How The Financial Crisis Came About
In the years previous to the global economic crisis, a subprime mortgage crisis was already toppling the foundations of the wider housing market. Reckless borrowing by consumers along with unnecessary leveraging of Wallstreet brought the US to the threshold. Several experts and analysts have made predictions of the crisis 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 ultimately absorbed by JPMorgan Chase. Henry Paulson, who was the treasury secretary at the time announced to the public that the economic fundamentals of the country was still strong. 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. The federal government was forced to bail these companies out with taxpayer money amounting to $5 trillion. The collapse of Wallstreet occurred not too long afterwards. In turn, the five pure investment banks in Wallstreet which consist of Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, were either reduced to being depository banks or collapsing altogether.
The world’s biggest insurer, AIG, was understood to be the next key financial institution to go down. AIG was too important and letting it fall was unthinkable. Otherwise the consequences would result to another great depression. The government reckoned it vital to bailout AIG because it has plenty of connection to numerous institutions where money is pretty much wrapped around it. Taxpayers were forced to pay $85 billion to bailout the insurance giant.
These disastrous events that different financial institutions went through together with the stock market’s collapse were events reminiscent to the pre-great depression of the late 1920s and lots 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 occured in the 1920s. Virtually every person can own a home ever since the Feds have lowered the mortgage rate to 1%. Loans including mortgages were granted to almost everybody without even doing some important checks on them. Loan applicants have an affinity to lie about the exact amount of money they make and only a credit rating will be asked. Even individuals who don’t have jobs were granted loans simply because this crucial information are neglected to be verified by lenders.
These risky loans were granted by lenders with utmost confidence 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 globe. These newly converted loans then became “pooled risks” as many investors across the world now have their share on them and because of this aspect it was assumed 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 struggle. Both lower, middle and upper middle classes suffered financially because of human greed and error. Now that the economies around the planet are little by little recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes once more.
