why and how the 2008 economic crisis happen?
In: Economics
The major cause of it was collapse of the housing bubble in the United States.
Basically in the years leading up to it, banks and other major financial institutions began to lend a lot of money (house mortgages) to people that couldn’t really pay it back. Why did they do this? Because they would bundle up these loans (bundling them up made them look less risky than they actually were) and sell it to other people, who thought that these loan bundles were really secure investments.
The banks made tons of money off of this, and so they basically would give out massive loans to people that might not even have jobs since they could just sell the loans to someone else and then they didn’t worry about what happened when the borrower couldn’t pay the loan back. Since anyone could get a loan, this drove housing prices up, which created a really big housing bubble. Importantly, secondary markets began to develop around these loans – that is, they became assets that were passed around the financial market and could be used as things like collateral for *other* loans. On paper, these bundles seemed great since even if the borrower defaulted on the loan (not super common generally), the owner of the loan could sell the house to offset the loss. So these loan bundles were very desirable.
Anyway, eventually the borrowers *weren’t* able to pay back their loans and started defaulting. Well, that’s fine right? The owners of the loans could just sell the houses, which were theoretically worth a lot since the mortgages were big. Well, this is when the housing bubble popped. Suddenly there were tons of houses on the market (nobody was paying their loans so the banks tried selling them) and nobody wanted to buy it. The prices cratered. It turns out that house bought by somebody with no job wasn’t worth $500K, after all. So that means companies with a ton of these loan bundles had a bunch of literally worthless items on their balance sheet – and maybe these loan bundles were what kept them solvent on paper. So companies start collapsing and *trillions* of dollars of theoretical wealth has evaporated practically overnight. This economic mayhem spreads to other places in the world.
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