The 2008 financial crisis was unlike anything the country had ever seen. It was caused by a compilation of greed and poor decisions. Each one of those acted like a Jenga tile, removed from the tower individually, it wasn’t too bad, but when all of them were taken out, the entire market collapsed. The three main Jenga tiles were interest rates dropping to 1%, subprime mortgages, and the failing of banks. Interest Rates The beginnings of the crash have ties all the way back to 2001, when the Federal Reserve lowered the federal funds interest rate from 6.5% to 1.75% over the course of the year. This resulted in big banks having more access to borrow money from the Federal Reserve. They used this surplus in funds to give big loans for mortgages …show more content…
The banks were able to trick buyers into these loans by offering them rates that were low initially but after the first couple years, the rates would spike, leaving families unable to afford their new home. Once the introductory rate period was over the homeowner’s monthly payments would become so high they defaulted on the loan. This left the banks and all of their investors with empty houses and no income from the mortgage. THE BUBBLE THAT BURST AROUND THE WORLD PART TWO3 Mortgage Backed Securities A mortgage backed security is a bond that is secured by various typed of real estate loans. The way a mortgage backed security works is, when a bank issues a home loan to a buyer they must hold the debt of that loan for its duration, this keeps money tied up in banking systems for long periods of time. In order to free up this money, the banks sell bundles of these loans to investment banks, who then open them up for outside investors to buy into. Like all other practices at this time, the success of these programs relies on homeowners making their payments. When the homeowners began defaulting on their loans, the flow of money was cut off and the banks began to