Kathyannie Torres Mr. Katzenmoyer Social Science November, 2016 Economic collapse of 2008 The financial crisis of 2008, also know as the global financial crisis, is considered, by many economics, worst since the Great Depression. During that time, many banks were buying mortgages securities to make easy money with low risks. But, many people were defaulting in their mortgages and no one were buying houses at the same time. And because of that, banks starting losing money fast, and people were losing their jobs. One of the problems was the housing crisis. It all started when the investors, traders, and bankers were putting their money into U.S. housing market, the price of homes were going up and up. And so people weren’t able to pay for their …show more content…
Mortgage backed-securities are created when large financial institutions buy up thousands of individual mortgages, bundle them together, and sell shares of the mortgages to investors. Many investors bought these investments, hoping they could get a better return from the interest rates homeowners paid on mortgages. Many believe it was safe because home prices were going up and up, and when the borrower defaults, they could sell the house for a higher price. Also, credit agencies were telling investors that these investments were safe, so many investors bought more. It was only a safe investments when the mortgages were only for borrowers with good credit. Because investors were desperate to buy more of these securities, lenders had to create more of them, but they needed more mortgages. So the lenders started to loosened their standards and made loans with people with low income and bad credit. Lenders also started to make loans to people without verifying income and offered adjustable rate mortgages with payments people could afford at first, but quickly went up when they couldn’t afford to pay it. When there were many defaults, big financial institution stopped buying subprime mortgages, and lenders were stuck with bad loans. Many big lenders had declare bankruptcy, and it was spread to the big investors who’d poured their money into these securities, who started losing money on their …show more content…
TARP is created and run by the U.S. Treasury to stabilize the country’s financial system and to restore economic growth. In 2008, they try to buy the banks bad assets to restore the economy. It also reduces the potential lossing banks. The rules demanded that the companies would lose certain tax benefits and forbid them giving bonuses to their top 25 highest-paid employees. The banks were okay with being apart of TARP, Paulson proposes the deal to the Congress, but it was rejected at first, but later on approves the bailout. And the last solution was Capital injections (Nationalization). “Capital injection is an investment of capital into a company or institution, generally in the form of cash, equity or debt.” (http://www.investopedia.com/terms/c/capital-injection.asp). This method was used in attempt to stabilize the global economy. But, some of the international financial institutions were unable to recovered from the 2008 economic crisis, and so they required constant capital injections.Till this day, many institutions still need capital injection in order to keep the economy