In the years previous to the global economic crisis, the foundations of the wider housing market is steadily being toppled by the subprime mortgage crisis. Consumers who were borrowing recklessly along with excessive leveraging of Wallstreet brought the US to the threshold. The crisis has been compared to a hurricane in the middle of the summer season and the magnitude on how Wallstreet really messed up was the focus of everyone’s attention.
Bear Stearns is a global investment bank that was the first to fall and in March 2008, it was finally absorbed by JPMorgan Chase. Then President Bush and his Treasury Secretary, Henry Paulson, remained firm in the belief that people need not be bothered because the country’s economy stands firm. Also that time, the White House was confining the subject to just the subprime mortgage sector.
Freddie Mac and Fannie Mae are two mortgage giants which next fell in August 2008. The Government decided to bail them out by shelling out $5 trillion in taxpayer money. Not too long, in just a matter of days, Wallstreet collapsed. As a result, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, were either reduced to being depository banks or collapsing altogether.
AIG,the world’s largest insurer, is said to fall next. AIG was too valuable and letting it fall was unimaginable. If not, the consequences might result to another great depression. It was considered a huge risk to let AIG fall seeing as it has a lot of link to many institutions where money is pretty much wrapped around it. Hence, it was given by the Federal Government an $85 billion bailout in taxpayer money.
The collapse of these institutions and the fall of the stock market were events reminiscent to the pre-great depression of the late 1920s and plenty of individuals thought that another great depression is on the horizon. Before the financial crisis in 2008, the housing bubble was fueled by easy money that also occured in the 1920s. Almost every person can own a home ever since the Feds have lowered the mortgage rate to 1%. Because of this, mortgages and other kinds of loans were easily approved by most banks across the country without even doing some important checks on the applicant. Plenty of loan applicants lie about how much money they make and anyone who can present a credit rating passes. Loans were even granted to people who don’t have a source of income simply because lenders will not verify this critical information.
Lenders are willing and confident to grant “risky” loans because of a financing tool known as mortgage-backed securities. These loans were bulked and resold to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world. Investors who have procured these loans are known as “pooled risks” and because of this aspect it was thought that it will always be safe.
In the wake of all this, these were all a big mistake that dragged each and every individual from every corner of the world into financial struggle. Job-losses, foreclosures, bankruptcies, debts, etc. are all the product of this human error. Now that the economies around the planet are slowly recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes once more.
Related posts:
- Commerical loans and the Financial Crisis
- Talking of financial points broadly, in these arduous financial periods and the so-called recession. Thinking about a paycheck Loan, and information how tobuy travel currency – looking to acquire foreign currency
- The Best Way to Survive Online During An Economic Crisis
Place your comment