ipl-logo

Summary: The 2008 Financial Crisis

1453 Words6 Pages

When thinking of the 2008 economic crisis, the first thing that comes to mind is the housing market bubble. There are many factors that come into play regarding why the housing market crashed. Historically, real-estate was always a solid and stable investment. But with the development of the complex packaging of mortgages, a bubble was created through lenient credit agencies with little government regulation, as well as fraudulent deceptive practices by mortgage brokers, leading to a crash in the global economy. The primary reason for the 2008 financial crash was the housing market. It is not necessarily that the nature of the housing market was itself volatile, but rather because of the irresponsibility of credit rating agencies and banks. …show more content…

Eventually, what began to happen was the private sector started to create mortgage backed securities using sub-prime mortgages. A sub-prime mortgage is a loan given to somebody with a low credit score and or insufficient income to make the monthly payments on the loan. The banks needed to develop new ways to package these sub-prime mortgages in order to market them as beneficial. By packaging them together and having rights to cash flows, they were able to receive the best ratings from the credit rating agencies. Along with having a perfect rating they were also backed by insurance in case of default. This further perpetuated the bubble as investors were under the illusion that these securities were completely safe to invest …show more content…

Technically the bank did not give out the loan The originators of the loans are called mortgage brokers. These brokers used numerous deceptive practices to sell homes to people who couldn’t actually afford it. To make matters worse, they worked on commission. So they were incentivized to open up as many loans as they could. One of the deceptive practices used was offering adjustable rate mortgages. This means that for the first three years the buyer only has to pay a seemingly affordable monthly payment(Aziz 212). But after the three years is up, the payment significantly increases. Brokers would tell buyers that in three years you will not have to worry about the increase, because the value of the house will increase enough to refinance. They would also claim that your salary will increase enough in order to afford the new payment. Another practice similar to this is “interest only loans” and “negative amortization loans.” With the “interest only loan,” the buyer pays only the interest, rather than initially having to pay the principle. On top of that, with the “negative amortization loan,” the buyer doesn’t even have to pay the entire monthly interest. It eventually adds up to the point that the buyer cannot afford

Show More
Related
739 Words | 3 Pages

Overall, it was the combination of the desire for money mixed with ignorance towards making quality financial decisions that led to the financial crisis. 2. In the past, to get a mortgage you had to go through a series of steps; list them. Show up at the bank with tax records, pay stubs (to verify your income) and proof that you have enough savings to make a 20% down payment

Read More
590 Words | 3 Pages

Even though many factors contributed to cause the Great depression, many argue that the biggest contributor was the stock market crash in 1929. During the years, previous to the recession, real state became very popular market to invest in. People were borrowing a great deal of money from banks to invest on purchasing lands, fixing roads, building houses, and buying houses. Even though people did not have enough money to repay their loans, they continued to borrow more, because of low tax returns. People believed that if they waited longer to invest, prices and interest rates will increase.

Read More
1053 Words | 5 Pages

Leuchtenberg sad, “There was no single cause of the crash and ensuing depression,” [Doc2]. Many things as stated earlier contributed to the crash, such as overexpansion of credit, goods, industries and rising rates of unemployment. Many Americans saw the Stock Market as an easy way to create wealth by buying stocks cheap, usually at a margin, and selling for a higher price, hopeful to profit. Buying on margin was the act of paying some money on a stock, but loaning the rest from a bank who expected would be paid back when profit was made. Stocks became more expensive to the point where nobody wanted to buy them because of their extreme price.

Read More
426 Words | 2 Pages

It essentially is when the someone borrows money from a brokerage to purchase stocks, which allows them to buy more stocks than they normally would. The loans are backed up by the borrows past investments. To buy a home with an on-margin loan, it would be similar as to buying stocks. It is backed by past investments, and essentially can be used for anything, but in this case, it is used for a home.

Read More
462 Words | 2 Pages

With these new installment plans people were buying more unnecessary expensive things. Like, buying a 35,000 boat instead of the 10,000 when they work the exact same but the 35,000 has a few more details. But because, these people were on installment plans the

Read More
1069 Words | 5 Pages

The Stock market Crash was one of the causes of the Great Depression. One cause of the Stock Market Crash was the stock exchange. This led thousands of Americans to invest in stocks and lose money. Many Americans borrowed money from the bank to buy stocks. Most of the time, people who lost money were unable to pay the banks back their debt; which caused banks to fail.

Read More
535 Words | 3 Pages

Why it happened? There are number of reasons why it happened but to give you a direct debrief some of the reasons were that people were not purchasing enough across the board with the stock market crash people were

Read More
994 Words | 4 Pages

Consequently, this method of purchasing goods became a huge problem because some buyers were unable to repay the lender, putting them in debt and hurting businesses. Money was not being used responsibly during this time period leading to the Stock Market Crash in 1929. There were so many events and foolish actions that people consider as causes of the worst economic downturn. Speculation,

Read More
460 Words | 2 Pages

When the stock market crashed, wealthy people had all their saved money wiped. People couldn’t really take loans out because they were in debt owing money to the bank. After banks shut down, then local stores, factories, and restaurants all shut down. This then escalated into unemployment. Over 600% of citizens were unemployed and had no income.

Read More
810 Words | 4 Pages

The crash was caused by people doing more and more installment buying and they did not have the money to pay for everything they bought so basically everybody stopped buying the things they wanted at the same time because they all had the realization that they had no money. As document 5 titled A History of the American People it is stated that, “The final development that set the stage for the collapse of American prosperity in 1929 was the speculative boom that developed with increasing intensity. . . more investors put their money into securities(stocks). . .” This is supporting the fact that when the stock market crashed people lost more than they ever thought they

Read More
878 Words | 4 Pages

The timing of these failures, the bank’s lack of dealing with them effectively, and the brevity of the Stock Market Crash caused the economy to suffer

Read More
1374 Words | 6 Pages

The stock market crash was one of the major causes of the Great Depression. During the Great Depression, the American people were struggling. Franklin Delano Roosevelt, the President at the time, had a plan to help the people. He called his plan the New Deal. Ultimately, the New Deal was successful

Read More
642 Words | 3 Pages

People invested in stocks and bonds, hoping to make a quick profit. However, this growth was not sustainable, and several factors led to the crash. Firstly, there was overproduction in the industrial sector, which created a surplus of goods, and the demand could not keep up with the supply. This led to a decline in prices and profits, which affected the stock market. Additionally, many people borrowed money to invest in the stock market, which created a speculative bubble, and the prices of stocks were artificially inflated.

Read More
709 Words | 3 Pages

For years the banking company sold subprime mortgages to companies and home owners. A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages (Carther, S. (2007, September 2). What is a subprime mortgage? Retrieved August 2, 2015.). In some cases, there were obvious red flags that should suggest the seller would not be able to afford to their mortgage.

Read More
585 Words | 3 Pages

America had experienced other depressions or “panics,” but none were like the Great Depression. The Great Depression began on October 29, 1929, Black Tuesday, with the stock market crashing. Most people believe that the cause of the Great Depression was the stock market crashing. Although that is what triggered the Great Depression there were many underlying causes that lead up to the stock market crashing. Some of the underlying causes include under-consumption/over-production, uneven distribution of wealth, loose banking and corporate regulations, tariffs policies, and the stock market.

Read More

More about Summary: The 2008 Financial Crisis

Open Document