American Financial Crisis - What Happened
The great American Financial Crisis. Basically what happened. Why did this crisis occur. The whole story behind it, a brief summary compiled together. Let's hear it.
So, what was actually the 'American Dream'. The American Dream basically meant that all households who require their own home could have and afford one. Basically what happens is that if somone requires a house worth $100,000 and is willing to pay $20,000 as down payment, he would be provided the required home. The rest, which is $80,000, would be financed by the BANK, in the form of a LOAN. Furthermore, you leased the particular place for 30 Years, so that means at 5% you would only be paying $1500 a month. Which was pretty much affordable for everyone. This system supported a gradual increase in home ownership and Loans were provided to people in different class.
According to Mr. Greenspan, he brought some new economic management in the system. And his rule would say, "Rapid Economic Expansion Would Increase The Demand For Workers." A move towards NO-UNEMPLOYMENT.
Mr. Alan Greenspan quoted this as the "The New Economy". Lower interest rates increased the demand for housing. The banks made new products such as 'mortgage-backed securities'. To cover the loans which they were giving people. These securities were provided to cash-rich institutions, so that they could spread the risk in finance which the banks had solely undertaken.
The competition amongst the banks intensified and the competition was so tough that banks started to through away money to its customers like anything. The banks loaned money to the borrowers who couldnt even afford to purchase the mortgage. Loans were started to be lend with little or no down Payments. Then a couples of years ago, The Feds started to raise the interest rates and this started to affect the borrowers to repay the loans. Most of the American Households dont have savings, they mostly spend it as they earn. This highly affected the payments, and the many of them started to default, which send shocks in the market.
The banks started to seize the properties of the defaulting owners, and dumping it in the open market. This caused a major decline in the price of the houses. The amount of the houses fell so low, that the value of the houses fell below what they owed the Banks. This situation, further led to more severe crises and more people started to default.
The financial institutions which had purchased those securities, had no other thing then to dump the properties in the open market. Due to which the shares of the Financial Institutions fell and the enterprises collapsed. Several large institutions failed such as the Lehman Brothers, Merrill Lynch, AIG, Bear Sterns etc.
The Story never ended.....The Fall continued...With many major other Financial Institutions collapsing day by day....Furthermore the U.S. planned A $700 BLN Bailout....
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