The Great Recession E-Book

50MINUTES

• Herausgeber: 50Minutes.com
• Kategorie: Geisteswissenschaft
• Serie: Economic Culture
• Sprache: Englisch

Seitenzahl: 29

Veröffentlichungsjahr: 2018

Beschreibung

Understand the Great Recession in no time! Find out everything you need to know about this key moment in contemporary economic history with this practical and accessible guide.

The burst of the property bubble in the USA in 2008 saw millions of families evicted from their homes and soon led to a major worldwide economic crisis. The spread of the crisis and the presence of toxic assets in banks around the world laid bare the complex mechanisms used by financial institutions to avoid taking responsibility for risky assets and the arrogance of the largest banks, who saw themselves as “too big to fail”. In spite of large-scale efforts to mitigate the effects of the crisis, its consequences are still felt today.

In 50 minutes you will be able to:
• Identify the key causes of the recession, including the widespread use of securitization
• Understand how the crisis unfolded and spread around the world
• Evaluate the measures taken by national governments to mitigate its effects

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Leseprobe

The Great Recession (2007-2009)

The burst of the property bubble and the excesses of speculation

When: 2007-2009.Where: the crisis began in the USA, before spreading around the world.Context: when a speculative housing bubble in the USA burst, many homeowners ended up defaulting on their mortgage payments. Subsequently, a high-risk loans mechanism, through which lenders used securitization to transfer their responsibility to other financial organisations, came to light.Key protagonists:The government-sponsored organisations the Federal National Mortgage Association (FNMA, known colloquially as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, known colloquially as Freddy Mac).The major American merchant banks and insurance companies Goldman Sachs, AIG, Lehman Brothers, Morgan Stanley and JPMorgan Chase.Michael Burry (American physician and hedge fund manager, born in 1971) and Steve Eisman (American investor, born in 1962), who were among the first investors to foresee the impending subprime mortgage crisis.Key terms:Securitization: a mechanism introduced in the 1990s which allows banks to sell on the loans they have given out in the form of securities.Subprime loan: a type of loan in the US which involves lending to borrowers who may struggle to pay back the money, in order to purchase property or other goods.

In 2008, the world saw another side to America: when the property bubble burst and the financial crisis hit the country, onlookers learnt of financial practices that left thousands of American households homeless, emptied whole neighbourhoods of their inhabitants, ruined towns and drove numerous banks and insurance companies to bankruptcy.

This year marked the beginning of a localised financial crisis which soon developed into a worldwide economic crisis. Before long, the terms “subprime lending”, “toxic assets” and “securitization” began cropping up in everyday conversation and, through investment funds, these toxic assets threatened major European banks. Citizens became aware of the banks’ lack of transparency and the fundamental arrogance underlying the expression “too big to fail” used to describe the largest American and European banks. Governments around the world were soon forced to pump billions of dollars into bailout plans to rescue the ailing financial institutions.

As we will see in this guide, 2008 was the year the American dream became a nightmare.

Context

Harmful lending mechanisms

Subprime loans

Subprime loans were initially introduced in the 1990s to allow a less financially stable section of the population to get on the property ladder, but their purpose changed in the early 2000s, largely because of their higher variable interest rates and the state of the property market, which was booming at that time. The outstanding growth potential of subprime loans, also known as NINJA loans (No income, no job, no assets), attracted the attention of bankers, who planned to sell them on to other financial agents such as banks, insurance companies and investment funds.

But how do these loans work? In return for high, often variable interest rates, subprime mortgages allow households to borrow beyond their means, in the expectation that house prices will continue rising indefinitely. This allows these households to secure credit, sometimes taking out multiple loans for the same property. If borrowers find themselves struggling to make their repayments, they have two options:

Take out another loan for a higher amount, based on an upwards revision of the value of their property, in order to make the monthly repayments for the initial loan.