How The Recent Economic Crisis Compare To Economic Crisis OF the 1920s
Before the global financial crisis formally hit the US, 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. Some experts and analysts have made predictions of the crisis and the extent 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 fall where it was ultimately sold to JPMorgan Chase in March 2008. Then President Bush and his Treasury Secretary, Henry Paulson, remained firm in the belief that the economic fundamentals of the country was still solid. Also that time, the White House was confining the matter to just the subprime mortgage sector.
Freddie Mac and Fannie Mae are two mortgage giants which next fell in August 2008. The Government decided to bail them out by shelling out $5 trillion in taxpayer money. Not too long, in just a matter of days, Wallstreet collapsed. In turn, 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. AIG was too important and letting it fall was unimaginable. If not, the consequences would result to another great depression. Letting AIG fall was a massive risk seeing as it has lots of tie to various institutions where money is pretty much wrapped around it. Therefore, it was given by the Federal Government an $85 billion bailout in taxpayer money.
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 a lot 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 occured in the 1920s. The federal government had made it possible for practically everyone to own their own home by giving a 1% rate on mortgage. Because of this, mortgages and other types of loans were easily approved by nearly all banks across the country without even doing some important checks on the applicant. The tendency to lie about how much money one makes was very usual at the time and only a credit rating will be asked. Loans were even granted to people who don’t have a source of income 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 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 globe. These newly converted loans then became “pooled risks” as many investors across the globe now have their share on them and because of this viewpoint it was assumed 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 difficulty. 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 slowly recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes for a second time.