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The Big Short Essay

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The 2007-2008 financial crisis was the culmination of events that lead to the demise of the US economy. In the film The Big Short, Michael Burry an investor from Scion Capital, notices that the housing market is very unstable and could crash atany time. He plans to short the housing market by purchasing credit default swaps. Credit default swaps were designed as safety net for banks, because of the mortgages they sold. When a homeowner gets a mortgage, the bank posses some risk that the homeowner might not pay their mortgage, so the banks looks to an insurance company to sell them a credit default swap. That way bank will get their money even if the homeowner defaults on their payments, inreturn the insurance company only take a little bit …show more content…

The average price of a house skyrocketed 124% between 1996 and 2006 (CSI). This lead homeowners to believe that if they bought a house it’s value would only go up, therefore making them money. This unfortunately didn’t happen because to many people defaulted on their mortgage. In 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004, and 4.6 in 2006 (CSI). This upward trend shows the trust being gained from the american people in the housing\ market. People felt confident that they could afford an expensive house because they were lured in with low adjustable interest rates, that then increased to an outrages rate in a few years. As more and more subprime mortgage owners defaulted on the payments it trapped those in adjustable mortgage rates. With interest rates rising it caused many to default on their payments or take out a second mortgage with they couldn’t afford. By August 2008, 9.2% of all US mortgages outstanding were either delinquent or in foreclosure, by September 2009, this had risen to 14.4% (CSI). This lead to a huge number of house for sale and nobody able to buy them. As a result prices fell leaving people paying more than what there house was worth. This caused even more people to walk away from their mortgage because it was a waste of their

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In Addition to maldistribution stood the credit structure of the economy, some farmers were in deep land mortgage debt, so they lowered their crop prices in order to regain credit, and because the farmers were no longer accountable for what they owed banks. Across the nation the banking system found themselves in constant trouble. In America both small and large bankers were concerned for their survival, so they began investing recklessly in stock markets and granting unwise loans. These unconscious decisions would lead a large consequence, such as families losing their life savings and their deposits became uninsured. “ More than 9,000 American banks either went bankrupt or closed their doors to avoid bankruptcy between 1930 and 1933.”Although

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This lost many people money because they were unable to pay their growing debts. This did not only effected the people involved, but it rocked the whole country’s economy. It was losses on mortgage securities like those involved in this case that triggered a loss of confidence in the U.S. banking and financial system (Irwin, N. (n.d.). Everything you need to

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People were forced to sell their homes to deal with the rising mortgage rates and no jobs to pay it off. People have become homeless, in debt and have no source of money. People were dying from hunger and no affordable health care. The country has dipped into its

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"Great depression?" they gasped. Consumer confidence plummeted, as did consumer spending (which accounts for a stunning 2/3 of US GDP). Corporations, in a mass panic, swiftly switched into a mode of panicked layoffs and cost cutting. The banks, already spooked, continued to tighten their lending not just to consumers but to corporations and other banks as well. And ditto for the rest of the world.

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