How The Financial Crisis Came About
In the years before the global economic crisis, the foundations of the wider housing market is slowly being toppled by the subprime mortgage crisis. Consumers who were borrowing recklessly along with unnecessary leveraging of Wallstreet brought the US to the brink. The crisis has been compared to a hurricane in the middle of the summer season and the degree on how Wallstreet really messed up was the focus of everyone’s attention.
The first to fall was global investment bank Bear Stearns and in March 2008, it was ultimately absorbed by JPMorgan Chase. During that time, the White House has maintained that there is still a strong foundation in the US economy and nothing has changed it. Also that time, the White House was confining the subject to just the subprime mortgage sector.
By August 2008, the next mortgage companies to fall are Freddie Mac and Fannie Mae. $5 trillion in taxpayer money was spent by the federal government to bail them out. Soonafter, Wallstreet collapsed. In turn, the five pure investment banks in Wallstreet which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks.
AIG,the world’s largest insurer, is said to fall next. AIG was measured to be an entity that should not be allowed to fall. Otherwise the consequences would result to another great depression. Letting AIG fall was a massive risk since it has plenty of tie to numerous institutions where money is pretty much wrapped around it. Taxpayers were forced to pay $85 billion to bailout the insurance giant.
The collapse of the stock market together with the fall of different financial institutions were events that are comparable before the great depression of the ‘20s and a lot of people thought that another great depression is on the horizon. As the 2008 financial crisis was still building its momentum, the housing bubble was fueled by easy money that also happened in the 1920s. From the time when the US government lowered the mortgage rate to 1 percent, people of every status could practically own a house. A good number of banks approved all sorts of loan applications left and right without checking the applicant’s credentials. The propensity to lie about how much money one makes was very widespread at the time and anyone who can present a credit rating passes. Even individuals who don’t have jobs were granted loans simply because this crucial information are not verified by lenders.
Though risky, a lot of lenders don’t mind granting these loans because of a financing tool identified as mortgage-backed securities. They resold their loans in bulk to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world. These newly converted loans then became “pooled risks” as many investors across the globe now have their share on them and because of this point of view it was believed 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 difficulty. Job-losses, foreclosures, bankruptcies, debts, etc. are all the product of this human error. Now that the economies around the world are slowly recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes over again.
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