The 2008 crisis plunged the economies of all the major countries around the world. WTF happened in the global financial crisis? The 2008 Global Financial crisis, explained for dummies.
Banks started to lend money to people who didn’t have higher credit ratings, and therefore, were less likely to pay the banks back (these are called subprime mortgages).
WHY WOULD THEY DO THAT?
Banks got greedy. The real estate sector was booming at an enormous rate (i.e. you bought a house and it rose in value). So the banks thought: ok, worst case scenario, if they don’t pay us back, we will take their super valuable houses.
LET’S BUY HOUSES!
A lot of people took these subprime mortgages because they thought they would make a large profit if their house increased in value and many Americans saw the opportunity of finally owning a hose.
- In 2007, many people couldn’t afford to pay back loans, which put many houses back on the market for sale. Now supply was up and demand down, which means home prices fell.
- As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth.
- Investors immediately stopped all investings in the real estate sector.
- Subprime lenders were getting stuck with bad loans and some declared backruptcy (e.g Lehman Brothers).
- 8 million people lost jobs and 4 million homes were foreclosed.
- Financial firms didn’t have enough resources to lend out any more money as they themselves were in a huge loss.
- The US government stepped in to bail out the banks by increasing the national deficits.
- The crisis spread from the US to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. The 2008 global financial crisis for dummies explained.