What's driving market volatility?
Since the Dow Jones Industrial Average (DJIA) reached a record high of 14,164.53 on October 9, 2007, major changes have occurred in the market. Below is a quick overview of some of the causes.
Loose lending practices
An oversupply of credit in 2003 and 2004 resulted in unprecedented spending and an overvaluation of assets like housing. Housing values began to decline in 2006, and accelerated their decline in 2007.
The subprime mortgage crisis
Many borrowers who obtained subprime mortgages under these easy lending terms were ultimately not able to live up to the terms of their mortgage. A number of financial institutions invested in securities backed at least in part by subprime mortgages. When the mortgages backing these securities turned out to be worth far less than their face value, theses institutions incurred significant losses. The problems of these more vulnerable institutions spread to the larger market, and officials are still resolving what to do with these securities.
Global economic fallout
The effects of these problems have been felt around the world. Many overseas firms invested in troubled securities, which spread the subprime crisis to other countries. This led many firms to cut back on issuing credit to financial institutions and businesses, affecting their ability to operate. This has created a shortage of available credit, requiring government intervention to help keep markets working smoothly. We have since seen such intervention occur on a global basis.