Late-2000s financial crisis
The Late-2000s financial crisis is an ongoing economic crisis. Many economists say that it is the worst financial crisis since the Great Depression during the 1930s. Many important businesses have shut down because of it, which has caused many people to lose their jobs. This means that people have been buying less, which is very bad for the economy.
Background and causes [change]
There are many reasons economists think this happened. Most economists believe that it started in the United States. From 1997 to 2006, people bought very expensive houses even though they did not have enough money. But because of the money coming into the U.S. from other countries, it was easy to have good credit. People used this credit for expensive home loans. This created a housing bubble, which made the price of houses rise more. Because they had a lot of money, the loaning companies made it easier to get a loan, even if the borrower didn't have a good credit history. These loans are called subprime loans.
During this time, many refinanced their homes. This means that their mortgage was changed so that they had lower interest. After they refinanced, homeowners could take out another mortgage to use as spending money. The loaning companies changed their loans so that they had low interest at first, which would increase later. This is called adjustable rate mortgage. The companies did this to try to convince more people to take loans. Many people with subprime loans also took these adjustable rate mortgages, hoping that the good price of housing would help them refinance later.
While the housing prices were still high, many American and European companies, including banks, invested in subprime loans. These investments gave more money to the loaning companies, who used it to give out more subprime loans. These investments would make a lot of money as long as the prices of housing was high.
However, the housing companies built too many houses. This caused the price of housing to decrease beginning in the summer of 2006. When this happened, many people were paying more money than their homes were worth. This is called negative equity. About 8.8 million homeowners in the U.S. had 0 or negative equity by March 2008. This caused the number of foreclosures on homes to increase, meaning that many people lost their homes. During 2007, almost 1.3 million U.S. homes could be foreclosed on. The number of houses for sale continued to increase, which made the prices decrease. The homeowners with subprime loans left their houses with less value than they had when they were bought, which meant that the loans were worth more money than the house. This meant that the loaning companies were not able to make money from these houses.
The collapse of the housing bubble caused the value of investments to fall. The companies that had invested in subprime loans lost a total of about $512 billion. Citigroup and Merrill Lynch were two of the companies which lost the most money. More than half of the money lost, $260 billion, was lost by American firms.
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