The Global Financial Crisis: History Repeats Itself

Previous to the global financial crisis formally hit the US, the foundations of the wider housing market is slowly being toppled by the subprime mortgage crisis.   Consumers who were borrowing recklessly along with excessive leveraging of Wallstreet brought the US to the brink.  The crisis has been compared to a hurricane in the middle of the summer season the focus of everyone’s thought was the extent of how Wallstreet messed everything up. 

Global investment bank Bear Stearns was the first to fall where it was eventually sold to JPMorgan Chase in March 2008.  Then President Bush and his Treasury Secretary, Henry Paulson, remained firm in the belief that there is still a strong foundation in the US economy and nothing has changed it.  Also that time, the White House was confining the subject to just the subprime mortgage sector. 

The next major institutions to fall are Freddie Mac and Fannie Mae which are two of the biggest US mortgage companies.  The federal government was forced to bail these companies out using taxpayer money amounting to $5 trillion.  Soonafter, Wallstreet collapsed.  Because of this, the five pure investment banks in Wallstreet which consist of Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks. 

The next major financial entity said to fall next is the largest insurer in the world, AIG.  There was too much riding on AIG to be allowed to suffer the same fate as the other institutions.  If not, the consequences would result to a new great depression.  It was considered a huge risk to let AIG fall since it has lots of link to many institutions where money is pretty much wrapped around it.  Thus, it was given by the Federal Government an $85 billion bailout in taxpayer money.

The collapse of these institutions and the fall of the stock market were events that are comparable before the great depression of the ‘20s and plenty of individuals thought that another great depression is on the horizon.  As the 2008 financial crisis was still building its momentum, easy money fueled the housing sector like a well-oiled machine that also happened in the 1920s.  Nearly every person can own a home ever since the Feds have lowered the mortgage rate to 1%.  Because of this, mortgages and other forms of loans were easily approved by nearly all banks across the country without doing some background checks.  The affinity to lie about how much money one makes was very common at the time and anyone who can present a credit rating passes.  Loans were even granted to people who don’t have jobs simply because lenders will not verify this critical information.

These risky loans were granted by lenders with utmost confidence because of a financing tool acknowledged as mortgage-backed securities.  They resold their loans in bulk to banks in Wallstreet and Wallstreet banks bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world.  Because of the “pooled risks” connecting many investors from other nations, these loans are believed to be protected and because of this viewpoint it was thought that it will always be protected. 

Since lots of people were affected, these were all a big mistake that dragged each and every individual from every corner of the world into financial difficulty.  The meltdown lead to companies getting bankrupt and closing which lead to job losses, which lead to foreclosures which lead to debt.  Now that the economies around the world are little by little recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes for a second time.