman Brother, before the crisis, it was the fourth largest investment bank in the U.S., and Washing Mutual, which was the largest savings and loan association in the U.S. before the crisis. And the housing market in the U.S. had also suffered, due to the collapse of housing bubble, and tons of people lost their house and had nowhere to live. And this crisis was not just stayed in the U.S., the world stock market followed it to fall, even country, like Iceland announced its collapse as three major banks in the Iceland went bankruptcy. Also Canada had suffered in the crisis, but not as bad as what U.S. went through.

Figure 1

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As Figure 1 showed above, the employment rate in the Canada during the financial crisis from 2007 to 2010 increased 1.5% with 0.3 million jobless. And on the other hand, American unemployment rate rose from 4.6% to 7.5%, which increased nearly 5 million jobless. And Canadian bank system in the financial crisis was performing well, so there are differences in the monetary policies between Canadian and U.S. that cause the worse influences in the America.

Causes of the Financial Crisis

Housing bubble

Figure 2

The housing bubble in America came along with the stock bubble, which

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stimulated another financial crisis at the end of 20th century (Baker 2008). First, we will take a look at the housing bubble in the U.S. As Figure 2 shows clearly, the trend that the price of new homes in the U.S. kept growing from 1963 to 2007, then the price of house began to drop. Notice that, from 1963 to 1990, the increase for the price in not that deep as the years after, especially from 1999 to 2005, the price of house in 1999 was an average of $200,000, and then it increased to $300,000, if we use 1999 as the base year here, the percentage that increased is equal to [(current year price- base year price)/ base year price] *100%, which is [($300,000-$200,000)/$200]*100%=50%. As most people want to buy a house as a standard of living, but since the price of house keeps getting higher, it is really hard for low medium income people to buy a house. But they still need the house. So instead of directly purchasing the house, buyer would contact a mortgage lender, who lends the buyer a mortgage loan. Since the price of