So I recently read articles talking about the recession of 2008 and how severe it was, but because I have no knowledge on economics and finance, I can barely understand what happened during the recession. I only know that it has something to do with mortgages. Would anyone care to explain the 2008 recession with some sort of analogy? Like in terms of slices of cake or something easy to understand? Thanks.
In: Economics
Okay. So basically banks wondered how they could make even more money. Economy seemed good. People wanted houses. They went to the banks. They started giving out risky loans they shouldnt have, as part of a larger plan. Yes they were risky but they hwd a fallback.
They began to sell what was basically “loan packages”. Where you would pay the bank a certain amount to take over these loans. This benefited the banks since they removed risk from themselves. They got rid of the risky loans they had been giving. The benefit to the buyer was that they now recieved money from these mortgage loan payments. Yes they were buying risky loans, but they were packaged with good loans so it all averaged out.
Everyone on both sides was making lots of money. Economy still doing great.
“How can we invent even more money for ourselves?” The banks asked.
“More loans!” They summised.
So they began giving out more and more risky loans. They would put more and more of these into the packages, but lie about it. The group of people who were in charge of determining how good these packages were, were being paid off to lie as well. (This is where the fraud came in. Up until this point what they were doing was shitty, risky, and basically just a way to invent more money for themselves, but it was not really fraud until this point. When you hear people ask why no one went to jail, this is what they are talking about. These people straight up commited fraud and it destroyed the economy.)
Businesses, investors, banks, everyone was buying up these packages. They were being called risk free, even as they were being fraudulently labled and created.
Then the market started to slow. Stopped doing so hot. People started not being able to pay back their loans. They started to be foreclosed.
Not such a big deal at first, but when it reached a critical point where enough people could not pay, it caused a chain effect if destruction.
Suddenly, all of these free money making packages that so many places and people had bought up, were doing the opposite. They were costing money. To recoup these, they began foreclosing on people’s homes. People had put all the money they had into their homes. They are always worth money, but at the time they were considered an investment and that too was gone. These packages all collapsed. Tons of “risk free” investments suddenly failed and a lot of people were out a lot of money. People were being foreclosed on with nowhere to go. People panic sold everything and tried to grab all that they could before it disappeared.
This kind of panic quickly steamrolls the market and the economy.
That is the short of it.
You can even see this occuring right now with Corona virus. The market is being hurt not just because people are afraid business will not be good. Many people are taking their money out of things like stocks and bitcoin so that they have money on hand to spend as needed and not risk losing it in the market. Panic is what makes the market drop. The fear of the drop creates the drop, so to speak.
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