How The Recent Economic Crisis Compare To Economic Crisis OF the 1920s
Previous to the global financial crisis formally hit the US, the foundations of the wider housing market is slowly but surely being toppled by the subprime mortgage crisis. The US was brought to the brink due to reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings. Several experts and analysts have made predictions of the crisis the focus of everyone’s thought was the extent of how Wallstreet messed everything up.
The first to fall was global investment bank Bear Stearns where JPMorgan Chase saved it by acquiring it in March 2008. During that time, the White House has insisted that there is still a strong foundation in the US economy and nothing has changed it. The administration also informed the public that the problem is contained only within the subprime mortgage sector.
The next major institutions to fall are Freddie Mac and Fannie Mae which are two of the largest US mortgage companies. $5 trillion in taxpayer money was spent by the federal government to bail them out. Not too long, in just a matter of days, Wallstreet collapsed. In turn, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks.
AIG,the world’s largest insurer, is said to fall next. There was too much riding on AIG to be allowed to undergo the same outcome as the other institutions. Otherwise the consequences might result to another great depression. It was considered a huge risk to let AIG fall seeing as it has plenty of link to numerous institutions where money is pretty much wrapped around it. Taxpayers were forced to pay $85 billion to bailout the insurance giant.
These ill-fated incidents that several financial institutions went through together with the stock market’s collapse were events mirroring that of what happened prior to the 1920s great depression and plenty of people believed that another great depression is on the horizon. Before the financial crisis in 2008, the housing bubble was fueled by easy money that also happened in the 1920s. Ever since the US government lowered the mortgage rate to 1 percent, people of every status could practically own a house. The majority banks approved all sorts of loan applications left and right without checking the applicant’s credentials. The affinity to lie about how much money one makes was very widespread at the time and anyone who can present a credit rating passes. Loans were even granted to people who don’t have jobs simply because this crucial information are neglected to be verified by lenders.
Lenders are keen and confident to grant “risky” loans because of a financing tool known as mortgage-backed securities. These loans were bulked and resold to banks in Wallstreet and Wallstreet banks bundle these loans into higher yielding mortgage-backed securities and sold to investors around the globe. Because of the “pooled risks” involving many investors from other countries, these loans are believed to be protected and because of this aspect it was assumed that it will always be safe.
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 struggle. 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 world are gradually recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes over again.
