America’s economy forever changed following a disastrous event taking place on September 29, 2008. To comprehend the events of the situation, the primary logic of banking requires initial understanding. The system in which loans were distributed was that someone would require a loan from a bank, and the bank would ensure they are a good candidate by referencing their credit score and job history for reliability of payment. It is also crucial to understand that the bank is able to distribute money on hand from the salaries deposited by citizens. Generally, banks will stock money by selling bonds to individuals promising to pay back the money they received with a specific rate of interest over a certain time period. They would then be able to pay back these loans by charging higher rates of interest to the individuals they loaned money to. They would keep the difference and be able to recycle this cash.
However, this tragic downfall initially emerged with the intent of having all American citizens be able to achieve the “American Dream”. Fannie Mae was the company responsible for this, and lenders began distributing many mortgage loans with more unusual terms to support the likelihood of failure to pay. The housing market was at a favorable juncture, acting as the reasoning behind these decisions. The banks ignored the need to check the candidacy of the loanee, but charged them significantly higher interest rates.
The amalgamation of exorbitant interest rates and faulty reliability resulted in the lack of payment from many individuals. As a result, they were then forced to foreclose the homes. The rate of foreclosure skyrocketed in an incredibly short span of time. Banks were then left with a superfluous amount of homes with no use. There was frankly a non-existent source of cash income as the individuals would not have to pay interest on these foreclosed homes. Banks were left with no way to pay back the interest for the bonds they initially gave out. The only choice was to sell the houses for liquid cash.
The issue was that with all the sudden foreclosures, the housing market had plummeted. It spread rapidly as if the price of one home fell, so would the prices of the homes in the remainder of the community. The prices the houses were sold at were so low in comparison to the price it was loaned out for, so billions of dollars were lost.
Banks had to announce bankruptcy and it was “the largest bankruptcy filing in U.S history up to that point.” Repercussions seemed to endlessly occur. The unemployment rate spiked to 10% with nearly 9 million jobs being lost. Retirement savings numbers descended. The combination of deteriorating stock and losses of home value totaled to be close to $100,000 per house. This cost the U.S nearly $648 billion dollars.
Government intervention eventually took place. They funded the money to pay for the difference of what the banks did not have. This number was still exceptionally costly with the entire series of events being perceived as unreal and extraordinarily frustrating. Congress also passed the American Recovery and Reinvestment Act of 2009 in an attempt to restart the economy and allow citizens to find new areas of employment.
With the unimaginable and destructive events of this situation being resolved, it can be observed and presumed that banks will be cautious with similar circumstances. While the effects of the market crash proved to be brutal and enormously tormenting, crucial lessons can be derived from this incident to ensure that history will not have to repeat itself in this particular manner.
Lusk, Veneta. “The Market Crash of 2008 Explained.” Wealthsimple, www.wealthsimple.com/en-ca/learn/2008-market-crash#who_predicted_the_market_crash_of_2008. Accessed 30 Sept. 2023.
Mccaig, et al. “Meltdown 2008 Stock Photo.” Stock Market Crash 2008 Photos and Premium High Res Pictures - Getty Images, www.gettyimages.com/photos/stock-market-crash-2008. Accessed 30 Sept. 2023.
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