In the years before the global economic crisis, a lot of people were already experiencing 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. 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.
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 insisted 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 problem 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. As a consequence, the five pure investment banks in Wallstreet which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, were either reduced to being depository banks or collapsing completely.
AIG,the world’s largest insurer, is said to fall next. AIG was too important and letting it fall was unthinkable. Otherwise the consequences might result to another great depression. The government deemed it necessary to bailout AIG because it has plenty of link to numerous institutions where money is pretty much wrapped around it. An $85 billion bailout was given by the government to AIG officials to save itself and the bonuses AIG had given to a number of of its executives were strongly criticized.
The collapse of the stock market together with the fall of several financial institutions were events that are comparable before the great depression of the ‘20s and lots of people 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. The federal government had made it possible for just about everyone to own their own home by giving a 1% rate on mortgage. Nearly all banks approved all sorts of loan applications left and right without checking the applicant’s credentials. The affinity to lie about how much money one makes was very common at the time and anyone who can present a credit rating passes. Even individuals who don’t have jobs were granted loans simply because lenders will not verify this critical information.
These risky loans were granted by lenders with extreme confidence because of a financing tool known as mortgage-backed securities. They resold their loans in bulk to banks in Wallstreet and Wallstreet banks bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world. Investors who have purchased these loans are known as “pooled risks” and because of this aspect it was thought that it will always be protected.
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. Job-losses, foreclosures, bankruptcies, debts, etc. are all the result of this human blunder. 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 over again.
