The Global Financial Crisis: A Dj Vu
In the years ahead of the global economic crisis, a subprime mortgage crisis was already toppling the foundations of the wider housing market. Reckless borrowing by consumers along with excessive leveraging of Wallstreet brought the US to the threshold. Everybody was shocked when the news broke o
The first to fall was global investment bank Bear Stearns where JPMorgan Chase saved it by absorbing it in March 2008. Henry Paulson, who was the treasury secretary at the time announced to the public that citizens don’t have to worry because the country’s economy stands firm. The government also informed the public that the problem is contained only within the subprime mortgage sector.
The next significant institutions to fall are Freddie Mac and Fannie Mae which are two of the major US mortgage companies. trillion in taxpayer money was spent by the federal government to bail them out. The collapse of Wallstreet came about soonafter. In turn, the five pure investment banks in Wallstreet which consist of 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. There was too much riding on AIG to be allowed to suffer the same fate as the other institutions. If not, the consequences would result to a new great depression. The government considered it vital to bailout AIG since it has lots of tie to various institutions where money is pretty much wrapped around it. An billion bailout was given by the government to AIG officials to save itself and the bonuses AIG had given to some of its executives were strongly criticized.
The collapse of these institutions and the fall of the stock market were events reminiscent to the pre-great depression of the late 1920s and lots of individuals believed 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 skyrocketed because of easily acquired money that also happened in the 1920s. Almost everyone can own a home ever since the Feds have lowered the mortgage rate to 1%. Because of this, mortgages and other types of loans were easily granted by nearly all banks across the country without even doing some important checks on the applicant. 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. Jobless people were even able to obtain loans simply because lenders will not verify this critical information.
Lenders are keen and confident to grant “risky” loans because of a financing tool acknowledged as mortgage-backed securities. These loans were bulked and resold 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” involving many investors from other nations, these loans are believed to be protected and because of this point of view it was assumed that it will always be safe.
Given that a lot 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. Both lower, middle and upper classes suffered financially because of human greed and error. Now that the economies around the globe are slowly recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes once more.
Steve Smith writes for All About Loans where visitors can apply for cheap personal loans and also focuses on the best loans , in the UK and fast secured loans for UK Homeowners.
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