The Financial crisis of 2007 and recession that followed and why we are blaming the wrong people.
As of September 2nd, 2011 8 in 10 think we're in a recession (CNN). A recession is loosely defined as a “A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession” (Investopedia). Unbenounced to the 8 of 10 people in the USA in 2011 we left the “great recession” as of July 2009 (Tseng). Yet people are under the impression that wall street caused the recession in 2007 when in reality people buying houses they could not afford was a major cause of the recession and financial crises. If you remember the american taxpayer gave billions of dollars to major corporations like General Motors but most people don't point to companies that gave the money back and are now a success they point to companies such as Bear Stearns, who are now defunct and owned by JPMorgan Chase, they go own and own about how we the taxpayers should not have given the money to wall street and big banks. They also vehemently reject the mere idea of the bailouts of major banks and the TARP (Troubled Asset Relief Program). But they do not fully realise what was going on at the time of the this crisis. this paper will endeavor to make sense of the financial crises and who caused it. To help with this a key terms sheet is attached.
To understand recession we have to examine the root causes of the financial crises. thowe the financial crisis affected every part of the financial sector it can be traced to one starting point on type of financial instrument the mortgage, the simple idea of buying a house and paying for it little by little. In the 2002 this seemed to be a low risk way to make a huge return on investments in fact people for year before had been making money on Collateralized Debt Obligation so why not do this a much larger scale with something almost every american seemed to have or want a house. Then the enterprising people at investment bank remembered that something like this already existed its was called a Collateralized Mortgage Obligation. But there was one more problem wall street need a way to protect themselves from risk they did what any person would do they if they owned a home or a business they took out insurance. So massive numbers of insurance polices need to taken out and who better then one of the largest insurance provider AIG. The great thing about these instruments is that they used mortgages and banks held massive amounts mortgages on their books and they normally held on to them for 30 years but now they only held them for a couple of months. At first these were “prime mortgages” the banks had done the due diligence, these people could pay and most of them do but theses mortgages were eaten up by investors as the bubble began to form. So the storm of a crisis beginning to form, with the investors eating up Mortgage-backed security banks had massive amount of unused capital sitting in their mortgage deviations and they also did not have to hold on to them for very long so they relaxed the restrictions on the lone requirements. This started an never ending cycle to the point where a credit check were not even required hence the term subprime. Thanks to 70+ years of good mortgage data the analytics showed that default rate was 2% at worst they predicted that 12% would default today there are pools that have a 50% default rate (This American Life). Thanks to these flawed analytics the banks rationalized CDO’s ratings at AAA. This caused the largest financial mastrum to let loose on the US and there full the rest of the…