How The Financial Crisis Came About
In the pre-financial crisis of 2008, a lot of the population were already suffering from the subprime mortgage crisis. The US was brought to the threshold due to reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings. Each person was caught by surprise when the news broke out and the magnitude on how Wallstreet really messed up was the focus of everybody’s attention.
The first to fall was global investment bank Bear Stearns and in March 2008, it was ultimately absorbed by JPMorgan Chase. Then President Bush and his Treasury Secretary, Henry Paulson, remained firm in the belief that people don’t have to be bothered because the country’s economy stands firm. The government also informed the public that the conundrum is limited only inside the subprime mortgage sector.
By August 2008, the next mortgage companies to fall are Freddie Mac and Fannie Mae. The Government decided to bail them out by spending $5 trillion in taxpayer money. The collapse of Wallstreet came about not too long afterwards. As a consequence, Wallstreet’s five investment banks which consist of 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. There was too much riding on AIG to be allowed to undergo the same fate as the other institutions. If not, the consequences might result to a new great depression. It was considered a huge risk to let AIG fall since it has a lot of connection to various 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 in concert with the fall of different financial institutions were events reminiscent to the pre-great depression of the late 1920s and plenty of people thought that another great depression is on the horizon. As the 2008 financial crisis was still building its momentum, Like a well-oiled machine, the housing sector soared because of easily acquired money that also happened in the 1920s. Virtually everyone can own a home ever since the Feds have lowered the mortgage rate to 1%. Because of this, mortgages and other forms of loans were easily granted by nearly all banks across the country without doing some background checks. Lots of loan applicants lie about how much money they make and only a credit rating will be asked. Jobless people were even able to obtain loans 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. These loans were bulked and resold to banks in Wallstreet and Wallstreet banks 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 world now have their share on them and because of this viewpoint it was thought that it will always be safe.
Based on what each and everyone has experienced, these were all a big mistake that dragged each and every individual from every corner of the world into financial struggle. The meltdown lead to companies getting bankrupt and closing which lead to job cuts, which lead to foreclosures which lead to debt. Now that the economies around the globe 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 again.