An Analysis of the Financial Crisis of 2008: Causes and Solutions

Abstract

This research evaluates the fundamental causes of the current financial crisis. Close financial analysis indicates that theoretical modeling based on unrealistic assumptions led to serious problems in mispricing in the massive unregulated market for credit default swaps that exploded upon catalytic rises in residential mortgage defaults. Recent academic research implies solutions to the crisis that are appraised to be far less costly than a bailout of investors who made poor financial decisions with respect to credit analysis.

Keywords: financial crisis, credit default swap, bailout, foreclosure, short sales, systematic risk, default risk, credit spread

JEL Classification: G11, G12, G13, G14