The Market Crash of 2008
This week’s videos discussed at length the causes of the Crash of 2008 and the subsequent recession.
To begin, reflect on what were the causes of the Crash of 2008, both business and individual. What were the key contributing factors? Next, consider how the Federal Reserve handled the problem. What were actions that it took? Was it legal?
To begin, reflect on what were the causes of the Crash of 2008, both business and individual. What were the key contributing factors? Next, consider how the Federal Reserve handled the problem. What were actions that it took? Was it legal?
With these thoughts in mind, respond to this week’s Discussion prompt.
First:
Post a one to three paragraph analysis of the causes of the Crash of 2008. Be sure to cite information from the videos to support your response.
Second:
- Read through a sampling of the postings of your colleagues, focusing particularly on those to which you can add relevant or insightful comments that expand the Discussion.
- Respond to two or more of your colleagues' postings in any of the following ways:
- Build on something your colleague said.
- Explain why and how you see things differently.
- Ask a probing or clarifying question.
- Share an insight from having read your colleague's posting.
- Offer and support an opinion.
- Validate an idea with your own experience.
- Expand on your colleague's posting.
- Ask for evidence that supports the posting.
- Return to your initial posting. Continue the dialogue as desired by responding to your colleagues’ thoughts.
Please proceed to the Federal Reserve Discussion.
The first cause of the 2008 recession was the fact that businesses were making loans to homeowners that would not be able to pay them back. Subprime mortgages were given out frequently and from many companies; these were mortgages given to people with very low credit and often little money and low income. They sold these subprime mortgages to investment banks, many of whom also insured the loans. Therefore, if the loans were not paid, the investment bank agreed to pay off the mortgage. Individuals also agreed to buy homes that they knew were well out of their price range, and often trusted lenders to tell them the truth about their loans instead of finding out what they were actually signed up for. Individuals during this time also had a habit of overspending on credit cards and building up their debt this way. With the mortgages not being paid and the credit debt building, the market crashed in 2008. The Federal Reserve bailed out a few of the largest investment banks in order to preserve Wall Street. They nationalized Fannie and Freddie in order to protect the economy. They had to take these actions because all of Wall Street is interconnected. The banks all had investments and ties with other banks. So if one major bank failed, it had the power to take much of Wall Street along with it. Their actions were legal at this time, because the Federal Reserve had to take action in the face of this national emergency. They feared the Great Depression could happen all over again, and thus used the powers that the Depression-era Federal Reserve used.
ReplyDeleteThe unfortunate market crash of 2008 was an event foreshadowed for years. From early-2000s, many banking and insurance companies began making horribly risky loans out to people of sub500 FICO score (deemed terrible credit) in hopes of cashing in quickly on the untrusted American population. However, many of these Americans could not or did not pay back on their loans. Many of them were forced to witness their house go through foreclosure as they tried to find a cheaper home or move in with relatives. With this, consumer confidence rapidly declined.
ReplyDeleteWith the decline of consumer confidence, the stock trades of certain companies like Bear, Lehmann Brothers, and AIG all began to rapidly drop due to the decreasing confidence from the American consumer population. This inevitably led to the stock market crash of 2008. The federal reserve really had no choice but to bail out certain companies, like AIG. Many wanted AIG to go under as standard business and economic punishment, but AIG’s branches were interwoven with many parts of the financial system, so they had to be bailed out. As the government’s balance went way off measurable numbers, the American population’s popular hobby took a hit: shopping.
By losing a home and hurting their family financially, insurance companies stunted many families and forced them to save all the money they had, forcing them to stop shopping. When this happened, the circulation of currency begins to halt in an economy based on consumerism. This inevitably led to job losses in nearly every single industry that was impacted by the loss of customers and purchases.
The crash of 2008 was the turning point of the economy into economic downfall. Due to subprime mortgages the banks were lending out money to people who couldn’t pay it back. Banks were losing money and everyone was getting out. Banks were going bankrupt and no one had confidence in the American market. Due to the rumors and insecurities of the market many people started selling their stocks due to the fact they were scared of losing their money and when people lost their money the insurance that the banks were giving its clients was no good because the banks had no money to give. The reason the money was lost was because the banks were making imprudent decisions about the loans they were lending out and they weren’t safe. While the markets looked very good on the CDO’s and the banks felt they were striking g gold in the housing market they were actually digging a ditch deeper and deeper till they realized they couldn’t get out.
ReplyDeleteOnce the Wall Street had no control over their problems the Fed had to step in and do whatever they could to save the economy and to not repeat another depression. The fed had to bailout multiple banks and some more than once. The AIG was bailed out four times and it took over 100 billion dollars in loans to do so. The Fed had to bail out small businesses which America runs on and help students with loans. They also let some banks go bankrupt like Leaghman Sacks who has been on Wall Street for over 130 years and. After the Fed bailed out banks, helped small businesses, and lent loans to students and others the economy started to level off. Although they are printing money, which many would think would cause inflation; the fed had leveled off the dropping markets to avoid a depression. In time the economy will get back to full employment but, will take a little awhile for the wounds to heal.
Matt,
DeleteDo you agree with the Fed's actions? Should the government always come to the rescue of the corporations? What does that say to the average American who may need assistance?
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ReplyDeleteThe crash of 2008 primarily occurred as a result of the toxic loans and assets headed by the major investment firms of Wall St. The initial problem started with loaning firms giving subprime mortgages which is essentially giving mortgages to under qualified people. Wall St. provided most of the funding to these loaning firms which would essentially give money to these firms to loan out, and these major Wall St. firms would then bundle up these toxic assets (which were filled with people who would not pay back) and sell them to foreign investors. Years later, when people were unable to pay off these debts, foreclosures were happening by the thousands and the debt in which the big firms took up was massive. The big investment firms such as Bear Sterns, Merrill Lynch, and Lehman Brothers began to fail and the government was forced to intervene for fear that the whole financial system would collapse. AIG, the insurance giant of the world, was also doomed to failure as they backed thousands of toxic mortgages. The Fed allowed Lehman Brothers to fail because The Fed cannot put capital into the system, only loans, but saved AIG under the impression of "good collateral". Bernanke said that you cannot allow major institutions to fail during a financial crisis, which is exactly why he saved AIG, although they made him furious.
ReplyDeleteOne cannot simply point out a single unequivocal wrong-doer in the reason for the collapse of the United States’ financial market. There are, however, many different culprits to the crime that is seen as the worst economic downturn since the Great Depression of the 1929-1930’s. You can look at it from the point of view as an ignorant American mortgage payer who was unaware of the consequences of signing a lease to a house they could not afford. Or you could try to place the blame on the banks and the big corporate owners who basically profited off of the failure and ignorance of the average American. To try to ease the pain of the housing bubble that was essentially created due to the two parties listed above, the Federal Reserve, also known as The Fed, attempted various approaches. The Fed constantly bailed out companies such as Bear Morgan, JP Morgan Chase, AIG, Fannie Mae and Freddie Mac, etc. These bailouts consisted of nearly a trillion dollars that the Fed really did not have. On top of that, the Federal Reserve bought faulty loans and took the debt of companies that truly did not deserve it. This angered the American people because the tax payers were essentially saving companies that were shady and committing illegal activities. Overall, you cannot simply just blame one group for the accountability of the financial crisis we are in today. Many parties were at fault, we just have to hope and pray America has learned from past mistakes.
ReplyDeleteAndrew,
DeleteWhat do you think of this culture, that is emerging in the USA, that insists on being blameless?
Can we ever go back to a culture of self-responsibility?
What steps must be taken?
It all started back in 2002 when the interest rates for mortgage loans began to decrease heavily as a result of the 9/11 terrorist attacks. Due to this rapid, widepsread decrease mortgage interest rates, the housing market exploded, and thus it became the new bubble. Consequently, the public's demand for housing increased , an banks dealt out countless loans to home buyers. The profit that banks were accruing from mortgage loans was so great that they started to practice lending out subprime mortgages in which they willingly lent money to those who were underqualified and underpaid for the housing they desired. Public financial incompetency as well as banking greed and dishonesty lead to numerous people buying homes that they could not afford. The amount of subprime mortgages (which are classified as toxic assets) grew to the point in which they could no longer be ignored. Countless homeowners soon defaulted on their mortgage and were forced to foreclose. The lending banks (who were responsible for the homeowner's insurance through credit default swaps) had to pay for these foreclosures, and since there were so many, the banks swiftly expended all their money. Thus, the housing bubble popped, and since banks had no money, American industry collapsed as well, for private business can function without the support of banking loans. And with this, the crash of 2008 began.
ReplyDeleteAumri,
DeleteThis was a well thought-out summary.
What must be done to prevent this from happening in the future?
The main cause of the market crash of 2008 was that businesses were giving out risky loans to people who weren't qualified to pay off the loans. So when these companies loaned out all this money, they didn't get any money in return because the people simply didn't have enough money to pay off the interst. If only a few companies did this, then it wouldn't have been that big of a problem. But a lot of companies did it and a lot of money was lost. This problem, coupled with dishonest lenders, caused a market meltdown. When Lehman Brothers failed, it made a lot of people panic because Lehman was such an old company that people thought if they could fail, then what other lesser companies could fail as well? When AIG was in trouble, the Fed had no choice but to bail them out, because AIG had such a big role in the financial system, that letting them fail would have been catastrophic to our economy and the world's economy.
ReplyDeletePart of what caused the Crash of 2008 was b/c of some companies keeping interest rates very low and encouraging people to do adjustable rate home loans. The main reason was that the home mortgage rates went out of control. There was no limit on housing mortgages. No regulations. Companies gave loans to people without knowing their financial status. Those people could not pay the interest rates. Basically the banks gave out free money without knowing that most of the people wouldnt psay their share. Many banks failed b/c of the interest rates and debts of the people. One company that went into massive debt was the Lehman Brothers. B/c the banks failed and prices went up, consumer confidence went down.
ReplyDeleteThe key issue that caused the economic crash of 2008 was subprime mortgages. Subprime mortgages are when people with low credit (sub-500 FICO rating) and little or no down payment are given mortgages. Oftentimes, the lenders of subprime mortgages would require no documentation proving the borrowers income and ability to pay off the loan. These subprime mortgages were packaged as CDOs and were given an AAA rating by credit rating organizations. At one time, this system was beneficial to everyone involved; borrowers with bad credit could now buy a home, lenders like Quick Loan Funding were making tons of money, and big banks made lots of money off of the CDOs. Many people in the finance industry, though, realized that this couldn’t be kept up. There is a reason that people with bad credit shouldn’t be given a loan: they won’t be able to pay them back. People like Ira Wagner timed it perfectly and got out of the industry before everything came down. Others were not so fortunate as banks like Lehman Brothers went bankrupt and hundreds of thousands of home were foreclosed.
ReplyDeleteThe causes of the 2008 market crises can be dated back to the events of 9/11. After the terrorist attack, the financial markets were in critical condition, many people were withdrawing their money and fear in the markets grew. To counter this, interest rates were lowered significantly; this allowed a surge in loans taken by Americans, loans that they could not pay back. Wall Street bought up these subprime mortgages knowing they could make big money off of them by selling them as securities to foreign nations. Housing prices began to rise and homeowners could no longer pay afford their mortgages. It was brought to light that the loans Wall Street was selling were crap, worth nothing and faith in the markets began to fall rapidly as many Wall Street giants began to go bankrupt. Many Americans lost their newly bought homes to foreclosure. Layoffs proceeded as American citizen's budgets began to dwindle and businesses began to close by the hundreds. The fed had a very difficult decision to make, bailout major financial institutions such as bear sterns, AIG and Lehman Brothers or let them fail and suffer the consequences. The Fed decided to bailout AIG and bear sterns while letting Lehman Brothers fail. They did this because they didn’t want it to look like they were desperate to the outside world. All of these Wall Street giants brought this pain on themselves; they knowingly bought up subprime mortgages with BBB ratings and sold them with AAA ratings. Whether or not the Fed made the ‘right’ decision is up for debate but they definitely made the most logical one. Perhaps they should have failed, that’s what they get for gambling with American lives and dreams but you have to look at the facts. AIG is an insurance company; they bought insurance on all of these crap mortgages and when they became worthless, AIG had to pay back all of the money, all of it. If AIG failed, not only would the entire financial system fail but millions of more Americans would lose their jobs and thousands of businesses would fail leading us into another great depression or more like the greatest depression. Could have the Fed done more? Yes but seeing how they diverted this nation from sinking into the worst depression in history, I think they did a pretty good job.
ReplyDeleteRichard,
DeleteAre you saying that you favor keynesian economics over laissez faire economics?
Must the government always be there to bail out bad behavior?
Doesn't this create an enabling culture?
The Market Crash of 2008 was caused by the sub-prime mortgages and loans that were given out to people who were not able to be held accountable. The mortgage companies should not have sold mortgages with interest rates that would exponentially rise after a certain time period and sell it to people who have low funds and a history of bad credit. These mortgages were often insured by companies so that when a large number of people suddenly defaulted on their mortgages, the insurance companies also went under. These sub-prime mortgages were sold all over the nation and many of the insurance companies were located outside of America. The businesses were at fault for maliciously creating these toxic assets and for inaccurate research behind these assets. However, the individuals also contributed to the problem by ignorantly not reading the fine print and signing onto these mortgage plans that they could never be able to pay off. The Federal Reserve bailed out several banks including Bear Stearns, Lehman Brothers, and Freddie Mac. The Fed also gave out loans to the insurance company AIG. Despite the discontent among America’s citizens, the Federal Reserve’s actions were legal since they did not directly input capital into the system. Despite costing trillions of dollars, the Federal Reserve’s immediate action allegedly had prevented an international financial crisis.
ReplyDeleteYuri,
DeleteYou said "allegedly". Do you feel that the Fed and the Government should have done nothing?
Do you think that the economy would better, now, if the country had done nothing?
The crash of 2008 was caused by the housing market/mortgages loans that were lent out to homeowners. People who normally qualify to get a house because they were credit challenged were allowed to get a mortgage through subprime mortgages. They were offered these mortgages even if they were prone to not be able to pay it off. The mortgage lending standards became more flexible to people so more and more people would get mortgages. By the time recession took over though, the housing market was at an all-time low. People couldn’t pay the mortgages off so they were hit with foreclosure.
ReplyDeleteInterest rates in the United States were also very low before the crisis because of inflation in earlier years. People could borrow money easily so more people wanted to get houses and cars. People would borrow and borrow money continuously and they thought that if the interests rates were low then they can pay it back later. Once the interest rates rose, the people who borrowed couldn’t pay the banks back.
The banks also didn’t provide all the money to the people who loaned. They were backed up by other groups that were supported by the federal government. Freddie Mac and Fannie Mae, ended up buying mortgages from banks so they could make more money. They offered cheaper ways to get the money the people needed for mortgages, so more people borrowed from them. These companies and investment firms made risky loans regardless of the people’s background with money or credit scores, because this helped the businesses profit during that time.
In order to fix the problems with the banks because they weren’t getting the money that they needed and they were in trouble, the Fed decided to bail out the banks. Since helping the banks directly was illegal, they came up with another solution by loaning to big firms that could loan to the banks like JP Morgan and the AIG. Also since a lot of the banks continued to loan to the public, the banks were in trouble. The banks that weren’t in that much trouble ended up buying the smaller banks through help from the government. Wells Fargo bought out Wachovia because Wachovia lent out more money than they had.
Financial markets crashed after the terrorist attacks of 9/11 which as a result forced interest rates lower to counter the economic downturn. The lower rates allowed for more people to take out loans and this caused a boom in the housing industry. Much of the early 21st century’s economy revolved around the housing market and the expansions of it. The major aspects of the market were based on property values going up and many people realized that the easiest way to profit off housing expansion was to get in the business of lending out loans to people as mortgages. Many lenders gave out subprime mortgages and Wall Street looked the other way because profits were being made. Most didn’t think that this economic expansion would ever end and therefore had no intentions of ever stopping poor lending to people with “stated” income and bad credit. Greed and lying kept this system going and it wasn’t until people had refinanced and taken a loan with a low monthly payment rate that the rates shot up and most people couldn’t repay their loans. The individual mortgage holders are to blame for their ignorance in not understanding their loan. Businesses are to blame for not accurately explaining to their clients the repercussions of taking out a loan they cannot afford. Everything that had been based on property values rising started coming apart because values began to fall as companies were full of toxic assets and subprime mortgages. People stopped taking out loans and values fell, jobs were lost, foreclosures were inevitable and lenders were in debt. While the country’s economy was in recession the Fed took on the role of fixing the problem. The Fed is partially to blame for the market crash because along with financial services and monetary policy banking supervision is one of the primary roles of the Fed. The Fed did not accurately supervise the poor decisions and mistakes large banks made by creating subprime mortgages and CDOs that no one fully understood…including those working at the Fed. The Fed handled the problem by bailing out major banks and forcing banks that were going under to merge with more stable banks. Although this is completely against the free market system the Fed really didn’t have a choice because branches of these large companies like AIG took root in many areas of the financial system. Not bailing them out would have only made the situation worse.
ReplyDeleteThere are several causes to the Crash of 2008. Businesses sought for too much profit, individuals became ignorant for their own financial safety, and the government did not react fast enough to fix the problem. In 2007, businesses paid mortgage brokers a higher commission on high interest subprime mortgages in order to make profit from selling those mortgages to Wall Street investment banks. Lehman Brothers was one of the Wall Street investment banks that became the victim to this mortgage crisis. Lehman Brothers entered the CDOs (collateralized debt obligations) and packaged subprime loans as investments and eventually became bankrupted. People that received the subprime loans were not able to pay back their loans, which eventually bankrupted the Lehman Brothers. Even after the financial crisis in 2007, President Bush and Treasury Secretary did not put out specific plans to prevent the crisis from becoming worse. When Bear Stearns failed in 2008, the government started to act. The Federal Reserve launched new lending programs and dropped multibillion dollar bailouts of Fannie Mae, Freddie Mac, AIG, and Citigroup. The Federal Reserve basically gave money to these businesses so that they don’t fail. These actions were legal upon the new law that was passed by the Congress, which gave the Treasury Secretary an authority to give money to the banks.
ReplyDeleteBasically, lenders failed in stabilizing the prices, so Bernanke decided to cut interest rates. But, it wasn't enough just to cut the interest rates so the banks were ceased by the gov't and the biggest corporation (bank), the Lehman Brothers, failed. The global insurance giant, the AIG, failed b/c of betting on spending funds and loans, which led to the downfall of the financial system. The Fed made 2 mistakes: the first mistake was that it made the money supply contract sharply and they let the banks fail basically without putting a lot effort to save them.
ReplyDelete