The financial crisis of 2008 has many root causes. Two examples of causes for the financial crisis of 2008 are excessive loans being given out by banks and the inflation of the housing market. One cause played off the other. Meaning that because so many loans were given out to people with bad credit, the demand for homes rose and caused inflation.
Every time a bank gave out a loan to someone, more money was created. This new money that was being created by banks did not have real value however. By giving out loans to an abundance of people at once, banks began having large sums of money. This accumulation of what could be called “worthless money” is what caused the housing market to see a huge rise in demand. This new large demand for homes caused the housing market to pop up houses at a fast pace and give homeowners a home with loans they were given by the banks even though they had bad credit.
With the housing market rising, costs of homes skyrocketed and at the time people thought they were okay because they were getting large loans from the banks. What caught up to these homeowners was the interest that had to be paid on all the loans given out. The plethora of loans given by banks quickly grew bigger than the incomes of the homeowners and the homeowners found themselves unable to pay back their loans. The lack of loans being paid off, but banks in a scary position of possibly going bankrupt and thus the financial crisis of 2008 occurred.
After this crisis occurred other issues arose in the market. Banks began to limit the amount of loans they offered because the economy was poor. However, people still had to pay back the previous loans that were already given out. So, as people were paying back their loans and banks were limiting the amount of new loans they gave out, price started to fall and the economy slowed down. This caused the homeowner’s debts to actually become more expensive due to the price drop and yielding of the economy.