In the years previous to the global economic crisis, the foundations of the wider housing market is slowly being toppled by the subprime mortgage crisis. The US was brought to the brink because of reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings. Some experts and analysts have made predictions of the [...]
In the years previous to the global economic crisis, the foundations of the wider housing market is slowly being toppled by the subprime mortgage crisis. The US was brought to the brink because of reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings. Some experts and analysts have made predictions of the crisis and the magnitude on how Wallstreet really messed up was the focus of everybody’s attention.
Bear Stearns is a global investment bank that was the first to go down where JPMorgan Chase saved it by acquiring it in March 2008. During that time, the White House has maintained that there is still a strong foundation in the US economy and nothing has changed it. The government also informed the public that the predicament is limited only within 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 used by the federal government to bail them out. In just a few days, Wallstreet and all that’s in it collapsed. In turn, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks.
The world’s largest insurer, AIG, was assumed to be the next major financial body to fall. AIG was too important and letting it fall was unthinkable. If not, the consequences might result to a new great depression. The government reckoned it vital to bailout AIG seeing as it has plenty of connection to numerous 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 the stock market in concert with the fall of several financial institutions were events mirroring that of what happened prior to the 1920s great depression and plenty of individuals 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 virtually own a house. Most banks approved all sorts of loan applications left and right without even doing some important checks on the applicant. Lots 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 this crucial information are not verified by lenders.
Lenders are willing and confident to grant “risky” loans because of a financing tool known 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. Due to the “pooled risks” connecting many investors from other nations, these loans are believed to be protected and because of this aspect it was believed that it will always be safe.
Given that lots of people were affected, 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 result of this human blunder. 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 for a second time.
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