The Market Crash of 2008
This week’s videos discussed at length the causes of the Crash of 2008 and the subsequent recession.
To begin, reflect on what were the causes of the Crash of 2008, both business and individual. What were the key contributing factors?
To begin, reflect on what were the causes of the Crash of 2008, both business and individual. What were the key contributing factors?
With these thoughts in mind, respond to this week’s Discussion prompt.
First:
Post a one to three paragraph analysis of the causes of the Crash of 2008. Be sure to cite information from the videos to support your response.
Second:
- Read through a sampling of the postings of your colleagues, focusing particularly on those to which you can add relevant or insightful comments that expand the Discussion.
- Respond to two or more of your colleagues' postings in any of the following ways:
- Build on something your colleague said.
- Explain why and how you see things differently.
- Ask a probing or clarifying question.
- Share an insight from having read your colleague's posting.
- Offer and support an opinion.
- Validate an idea with your own experience.
- Expand on your colleague's posting.
- Ask for evidence that supports the posting.
- Return to your initial posting. Continue the dialogue as desired by responding to your colleagues’ thoughts.
Please proceed to the Federal Reserve Discussion.
The crash of 2008 was caused by a number of factors, the biggest of which was the sale of subprime mortgages. By granting loans to borrowers with poor credit history, banks were able to make money off of these mortgages by selling them as safe investments. The video told the story of the Nordic town council that was told that CDOs (collateralized debt obligations) were a sure way to make money to cover the town’s budget. However, these CDOs had been carefully calculated and packaged such that nobody could verify the nature of the products. The Nordics took the sellers of the CDOs at their word and decided to invest the town’s money. They ended up losing a quarter of their budget. This happened all around the world because nobody suspected that these subprime mortgages were a bad investment.
ReplyDeleteBanks granted loans to unqualified borrowers because everybody expected housing prices to continue to rise, so when the supply of houses eventually exceeded the demand for houses, borrowers could no longer refinance their homes. Also, many mortgages had adjustable rates, which meant that the initial interest rate paid on the mortgage would be extremely low, but the lender had the power to increase the rate. These circumstances led to the failure of the subprime mortgages. Homeowners could not afford to pay the mortgage on their houses, and investors in these mortgage packages lost money. This greatly diminished public confidence in the American financial system, and investors everywhere tried to get rid of their risky assets, leading to the stock market crash in 2008.
The stock market endured 8 trading days of negative movement. This was caused by the rumors of banks failing such as Bear Stearns. All of this was originally started by banks loaning money to small-time businesses which used this money to loan out to Americans for house payments, car payments, and whatever else they could use the money for. However, the loaners got too greedy and started lending out money to those people who were not in the best financial state and it was made clear that there was a possibility that they could not pay back their loans. Certain bankers saw what was happening but did nothing to try to resolve this issue. One guy, Bass who was a hedge-fund manager predicted the crash but did little about it; instead he bet on the crash happening and made billions of dollars off of it.
ReplyDeleteBanks also lost investors due to their lack of money which would’ve been used to pay off their debt. Companies who had billions of dollars saved up which they could use for this type of crisis quickly ran through their savings and were in need of financial aid. In all, tens of thousands of banks failed including Bear Stearns which was one of the largest in the country, and also Wachovia and Washington Mutual.
The financial crisis of 2008 started with the purchase of subprime mortgages. It allowed for people with poor credit history to receive a loan from a borrower to purchase a house. Normally these people would not receive a loan but with subprime mortgages they could. The thing with loans is you often have to repay them, but the people receiving the mortgages often couldn’t pay back their debt. Another problem was that it allowed for these people to purchase homes they could normally not afford. Often the salesperson of the mortgage would cause the borrowers to buy mortgages they couldn’t fully understand.
ReplyDeleteAfter these mortgages were purchased they were bundled together by investment banks and transformed into securities. The income from the assets in the security was returned in cash to the investors. Lots of times different subprime mortgages were packaged together as well into securities and eventually were sold to investors all throughout the world spreading the risk. A lot of these banks eventually suffered once mortgages weren’t being paid back and the stock market eventually took a downturn when investors started to see the instability in the market due to faulty securities.
Also, homeowners were not saving their money and were spending lots of it so when the economy crashed a lot had no monetary cushion to fall back on. Eventually the prices of homes were too high and not enough people were taking out loans, so you had more homes than actual buyers. Due to no one purchasing homes anymore lots of industries directly related to the housing boom suffered. Eventually the people in houses who were refinancing and not paying back their loans had the mortgages they purchased catch up to them and they could no longer pay leading to several foreclosures. All of this greatly contributed to the crash of 2008.
The Federal Reserve consists of a board of governors and 12 district banks. The jobs of those banks are to issue monetary policy, provide financial services, and overview banking supervision. Before the banking crisis, the economy was quite slow in its grow and development therefore, the federal reserve saw fit that they should lower interest rates by increasing the supply of money in the economy. As an unseen consequence, the housing bubble was created. People saw the opportunity to borrow a large amount of money to purchase houses that were far beyond their accessibility. The main reason leading to the fail of the housing bubble was that banks were issuing loans to those people who had subprime mortgages or credits that did not usually meet their needs. The brokers saw that the money was within their grasp and failed to oversee the wellbeing of their customers. As the rates of mortgage payments began to increases faster the rate of wages, people found it hard to make each month payment and saw foreclosure. Stock value begins to fall, the availability of loans decreased, and the more money was held by the banks in response to the loss in stock values and effect of the subprime mortgages. People were soon terrified and tried to their money out of the banks before they completely crashed. Of course this only accelerated the process. One investment bank failed before the Federal Reserve decided to use the Federal Reserve Act and supply money to some institutional organizations. The final result lead us to a long recession.
ReplyDeleteThe crash of 2008 was caused by subprime mortgages. In the video they said “borrowers with bad credit history were receiving loans which they were not able to pay off. “ Plus these loans they received they would spend them right away or use them to pay off other things like bills and stuff. These loans allowed people to purchase a house that they could not afford. Also the people were not saving their money; they just spent it as fast as it came in.
ReplyDeleteThe sellers of these loans gave them to people who did not fully understand what they were getting themselves into. So they were completely clueless about these subprime mortgages. Then the banks started to suffer because people were not able to pay off their mortgages and the stock market started to go down.
It is blatently clear that the crash of 2008 was caused by the big banks on wall street. they kept using sub prime loans to get more money and then resold the toxic assets. the banks were gambling and they made poor bets and so our economy suffered
ReplyDeleteThe 2008 Market Crash is an event solely due to the Housing Market boom and the subprime-mortgage system that came with it. It all started when loan companies found out that they could make money from giving out subprime mortgages, so far Wall-Street provided them with the capital to do so. People who made less than $20,000.00 a year and who could certainly not afford a house were given the financing to do so. With this “financing” they could afford $400,00.00 homes that were way out of their league. Loaning companies such as Quickloans kept giving out such loans and made a huge profit. Wall-Street soon also capitalized on this and joined into the frenzy as well. With more and more capital coming into the housing market and loaning market, the housing bubble grew larger and larger. Housing prices kept rising and the mortgage business was at an all-time high. Loan officers and Wall-Street investment firms knew what they were doing and still did not stop because they knew there was much money to be made. Investment firms even sold these mortgage bundles in packages called CDO’s to foreign investors. As more and more money was brought in, the range of businesses linked to the U.S. housing market grew larger and larger. Eventually when the housing market came to halt in 2008 and prices started dropping, the subprime mortgages finally revealed their true destructive power. All CDO’s became toxic assets and soon all foreign investors lost money and started to bring down the global economy. The American economy also fell into deep recession, as all the major investment firms and banks started to loose stock value rapidly. Investors started pulling out investments which caused the stock market to plummet to an all-time low. Many Americans lost their homes, their “American Dreams” to be more specific. People fell into deep debt with their subprime mortgages and could not take loans to pay off their mortgages. Houses were foreclosed and the American economy foreclosed with it. It was a time for the Federal Reserve to step in and save the economy.
ReplyDelete@Michael Wessleman,
ReplyDeleteBe more specific. You are too general, what specfically did they sell, and HOW did they sell it? And do you think that there could have been a way to stop this selling of toxic assets? Could we, American Citizens, protested about this? Was it due to our ignorance that We missed out on that opportunity?
The cause of the Crash of 2008 contributes largely to the business’s greed and individual self-influence ignorance in the site of the housing market. The experiment with sub-prime mortgages and lazy instant gratification that so many people fell victim was due to how most people saw that as the American dream. Business knew they were harming the economy but they were blind to the effect by their instable greed to keep the influx of money they could make off of people with the same ideas as them. The housing market is the biggest contributing factor to the crash of 2008 because that is where all the money was being pushed toward and received from subprime mortgages. This led to loans that could not be paid and just kept collecting interest and adding the debt that the fed would have to bail everyone out of in the end. The experiment with American dream for anyone and everyone might as well have been called lets test how much debt the American people can handle before we realize that once things crash we will all be effected. The crash could be taken as a way to show Americans why they shouldn’t trust the soundness of the Federal governing.
ReplyDelete@ Ashley LeBlanc
ReplyDeleteAre you sure they were "clueless"? Even though I don't know much about finance I'm pretty sure I know my limits. For example: If I made only $40,000 a year, I'm pretty sure I could not afford a $400,000 dollar-house. Except in real life it was worse. We had people who made a little over above minimun wage apply for subprime mortgages to buy $400,000 houses! I don't know if they were "clueless" because they knew what they were getting paid and what they were buying. All in all, it was both side's fault, the buyers for agreeing to such a BS deal, and the sellers for using their rhetoric to persuade the buyers even more into buying it. Making it seem "affordable".
The 2008 economic collapse was primarily caused by the bursting of the real estate market along with the increase in foreclosures due to subprime lending. Lenders began lending money to many people who had bad credit or low incomes due to the potential profits that could be made. Many people invested in mortgage backed securities in order to ensure their investments with a usually safe and sound investment (housing). Banks had both money tied into the housing market and also were accountable for paying insurance to investors if a mortgage went belly up. Later in the 2000's, many people started to lose their homes along with the tightening up of lending and credit. This made it impossible for many people to refinance their loans, making them unable to afford their adjustable rate mortgages whose rates had just sky rocketed from very low percentages to very high percentages. Again, this increased the number of foreclosures, which left banks on the hook for the unpaid houses, and required them to pay investors who held insurance for their mortgage backed investments. Eventually, this caused many banks to fold, and left others on the verge of collapsing. Consumer confidence was destroyed and people began to hold onto their money, further restricting the economy, and banks stopped lending.
ReplyDelete@Wang - You have to remember that these buyers were, as you mentioned, misinformed, and that they believed that house prices would continue to rise at the rate at which they were, and therefore although they could not really afford the house on paper, through refinancing perhaps they could acquire the property after several years or refurbish and sell. Yes, it's true you could not afford a $400,000 house on a $40,000 income, but if you believed that the price of your house would double and you could make a profit off of it, couldn't you look at the purchase as an investment rather than a naive buy?
ReplyDeleteRAVEN NORMAN
ReplyDeleteThe crash of 2008 was caused by numerous ordeals which occure. One being trhe biggest:the sale of subprime mortgages. By granting loans to borrowers with poor credit history, banks were able to make money off of these mortgages by selling them as some what A "savior insurer". Banks also lost tons of investors due to their staggering drop monetary supply which would’ve been used to pay off their debt and loans. Companies who had billions of dollars saved up for this type of crisis quickly ran through their savings and were in need of financial aid.
The economic crash of 2008 caused the greatest recession since the Great Depression. When Bush came into office, the nation’s economy was prospering. What happened? What caused the crash of 2008? The main contributing factor was the creation of the subprime mortgages, but also the greed of the brokers on Wall Street. Working on Wall Street just turned into a money making game in the mortgage market. It is safe to say that the creation of subprime mortgages was a huge benefactor to the crash of 2008.According to a CNBC documentary, a subprime mortgage is a mortgage basically given to anyone who wants it. You can put zero down and people with poor credit can attain this loan. No proof of income is required for a subprime loan. This led to a huge demand for housing because it was now possible for anyone to achieve the “American dream.” However, a huge amount of foreclosures followed, which threw the banks into debt. On a business level, it is the bank’s fault for offering these loans. Also, banks did credit default swaps, or provided insurance for money. This insurance only threw the banks more into debt they could not repay. However, the crash of 2008 can also be blamed on the individuals, too. The brokers on Wall Street became sick with greed and only cared about increasing their personal income. Most of them did not consider the detrimental effects on the economy, or they just did not care. Also, the borrowers lied about their income to get the subprime loans, knowing it would be difficult to pay back. So, the economic crash of 2008 is not any one person’s fault, but rather the fault of the effects of the creation of the subprime mortgages.
ReplyDeleteAs many would state, Subprime mortgage was the primary culprit in this 2008 market crash. Responsibility was given to people who are not responsible, consequently raising the housing bubbles along with the housing prices. The ignorant loan companies were blinded by the profits and failed to consider the tragic outcome. People failed to consider the consequence of non-fixed interest rate which would rise after few years. Many Americans lost their home. They were deeply in debt and houses were foreclosed.
ReplyDeleteHere are the specific, destructive, and oblivious process led to the 2008 crash by WangTram Industries “The 2008 Market Crash is an event solely due to the Housing Market boom and the subprime-mortgage system that came with it. It all started when loan companies found out that they could make money from giving out subprime mortgages, so far Wall-Street provided them with the capital to do so. People who made less than $20,000.00 a year and who could certainly not afford a house were given the financing to do so. With this “financing” they could afford $400,00.00 homes that were way out of their league. Loaning companies such as Quickloans kept giving out such loans and made a huge profit. Wall-Street soon also capitalized on this and joined into the frenzy as well. With more and more capital coming into the housing market and loaning market, the housing bubble grew larger and larger. Housing prices kept rising and the mortgage business was at an all-time high. Loan officers and Wall-Street investment firms knew what they were doing and still did not stop because they knew there was much money to be made. Investment firms even sold these mortgage bundles in packages called CDO’s to foreign investors. As more and more money was brought in, the range of businesses linked to the U.S. housing market grew larger and larger. Eventually when the housing market came to halt in 2008 and prices started dropping, the subprime mortgages finally revealed their true destructive power. All CDO’s became toxic assets and soon all foreign investors lost money and started to bring down the global economy. The American economy also fell into deep recession, as all the major investment firms and banks started to loose stock value rapidly. Investors started pulling out investments which caused the stock market to plummet to an all-time low. Many Americans lost their homes, their “American Dreams” to be more specific. People fell into deep debt with their subprime mortgages and could not take loans to pay off their mortgages. Houses were foreclosed and the American economy foreclosed with it. It was a time for the Federal Reserve to step in and save the economy.” Stated WangTram
@Raven Norman
ReplyDeleteI agree witnh you that the banks were to blame for the economic crash of 2008. However, they are not the only ones to blame. It was equally the individual's fault. The individuals either knew what they were doing, but did not care about the effects, or they did not know what they were doing and had no business getting a subprime loan. So, it makes sense that you blame the banks, but it was also the brokers on Wall Street and the borrowers. Also, this would have never happened if it weren't for the creation of the subprime mortgage. So technically, the blame could be placed on the creation of the subprime loan.
The crash of 2008 was caused by several factors. The biggest and most important of these factors was the sale of subprime mortgages. According to the video, “House of Cards”, Subprime mortgages are available for anyone, especially the credit challenged. This to me does not even sound relatively close to a good idea, but many people thought otherwise. For a couple of years the sale of subprime mortgages stimulated the economy and led to people who could never afford a house actually be able to live in one. The biggest problem with placing people in homes that they could simply not afford without a subprime mortgage was that they could not pay back their loans. When the banks needed these people’s money, it was nowhere to be found and the banks were in for a major loss. Banks such as Bear Sterns began to fail and were in desperate need for a bail out.
ReplyDeleteBear Sterns was one of the lucky banks that did receive a bail out, but several other once well-known banks such as Washington Mutual were left out to dry and were shut down. The crash affected people of all levels in America as well as foreign countries who relied on us. Although the Crash of 2008 was not as bad as the Great Depression, it has certainly done a lot of unwanted damage to our economy.
@michael w
ReplyDeleteBe more specific. And not neccesarily these banks made bets. Their intention was clear and they aspired for profits. Also, it is absurd for banks to take full responsibilty for such consequence. Please stop sleeping in class so you don't miss out important details in the video.
@Scott
ReplyDeleteYou said that pepole like Bass are to blame for the economic crash of 2008. I agree with you for the most part of that, but the point of view of the brokers makes sense, too. He said he bet on the crash rather than trying to prevent it because he would have lost money trying to help it. All of the other brokers were greedy and trying to make the most money they could off of the subprime loans, so if he did not do the same, no one would borrow money from him. So, instead, he bet on the economic crash and make billions. I'm not saying it's right, but it's hard to blame him for what he did.
The crash of 2008 led to one of the biggest recessions in U.S. history. Some say that it was the 2nd biggest recession after the Great Depression. If the government did not intervene, who knows what would have happened. Ben Bernanke, the chairmen of the Federal Reserve who studied the great Depression most of his life, said the crash of 2008 could have been a deeper recession than the Great Depression if the federal government was left alone. In the video Inside the Meltdown, Ben Bernanke described the failing market as a systematic risk. If one bank or company fails, then all of them fail. This will happen, because all of the marketors are linked in some sort of way. All of this wouldn't have been a problem if everyone played it safe. After watching the House of Cards, I noticed why the Crash of 2008 couldn't have been avoided. Lenders were using the idea of Subprime mortgages thinking that it will generate a lot of profit. Subprime mortgages are loans given to people who have bad credits. At first, businesses made lots of money from subprime mortgages. People who recieved suprime mortgages accepted it, because they wanted the American Dream. Everything was fine until people couldn't pay back their mortgages. Lenders started losing money, and homes began to become empty.
ReplyDelete@ Patrick Kelly's response to Raven
ReplyDeleteYou are right. If we were to find founding culprit upon such tragic consequences, it would be the creation of subprime mortgage. Also, lot of confounding variables played role
@Wangtram
ReplyDeleteI thoroughly agree with everything that you stated. You used so many references and facts that it seemed as if I was reading a news article on the Crash of 2008. I also agree that the American Dream was crushed by the sale of these subprime mortgages. It was as if it was dangled in front of them and snatched up as quickly as it was taken away. Sometimes things are too good to be true and this is a prime example of that statement. As someone stated in “House of Cards”,” if things are too good to be true, they probably are.”
The economic crash of 2008 was largely caused by the sale of subprime mortgages. This is no secret. Anyone involved in economics or who studied this period could tell you that the sale of subprime mortgages damaged our economy greatly. At first, the sale of mortgages to people who could not pay them was leading to financial gain and a boom in the housing and real estate industry. Some people believed the value of houses would just keep rising and that the subprime mortgages were genius. However, when the people were unable to pay, houses began foreclosing, values of houses decreased, individuals were collecting debt, and banks were collecting debt.
ReplyDeleteI agree with Patrick that although the banks are to blame, the individuals who bought these subprime mortgages may not be let off the hook just that easy. It is the fault of our people that we were too lazy to really look into what we were all signing on to pay. Like the great Socrates once advised us, you must question everything. Especially when you go from living in a van down by the river to a $100,000 home.
The cause of the financial crisis was due to the idiocy of the average U.S. citizen. To believe that the housing industry could survive off people who can't pay their own mortgage, lies in the hands of the greedy upper class who were partaking in a rushed/hyped up industry. On the other hand, the people who believed they could own a house for free are just as foolish. If they couldn't afford the house before the housing boom, what made them believe that they could afford the home after the housing boom..... they didn't think of all high possibilities of their houses being foreclosed when relying on the same salary that couldn't afford the morgage before the housing boom.
ReplyDelete@Patrick
ReplyDeleteI agree that the crash is not just one group of individuals. Everyone contributed in some way regardless of what would happen in the future. I believe everyone was fouced on the short termof htis housing boom rather than focusing on the long term effects and resisting, but American greed and need for the American dream can cause us all to do awful things.
The crash of the financial market of the United States was mostly due to the lending of subprime mortgages. Subprime mortgages are loans to those who may or may not be able to repay the loan as expected. In the years leading up to the financial crisis there was a housing boom because of these subprime mortgages that lead to a substantial increase in housing costs. With the increasing costs of homes there was now even more incentive for those selling loans to receive even more commissions so they decided to sell even more subprime mortgages. After getting someone to buy the loan the loan officer would then sell the rest of the debt to buyers who were expecting big payouts when the debt was repaid.
ReplyDeleteWith more people getting loans and buying homes interest rates began to skyrocket leading to substantially higher adjustable rate loans and it made it impossible for many to repay loans with this higher interest payment. Suddenly many people were no longer able to pay their mortgage payments with the increased interest payments leading to foreclosures. Banks then were losing money an all the loans that they thought were going to bring in large payouts when the loan was repaid. When investors in those banks found out that they were all going to lose their investments they began pulling stock out of the banks including the major player in the subprime mortgage industry, Bear Stearns. This lead to all major banks being put in jeopardy since the y were all linked in unforeseeable ways. Without help from the national government the whole world financial system was in jeopardy.
@JinPyon I agree with your statement that this crash could not have been avoided once all of the subprime mortages had been sold. There was a lot of investment based off of really no real money. Even when subprime mortgages firsrt began it would have been hard to stop because the immediate benefits were astounding and as Americans we tend to only focus on the immediate benefits we recieve rather than the long term effects. This is what caused the huge crash. I believe in order to prevent this in the future there needs to be a better system for checking this type of massive lending.
ReplyDelete@ Jinhak Chung
ReplyDeleteI agree with this point that financial crisis is due to the idiocy of the U.S citizen why would you believe you can afford somthing based on the words of someone who is just looking to make a profit off of you. Rather than think US citizens just acted in the end causing their own downfall. People should've stop and thought of the possiblities and weighted the pros and cons instead of just going for it. Isn't this what we are taught from the beginning?
@ Sarah Paik
ReplyDeleteI understand what you are saying. Yes it would have been a good investment, but do you really think people who could barely afford to get a house in the first place could have the knowledge to analyze the housing market daily and predict the up's and down's to know exactly when to sell? I doubt they thought about it thoroughly enough but I agree that they thought I would be a good investment. They should have planned it out better, but ehh things happen sometimes.
im not going to go into specifics because it would be redundant, everyone else already said what i have said except i only summarized it. they sold bad loan credit things to towns and what not. thats as specific as i will get
ReplyDeleteThe crash of 2008 was caused by subprime loans and CDOs. The big investment bankers won’t claim responsibility for the crash even though they knowingly sold toxic assets. In many cases people would buy homes with mortgages they didn’t even understand. Real Estate agents gained so much commission. Investment banker knew what they were doing was immoral at time. In “house of cards” many bankers admitted that they knew something was a little bit weird about the business they had started conducting. Nobody wanted to stop this business because it was so profitable.
ReplyDeleteI do believe that the American people are also to blame. People need to start educating themselves to prevent things like this from happening again. It’s not alright to spend without knowing what you are getting yourself into.
@Michael Wessleman
ReplyDeleteI agree this was all this a wall street game that they could afford to play. Just like that email stated in the House of Cards video as long as they got out before it crashed they would be alright, it didnt matter the result of their game on the people played just the benifits they had reaped.
@Shelby
ReplyDeleteI said the same thing in my response to Patrick.People purchasing these homes should have done it the right way and worked their way up, instead of going beyoned their obvious means to keep up with the Joneses. However I understand, if youve been eating tuna out of a can, youre going to jump at the opportnity to have filet mignon.
im fairly posotive that this crash couldve been avoided regardless of the subprime mortgages because if the banks werent dependant on the government then they would have known better. plus i dont think that we shouldve bailed out the banks
ReplyDelete@James Kim who @Patrick Kelly who @Raven
ReplyDeleteSuprime Mortgages played a huge factor on the Crash but like you said there were other confounding variables. I believed that subprime mortgages played a big role in the crash, but one action does not lead to a recession. There is always something around with the people.
@Wangtram Industries
ReplyDeleteThis recession was caused by failing housing market. There is bound to be another recession in the future. What market do you think will it be the next time? the WangTram Industries?
@Shelby who comment @Jin
ReplyDeleteI agree with you. I believe in most part that the government should keep its hand off the market, but there should be regulations. Regulations that keeps the economy away from a recession.
@Michael W
ReplyDeletei agree because the big banks were the ones who granted their usage of the money rights to the individually owned loaners which gave the money to the red neck people who crapped it all away and couldnt pay
According to the "House of Cards," Subprime morgages played a key role in causing the crash of 2008. Banks were issuing subprime mortages to people with a very low credit score, low paying jobs, and low income to afford paying a house. The banks issused the subprime mortages targetting people they knew would not be able to keep up with the monthly payments. The subprime mortgage usually had low interest rates for the first few months and then the interst rate would sky rocket and the family would not be able to make the monthly payements on time. A large amount of homeowners called for forclosure while banks on Wall Street got rich from making investments. The bank investors grouped the mortages into CODs and sell them to other investors. The people that rated the mortgages started lying about their true rating and began rating high risk mortgages as AAA low risk investments. These rating created the illusion that investing in mortgages was safe. The investors began selling CODs to other countries around the world as well. The investors were making high profits that they did not mind selling bad investments that would ultimately affect the entire housing market. SOme investors were smart however and got credit default swaps which insure your own innestments. Even after the market crashed, the investors with credit default swap continued making money because their bad investments were secured by banks ("Inside the Meltdown").
ReplyDelete@ Enya
ReplyDeleteI agree with your statement that the housing boom was caused by Wall Street bankers that could afford to gamble with the people's money. It is not fair that an entire country had to suffer through the consequences and not have such a low housing markek.
The crash of 2008 was a tragic moment in the history of the American Economy. A lot of people are quick to jump to the conclusion that it was entirely the banks' fault for handing out loans to unqualified individuals, and while they are largely to blame for, it is worth mentioning that some banks felt pressured by Community Reinvestment Act to make these loans. About 25 to 30 percent of the loans made came from CRA bank affiliates. Like I said before, this pressure by the CRA was not responsible for the majority of the fault. That again should be rested on these big mortgage companies that made subprime loans easily available to people who don't know how to handle their finances. As the prices of houses began to fall, unexpectedly, people began having to pay off loans that were worth more than the current price of their homes, and many times they let their house go to foreclosure or even moved because they simply didn't care.
ReplyDelete@ WangTram Industries
ReplyDeleteDavid Wang, you provided a lot of important detail, and I just want to highlight one part of your comment. You said that investors started pulling out rapidly when stock prices began to drop. This is an important statement because it shows the American idea of following a crowd's behavior. People began to get nervous and so they pulled out, which only hurt the economy even more. This also happened back during the Great Depression, people started to come to the banks and all want to take out their money at the same time. Even though what happened in 2008 was on a much larger scale, because these were large-time investments that were being pulled out not just personal finances, I still find it interesting to compare the two times.
The Crash of 2008 was mainly triggered by the lending of subprime mortgage. People with low credit rating failed to make payments that were due under the terms of loans secured against the value of their houses. By the end of 2006 it was estimated that over two million households had either lost their homes or would do so in the course of the following two years, and that one in five subprime mortgages that had been taken out in the previous two years would end in foreclosure. This led to a loss of confidence in the safety bonds whose value depend upon such loans and caused financial problems among banks and others who provided housing loans. This eventually spread to the financial markets and banks. Another cause is credit rating error. It led mortgage lenders to approve loans to borrowers without checking their ability to pay and the borrowers took out large loans than they could afford.
ReplyDeleteThe Crash of 2008 was caused by subprime mortgages. Because the companies were lending money to people with bad credit rating, they gradually struggled to pay back to all of their loans. When U.S. banks were exposed to these loans, they eventually collapsed. Even though subprime mortgages had interest rates that were above typical rates, individuals expected that the price of their home would continue to increase and that they would be able to refinance their home before the higher interests were to go into effect. However, when people realized that they could not afford these mortgage payments, homes were gradually defaulted, and this was the first step toward foreclosure. The ratings of mortgage backed by securities began to decline dramatically, this showed clear indication that these securities were a risky investment. No investors wanted to take on the risk. Due to this turn out, major banks suffered from huge losses, and for companies like Lehman Brother, it went out of business. Also, when Merril Lychn had to sell itself to Bank of American and Countrywide Financial Corporation got taken over by Bank of America, Federal Reserve began guaranteeing loans to Bear Stearns to prevent further financial failures and to save U.S.’s economy. After this crisis, legislations were passed to help those who have suffered severely with plans like Affordability and Stability Plan and Emergency Economic Stabilization Act. As a result, the key factor that led to the cause of the Crash of 2008 was subprime mortgages.
ReplyDelete