A Lesson Learned From The Global Financial Crisis

In the years ahead of the global economic crisis, the foundations of the wider housing market is gradually being toppled by the subprime mortgage crisis.   The US was brought to the edge because of reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings.  The crisis has been compared to a hurricane in the middle of the summer season the focus of everyone’s thought was the degree of how Wallstreet messed everything up. 

Bear Stearns is a global investment bank that was the first to go down where JPMorgan Chase saved it by absorbing it in March 2008.  Henry Paulson, who was the treasury secretary at the time declared to the public 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 issue to just the subprime mortgage sector. 

By August 2008, the next mortgage companies to fall are Freddie Mac and Fannie Mae.  The Government decided to bail them out by shelling out $5 trillion in taxpayer money.  The collapse of Wallstreet came about soonafter.  Because of this, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, were either reduced to being depository banks or collapsing altogether. 

AIG,the world’s largest insurer, is said to fall next.  AIG was too valuable and letting it fall was unimaginable.  Otherwise the consequences would result to a new great depression.  Letting AIG fall was a huge risk seeing as it has lots of link to many institutions where money is pretty much wrapped around it.  Hence, it was given by the Federal Government an $85 billion bailout in taxpayer money.

These unfortunate events that different financial institutions went through together with the stock market’s collapse were events mirroring that of what happened prior to the 1920s great depression and lots of individuals believed that another great depression is on the horizon.  Before the financial crisis in 2008, easy money fueled the housing sector like a well-oiled machine that also happened in the 1920s.  From the time when the US government lowered the mortgage rate to 1 percent, people of every status could practically own a house.  Loans including mortgages were granted to almost everyone without doing some background checks.  A lot of loan applicants lie about how much money they make and they only need to submit a credit rating and they are approved of the loan.  Jobless people were even able to obtain loans simply because this crucial information are not verified by lenders.

Lenders are willing and confident to grant “risky” loans because of a financing tool identified as mortgage-backed securities.  These loans were bulked and resold to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world.  These newly converted loans then became “pooled risks” as many investors across the world now have their share on them and because of this aspect it was believed that it will always be safe. 

In the wake of all this, these were all a big mistake that dragged each and every individual from every corner of the world into financial struggle.  Both lower, middle and upper middle classes suffered financially because of human greed and error.  Now that the economies around the planet are slowly recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes again.