Thursday, December 19, 2019
The Financial Crisis Since The Great Depression Of The 1930s
The 2008 Financial crisis was the worst financial crisis since the Great Depression of the 1930s. Suggested in the documentary Inside Job shown in class, many factors led to the 2008 Financial crisis including a largely unregulated financial sector, and complex financial instruments threatening stability of markets, and greedy predatory business tactics. The Great Depression was the deepest and longest worldwide economic downturn in the 20th century. Fearing another economic collapse, strict regulations were enacted upon the financial industry. This heavy regulation persisted up until the Reagan Era in the 1980s. Financial institutions on Wall Street and politicians in Washington wanted to deregulate the financial industry, which had beenâ⬠¦show more contentâ⬠¦Hereââ¬â¢s how it works. A family looking to buy a home would save up for a down-payment and then would contact a mortgage broker. The broker connects the family with lenders who in turn would give the family a loan. In return, they give the lender a mortgage which is an debt obligation. Investment banks such as JPMorgan, Lehman Brothers, and Citigroup, looking for low risk, high return investments would contact the lenders and then buy their mortgages. Betting they could get a higher return on the interest rates homeowners paid on mortgages than they could from buying treasury bonds. The investment banks would then combine hundreds of thousands of mortgages, corporate buyout debt, car loans, credit card debts and other loans, into packages called Collateralized Debts Obligations (CDO). The investment banks in turn would sell shares of these CDOââ¬â¢s to investors all over the world. Every month when homeowners go to pay their mortgage, the money no longer goes back to the lender, but instead to the investors who own shares of the CDOââ¬â¢s the mortgages are packaged in. CDOââ¬â¢s were seen as the safe bets as the housing market was strong. If someone were to default on their mortgage, they could sell the house for a profit. At the same time Credit Rating Agencies gave the CDOââ¬â¢s AAA rating, which is the best credit rating. Along with the fact that qualifying for a mortgage was only for borrowers with good credit,
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