It depends on who you ask. I work in the mortgage industry for a company that never got into subprime loans, we never sold nor bought these mortgage securities which are the major cause of problems right now. We never did 100% financing loans- we always required a down payment.
I blame the people who bought these houses. Over the past 10 years Americans have used their homes as an ATM. When your house goes up in value, you can refinance and pull money out of your home. Say you buy it for 100K, in 5 years it's worth 200K, you can refinance and take that extra 100K out of the house- you get a big fat 100K check to spend however you want.
Americans started relying on their homes to take care of their spending. There were also mortgages with VERY low rates and payments (subprime loans). A person working at McDonalds on minimum wage could have qualified to buy a 200K house 5 years ago.
To the average frugal person- they KNOW that is not right. Just like our grandparents had to pay cash for everything so they never bought what they couldn't afford- the availability of credit today makes it too easy for people to spend what they don't have, including buying houses they can't afford. But these people felt entitled to own a home and there were lenders willing to let them have these houses on minimum wage. The lender assumed the home would be worth 400K in a few years so they didn't worry if the borrower stopped paying their mortgage- they could sell for a profit. When house prices started falling, that is when everything came to a halt.
Could government have stepped in 3 years ago to control this? Most definitely. Did government know it was happening and could crash and take the economy with it? Most definitely. But the government can't stop stupidity or greed. Most of this is caused by these two characteristics- people who were stupid, or greedy, or both.Can anybody explain to me in a plain language the cause of the recent financial crisis?
There has been a housing boom in America these recent years. Now of course people would buy them, and, as most of the time, once they had already bought the house they had loaned it to a bank. Now what happened is most of those people who bought the houses can no longer afford to continue paying the house they bought. Now what happens when you can't pay your house? Just like what happens to the car you can't pay, the bank takes it back. Now the bank owns the house. To convert the house to real assets, they have to sell the house so that they get the real cash.
Now the problem is they can't sell it because there are already many houses with clean titles out there due to the boom. As with the law of supply and demand, the more the supply there are the cheaper the prices get. And that is what is happening: American houses get cheaper. And of course that's bad for the banks because that means that what they had bought from you for 100,000 dollars is only worth now for 70,000 dollars (that is for example). And that is a big loss on the big scale considering that the banks have reclaimed hundreds of thousands (or even millions) of houses through these years.
And that is the reasons why American banking and housing institutions were the first ones to be hit severely. And these includes the largest of American banking institutions, institutions where other banking institutions put up their money for investment. But that investment is gone since the banks (Lehman et al) where they've invested are already bankcrupt. Chain reaction: other financial institutions close too.
Now the panic comes in: people from stock exchanges around the world panic at the situation. And of course, in the panic they sell the stocks of the still standing financial institutions they own to evade the lost of their money in a belief that those institutions will close too. In a general sense, people also start withdrawing money from banks so that they can "save" theirs. But actually this makes the situation worse since if you withdraw your money from the bank or sell one's stock the more you are actually sentencing the company to its death. If millions of people withdrawn their money, what are those banks going to use. None. They go bankcrupt. If hundreds of people sell a company's stocks, the stock prices of which company will become cheaper, the value of their company become cheaper in a point on which they have to close or be nationalised in some countries like UK or Iceland where most major banks were took over by the national government.
Let me preface my answer my saying that I'm not an economist and I don't work in any aspect of the financial industry; I'm not a banker or an investor. But economics has been an interest of mine since taking macro-economics (et al) in college and reading Milton Friedman's book _Free to Choose_ (et al). ("Et al" is Latin for "and others.")
Quick answer: greed (on the part of lenders) and people living beyond their means.
More in-depth answer (prepare for _War and Peace_):
We had the housing-bubble in which large numbers of homes in different parts of the country were extremely over-valued. Hold that thought.
Sub-prime mortgages are home-loans made to people who can barely afford the payments (if at all). Some of these were structured so that re-payments did not begin until a year or more after the loan was made. The borrowers were fine--until they had to start making payments.
As an aside, the sub-prime mortgage industry was created with good intentions: to enable more people to be home-owners. For most people owning your own home is a good thing. Building equity in a home is another way of saving money and preparing for retirement. And it's a fact that people take better care of a home that the own as opposed to one they rent. Then there are certain intangible benefits like "the pride of ownership."
Other loans were structured with variable interest rates, meaning that the interest rate wasn't fixed; it could go up or down over time. Some borrowers could barely make the payments when the interest rate was low--and then the interest rate went up and they could no longer make the payments. (In some cases it just became "inconvenient" to make the payments).
And of course there are always some people who have a run of bad luck. They were making their payments--but they lost their job (or had catastrophic health-care costs or went through a divorce, etc.)
Another aside: in many cases the lenders knew darn well that the person that they were lending to had no business borrowing the money--couldn't afford it--but they were paid partially or completely on commision, so they had maximum incentive to make as many loans as possible. "Tar and feathers!!"
So we had large numbers of unqualified borrowers (as well as some otherwise qualified borrowers) buying homes that were over-valued (weren't worth what they paid for them). A recipe for disaster. "What goes up must come down." Eventually the housing-bubble burst and the appraised value of a great many homes dropped, practically overnight.. Suddenly large numbers of people were stuck with homes that were worth less than what they owed. Many of them "voted with their feet."
So now you had large numbers of lenders, to include banks and some insurance companies, with a whole lot of "bad paper." (Insurance companies make more money from investments than they do the premiums that the insured pay). Huge numbers of people were defaulting on home-loans in a short period of time. There are a number of other nit-noid issues that were in play--e.g. "margin calls," what ever that is--but I'm not qualifed to comment on those.
As we saw, a number of banks and other lenders "failed." Went belly-up. The federal government has allowed some to fail and bailed-out others.
All this was bad enough but then we entered Part 2 of the crisis. Lenders saw all this debt being defaulted on and were suddenly quite skittish about making loans. And not just home-loans but all kinds of loans: cars, student-loans...and, very important, "commercial paper."
Try to see it from their point of view: would you loan money to a total stranger if you perceived a significant risk that they couldn't or wouldn't repay you?
What is commercial paper? I barely understand it myself but simply put these are the day-to-day loans that businesses of all sizes use to fund daily/weekly operations. Mom-and-Pop Company has fifty employees. They just completed manufacture-and-delivery of a *Huge* order of...widgets. By the terms of the contract the customer has thirty days to make payment. The payment is going to be *huge*--when they get it--but payroll for fifty employees is due on Friday and they don't have it. What do they do? They take a short-term loan.
Suddenly the commercial paper industry contracted. Loans didn't stop completely but decreased enough to cause real pain. It's my understanding that at one point six-trillion dollars in capital, world-wide, that normally would've been moving every day--was suddenly and effectively frozen. A *lot* of those day-to-day loans suddenly ceased.
Which brings us to Part 3 of the Crisis, the stock market. What determines the value of a stock? A number of things, many of which I don't know or down't understand. Price-to-earning ratio, P/E, for one thing. How much does the stock cost versus how much is it earning?
But simply put, the stock market is a bet on the future. When invesCan anybody explain to me in a plain language the cause of the recent financial crisis?
Government Encouragement of risky down payments
Government lining their pockets with money, both dems and republicans.
Lenders taking it an extra step and giving out loans to anyone who can fog a mirror
Low borrowing rates increased leveraging and investment in to non-performing assets
Mark to market accounting principals bring banks to their knees (if you can't sell a security it is worth 0, even though it is performing or has a house as collateral which it does have value in reality)
Quick Answer!? I'll try....
US Lenders lending money to people who could not afford to borrow it, hoping that the real estate market would continue to grow. When RE bubble burst banks could not recover money that they had lent out. Now the Banks lend each other money (investment) and all of a sudden US banks are in trouble and other countries banks say "hey where's my money" that they had lent and they then go under. Basically too many people borrowed too much money that they couldn't afford.Can anybody explain to me in a plain language the cause of the recent financial crisis?
http://www.thislife.org/Radio_Episode.as鈥?/a>
and
http://www.thislife.org/Radio_Episode.as鈥?/a>
It's 2 hours long, but a very thorough explanation in plain language.
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