The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market. What at first seemed to be an economic slump turned into a brutal crisis, and all eyes looked to the Government and Federal Reserve to help the economy.
Many homeowners were unable or unwilling to pay, which caused banks to lose money and merge with other banks. As Mark Zandi on ABC news stated, “The last time we saw so many homeowners with home values that were worth less than the amount of mortgage they owed was back in the Great Depression”. During this time, another bank failure was the financial panic of the stock market. The stock market started to plummet like it did during the Great Depression, and investors became very worried. Andrew Ross Sorkin of ABC news stated, “… this is the time to be investing, because this is when people make money”.
The Stock Market Crash triggered a banking crisis, business failures and trouble overseas. American banks were affected most by the Stock Market Crash. Many banks had to go out of business which had an immense impact on American people. “Worse, many banks had themselves invested, directly or indirectly, in the stock market. They had purchased stock in companies whose shares were now crumbling in value” (Ayers 678).
Presently in the United States millions of homeowners are facing the prospect of losing their homes due to bank foreclosure. An event if allowed to occur has the potential of collapsing not only our financial system, but our social fabric as a nation. The unfolding crisis has prompted the US Government to enact aggressive monetary stimulus designed to reverse the downward spiral of home values. Unfortunately this approach has failed to achieve any meaningful results and perhaps has acted more as a red herring to conceal the real issues causing this debt implosion. With billions of dollars being pumped into the banking system why then are banks still timid to continue financing home loans?
The Causes of the Great Depression Adam Fenster Mr. Banker March 6, 2014 Modern World There were many contributions to the cause of the Great Depression, but the three most prominent catalysts were the crash of the New York Stock Exchange, the excessive spending by Americans in the 1920s as well as the bad shape the economy was in, and the false belief that the post-war economic boom would last. As we look back now from our future perspective, we can analyze exactly what went wrong, and how to prevent events like this from happening in the future. The New York Stock Exchange crash sent Americans into panic and made most people lose trust in stocks. Americans were spending too much and investments were put in too deep. As a result, America could no longer keep up the funding of war relief efforts in Europe.
Therefore, when one bank is unable to pay, other banks are also unable to fulfill their duty. This automatically triggers a financial disturbance in corporations and businesses, who depend on the money they borrow from the banks. The disturbance in the financial market is called a financial crisis. Starting from the Great Depression in 1929, going to the Global Financial Crisis today, it can be observed that financial crisis have two things in common: high unemployment and high indebtedness. Today, the Global Financial crisis resulted in the loss of people’s savings and homes, leaving them unable to pay back their debt.
The foreclosure rate is still a big economic problem, not to mention the increasing unemployment rate. The unemployment rate has reached nearly 11% this year due to bank failures like AIG, JP Morgan, and Goldman Sachs, which have really hurt the economy. To add onto that, American car companies like Ford and General Motors have gone into bankruptcy which have depleted the number of jobs available in the United States. People are losing their jobs, have come up empty when it was time to pay the mortgages. Sadly, they are sunk in debt and can’t find work in order to support their families.
In 2008, The United States economy was bombarded with a severe recession because of a lack of regulations on Wall Street and investment in general. This lack of regulation caused many risky loans to be passed, leading to many of them defaulting. Most major investment banks like Lehman Brothers and Goldman Sachs were dealt crushing blows, forcing them to either file for bankruptcy or take capital injection from the government. The economy fell into a free fall because people simply wanted to make easy money. “How an Economy Grows and Why It Crashes” does a tremendous job in explaining the crash of 2008 in layman’s terms, while still being extraordinarily accurate and full of knowledge.
With the banks relying on the circulation of money and people not needing all of their money all at once, the banks started to go bankrupt as they did not have enough money to give back everyone the money they have in the bank. The closing of banks started a blitz to get money from the banks before they closed due to not having enough money. These were a big part of the great depression and a major reason to the unemployment during this time. GML pg 849 The Presidents during this time were Hoover and Roosevelt and they both used very different tactics to combat the growing deficit in our nation's economics. With the troubling times came troubling problems that perplexed our nation’s government and forced them to deal with unforeseen circumstances that they were not accustomed to.
Big banks were in trouble as well, many investing recklessly in the stock market then losing it all when the stock market crashed in 1929. The fourth factor was Americas position in the international trade market. In the late 20's, Europe's demand for American goods began to decline, partly because their industry was becoming more productive and partially because their economy was destabilized from the international debt structure that emerged in the aftermath of WW1. The international debt structure was a fifth and final factor contributing to the Great Depression. At the end of the war in 1918, all the European nations that had been allied with the US owed large sums of money to American banks and could not repay them with their shattered economies.