eli5 2008 Global economic crisis
In: Economics
The catalyst for the crisis was the collapse of housing bubble in the United States, which caused a large amount of banks and financial companies to collapse. Since the United States economy is so dominant and intertwined with the world economy, the problems spread throughout the world.
The housing bubble itself was caused by a massive amount of reckless lending by banks and lenders. Basically, lenders made it extremely easy to give people mortgages for housing – not even requiring proof of income or money from the applicant. So this meant that it was very likely for the mortgages to not be paid. The lenders would then sell bundles of garbage mortgages (called securities) to larger financial institutions while lying and saying that they were virtually risk free, as mortgages bundled up like a traditionally considered a very safe investment for banks. So safe, in fact, that there were a lot of secondary markets that were set up to trade these bundles and related financial instruments.
Eventually, the bad debt that a bunch of financial institutions had bought up starting going into default. It turns out that the mortgages were so worthless that they couldn’t cover the losses, and major financial institutions went bankrupt. All of the secondary markets also collapsed.
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