Analysis of the Financial Crisis of 2008
While many say that the financial crisis, The Great Recession, has come to an end Americans are still feeling its impacts and will for years to come. The financial crisis that started in 2007 ended up costing US Households nearly 20 trillion dollars’ worth of financial assets. During the time period from 2007-2009 Unemployment increased from a rate of 4.7 to 10 percent. This number doesn’t take into account discouraged workers who were neither collecting unemployment nor looking for new work. It also doesn’t consider the fact that people in desperate need for work took lesser paying positions to get by. Their financial positions will be affected for the foreseeable future due to this fact. New college graduates are also earning less than comparable graduates prior to the economic crisis. This issue alone could lead us into the next financial crisis centering on all of the student loan debt that these graduates took with now no way of paying it back.
Leading up to the financial crisis mortgage rates were very low, incenting people to take advantage of the rates to purchase new homes. After the Dot-com collapse in 2001 the Fed continuously lowered the interest rate from 6 percent to a low of 1.75 percent, lowering it further to 1 percent in the summer of 2003. This in turn caused housing prices to increase. No one seemed to be able to fathom that housing prices would ever go down which led to even more purchasing. ("Financial Crisis and the Great Recession," p. 337) In the years preceding 2007 (2001-2007) The US government put programs in place to help Americans who couldn’t previously afford to purchase homes due to income requirements or the lack of a down payment acquire mortgages for homes. Little regulation and unscrupulous subprime mortgage policies converged to create an almost anything goes attitude in the mortgage lending market. “Examples included a deterioration of mortgage underwriting standards before the crisis which was not limited to subprime borrowers…” (Bernanke, 2010)
Consumers were approved for mortgages for much more than they could realistically afford with little or no income verification. People were able to take out home equity loans which were once used mainly for home improvements and use them for anything they wanted, vacations, cars, etc. increasing the amount that they borrowed against their homes. When the real estate market started to decrease they were left with payments that they could not afford without a way of obtaining new loans or a way of selling their home to get out of the debt. Many people just walked away from the debt since they did not have any personal stake in it. They had not put much capital down on the home in the first place so walking away from it was the easy for them to do. They weren’t really losing anything they had put into the deal. Throughout 2003-2004 growing macroeconomics imbalances were occurring. One in particular was the fact that the United States was borrowing approximately a half trillion to a trillion dollars per year from the rest of the world. This is turn was fueling the real estate boom. (Frieden, 2011) By 2005 most analysts of international economic conditions agreed that the imbalances would cause serious problems. The debate was about when it would happen and what exactly would happen.
In 2007 the housing bubble burst leading to a large amount of defaults on subprime mortgages. Exposure to these mortgages caused large banks such as Bear Sterns to default. The bad mortgages caused banking crisis in the fall of 2008 when Lehman Bros. declared bankruptcy. There wasn’t one single factor that that you can point to in order to say this was the factor that created the economic crisis. There were many factors. One factor that people believe contributed to it was the act of keeping interest rates so low during 2003-2005.