Thursday, April 4, 2013

The Story Behind The Global Financial Crisis

There is no doubt that the financial crisis and the recession that has followed in the second half of the of the past ten years has had a significant impact on economies and countries worldwide, and this is also the case in the United States, where national debt has increased significantly, and the number of companies and homeowners who have suffered serious problems is very large indeed.Tens of thousands of people have found themselves being made unemployed by companies that have been bankrupted by the crisis, and others have found their mortgages have been simply unsustainable in a massively changing financial climate. However, the way this came about really isn't related to those who have been worse hit by the crisis. One of the best resources that spans the whole period is financialcrisis.biz, but the real start of the crisis can be traced to the decision made by a number of bankers a few years before the crisis actually became common knowledge, and this is largely to do with the creation of investment products called derivatives, where varying mortgages of different qualities were packaged together to make investments for banks and private investors to put money into. Essentially, what was done in these products was that a number of different types of mortgages were bundled together by those at the investment banks and then sold on to other companies who would then earn money as these mortgages were paid off. It were these investments that allowed more mortgages to be sold because of the increased funds in the market, and with more funds available to borrow, mortgage companies released their tight grip on mortgage criteria. With less stringent checks carried out on those who were borrowing the money, many people were given mortgages that were above the value of the property they were purchasing to cover repairs or redecorating, and other people with lower credit suitability and lower incomes were approved for mortgages that they would struggle to afford. However, as these mortgages continued to be bundled together, and traded between investors and banks, the unsustainable nature of these mortgages wasn't identified. This was a time when lending was cheap, and those who were looking to the future couldn't see the bubble bursting, as it did in such a dramatic fashion in the second half of the decade. As more of these mortgages started to be defaulted on, and the widespread nature of the lending became clear, more and more people in the financial industry started to identify the mortgage derivatives that they owned that were much riskier than the original investments they thought they were buying. Default rates on these property loans continued to increase, and the panic spread, leading to some banks collapsing, both in the United States and abroad, and governments having to step in to prevent massive companies from going under. This is a very brief part of the narrative of the global financial crisis of the 2000s, and is probably the most defining and important event of the twenty first century so far.
How do you feel about the cause of the recession? Would could have been done to prevent it?

1 comment:

  1. I think the banks should have diversified their investments and not invested so much into mortgage back securities. I also think that allowing low creditors the ability to access a mortgage low is ridiculous and the key to this problem.

    ReplyDelete