By 2008, due to the failures of large financial institutions, there were severe liquidity problems within the US banking system. When the housing bubble peaked in late 2007 the values of securities linked to U.S. real estate pricing began to plummet (Stiglitz 55). This was a critical hit to financial institutions across the globe. Questions began to arise amongst consumers and members of government alike in regards to the solvency of banks due to poorly performing loans and mortgages, which in turn led to declines in the availability of credit. The complete loss of investor confidence impacted stock markets globally.
The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily. In result of this the home prices started decreasing rapidly and it caused foreclosures. The foreclosure issue began in late 2006 in the U.S. and continued to drain wealth from consumers and the banking institutions. It affected the other loan types and default on those loans increased enormously and the crisis got bigger and started to affect other parts of the economy. The basic cause of the financial crises falls collectively on debt and mortgage-backed assets.
It has left individuals and companies facing potentially higher interest costs, or struggling to get access at all.” The credit crunch can occur for several reasons such as; “sudden increase in interest rates, direct money controls by the government or drying up of funding the capital market”, (www.thismoney.co.uk). According to the Times Online, “years of lending increased a huge debt bubble; people were borrowing ‘cheap money” and properties. The crunch began in summer 2007, where lending to low-income Americans opened a wave of financial problems. As a result banks were not lending money to consumers and one another. Furthermore, it became a worldwide phenomenon; “the way the debt was sold on to investors gave the crisis global significance.
Sadly, they are sunk in debt and can’t find work in order to support their families. Too many people are becoming victims in this cruel economic time and losing their homes. My proposal to fix this problem, is to restructure the foreclosure practices that banks are resorting to. The reason banks do it? Banks have investors they need to please; they have annual reports to publish to the public.
Impact on EU Governments The GFC caused a decrease in government revenues, but an increase in government expenditures in terms of GDP in 2008 and 2009, which significantly deteriorated deficits ... ... middle of paper ... ...wever, at the end of 2008, Germany was hit by the crisis through two channels; 1) Finance as many banks were overexposed to toxic speculative papers originating in the U.S and Ireland. Both private banks, such as Commerzbank and Hypo Real Estate, public banks had to be rescued by the government’s public guarantees costing €400 billion and 2) Export industry as the international demand decreased significantly . Although, the spending in the financial sector could harm Germany’s government debt in short-term, the debt was expected to maintain its position with low interest rates and capital gains from privatisation. With a strong financial position, Germany was expected a balanced budget, after spending on recovery plans. Though, Germany’s government debt to GDP kept rising since 2008 until 2011 from 64.9% to 82.5%, then decreased by 2.5% from 2011 to 2012 .
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.
Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy. The causes of the Great Recession all started as hundreds of billions of dollars was given to the United States abroad and financiers conceiving were to make a profit and what better way but the real estate market. Since the Community Reinvestment Act of 1977 and an expansion made in 1995 the than President Bush endorsed the program that created Option adjustable rate mortgages (nick-named “Pick-A-Pay”) to allow for bank to sell these options even though they were high risk (Conservapedia, 2013). The Community Reinvestment Act of 1977/95 is defined as to framework financial institutions, state and local governments, and community organizations to jointly promote banking services in the community” (Office of the Comptroller of the Currency, n.d.).
This triggered an enormous foreclosure rate which caused many banks and hedge funds to panic after realizing the looming huge losses due to the buying of mortgage-backed securities on the secondary market. By August 2007, banks were afraid to lend to one another because they did not want these toxic loans as collateral. This led to the $700 billion bailout, and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual. Consumer spending experienced sharp cutbacks due to the resulting loss of wealth. The combination of this along with the financial market chaos elicited by the bursting of th... ... middle of paper ... ...able to work again on a regular basis.
People were taking out loans and balloon mortgage payments that they really could not afford. The problem began in late 2007, when housing prices began to fall and the system fell apart causing huge numbers of defaults on home loans and foreclosures. Currently, 5.6% of mortgages are delinquent, the highest rate in 21 years, and 2.5% of mortgages are in foreclosure, the highest rate ever (Fox 2). This has caused banks to lose huge amounts of money and as a result credit is becoming more difficult to get for consumers and businesses. With credit harder to get, consumers have cut back on their spending, which is very bad for the economy since around 72% of economic activity comes from consumers (Gross 2).
The 2008 Recession Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor.