The easy availability of credit in U.S, Russian debt crises and Asian financial crises of late 90’s showed the way to a housing construction boom in the USA. The relaxed lending rules and increasing property prices along with the increase in foreign funds added to generate this real estate bubble. There was an increase in housing and credit, mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which was due to the house prices and mortgages. The investors around the world invested in the U.S. housing market. The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily.
What Led to the Stock Market Crash in 2008? Several things led to the 2008 Stock Market Crash, one being that there were the high subprime mortgages that were given. The Federal National Mortgage Association, better known as Fannie Mae began to focus on making home loans more accessible in 1999. By doing this, the borrowers are considered high-risk and their mortgages had unorthodox loan terms that caused higher rates and payments. This seemed to be a great idea in the beginning, but there were red flags.
By examining the nation’s economic struggles during this time period (2007-2009), it will conclude that the current macroeconomic situation deals with unemployment, which is a direct result of the recession. It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates.
Starting when consumers began to lose confidence in the stock market and Bear Stearns required a federal bailout, the American people decided to separate instead of standing united. Since then the United States has plunged into an economic recession. The United States has suffered both the foreseen effects of a recession and several unforeseen effects, including a foreclosure problem of great magnitude. Coupled with unemployment and drops in the stock market, the United States has seen a rapidly increasing foreclosure rate, and the problem has only continued to escalate. This raises the question: how do we solve the foreclosure crisis?
Andrew Ross Sorkin of ABC news stated, “… this is the time to be investing, because this is when people make money”. The Dow had dropped 18 percent, and many people were worried that the stock market was going to crash, although it didn’t. During this time, investors were trying to switch from investing in risky assets, to safe assets. As a result, the prices of the stock market decreased dramatic... ... middle of paper ... ... ways to handle these risks, like interest rates, audits, diversified portfolios, and increase the amount of securities it holds. During the financial crisis of 2008, the Fed decided to push banks to hold more reserves so they could have financial safety.
From 2008 until now the national unemployment rate has risen from 5-6% to about 10.2% (U.S. Bureau of Labor Statistics). With unemployment rates continuing to climb, more and more Americans are stuck in large mortgages with no means to pay them. Many of these debtors are faced with mortgages that are greater than the values of their homes due to impairment resulting from the market collapse. With the job market in its current state and unemployment continuing to grow, most of these debtors look to default as the best solution to their problems. Simply, the best preventive measure to the foreclosure crisis would have been to not to overextend yourself.
Today’s America is in crisis; we are in a recession. The greatest factor driving this major recession is Foreclosure many Americans are forced to face every day. In simple terms, the foreclosure crisis was caused by greed in the banking industry and too much optimism of the American people. This resulted in a bubble of subprime mortgage lending, which eventually collapsed once leading mortgage firms in the banking industry such as Fannie Mae and Freddie Mac needed to be bailed out by the government. A great panic was caused in the Stock Market, resulting in job losses and companies going out of business.
Sachit Grover The Decision That Drove the Economy Forward The downward spiral of the United States economy began in 2007. Initially, banks made careless loans to individuals. Following these careless loans, many couldn’t afford to stay in their homes. The credit crisis was occurring simultaneously with the housing market collapse. The credit crisis occurred when large financial institutions were on the verge of collapsing due to the risky loans issued to United States residents.
In economics, a recession occurs when there is a slowdown in the spending of goods and services in the market. A recession causes a drop in employment, GDP growth, investment, as well as societal well-being. All recessions are caused by a specific cause, but the Great Recession of 2007-2009 was caused by a crash in the housing market. This crash was triggered by a steep decline in housing prices. All of a sudden, people bought houses because there was an excessive amount of money in the economy and they thought the price of houses would only increase.
This increase in loans being made and the amount being loaned caused a boom in the real estate market, similar to the United States. Also, the lack of regulation of the banks by the government led to a credit crisis. The bailouts led to the governments taking the responsibility for private debt that was incurred through banks. As the government started bailing out banks it started incurring large amounts of debt. The more debt that the countries would incur led to it increase in the countries’ debt level.