The current climate of the economic
crisis is a scary one. A lot
of pundits, experts and talking
heads are slathered across the
airways, trying to tell you what
to do and how to think. So
what’s this financial bailout
mean? Why should the economic
crisis matter to students at
Bucks?
Banks closed, Wall Street
dropped and the fed went into a
panicked frenzy over what to do.
But what really happened? How
did this all start?
The housing bubble broke, say
the financial pundits. Just a few
months back the U.S. was in a 10-
year high for housing. Every
year, the values of homes were
increasing, going up higher and
higher as each year passed.
The housing market became a
wild west of business.
Thousands of people were buying
homes, renovating them and
waiting for them to continue to
increase in value before turning
them over, selling them off to
make a profit.
In order to buy these homes,
banks issued a substantial number
of home equity loans across
the nation.
The banks, wanting the continued
good business of these
“entrepreneurs,” began issuing
loans to people at an unprecedented
rate, and even handed
out loans to groups with poor
credit, and in some cases, no
credit at all.
This market of poor credit/low
credit/no credit consumers is
known by many in the financial
sector as the sub-prime. The borrowers
within the sub-prime
market are those who have a
higher risk of defaulting, many
of whom have a previous history
of loan defaults, bankruptcy or
simply little to no debt history.
The banks proceeded to do
what many critics considered a
predatory lending tactic. They
began to give out adjustable APR
home equity loans with an outrageous
amount of hidden fees and
conditions.
Banks were giving out loans
with hard-to-pay clauses in them
to a market of people who had a
previous history of not paying
back loans. The banks were getting
greedy, lusting over the
profit that could be taken from
the increasingly profitable housing
market.
When the loans in the subprime
began to default, the
banks foreclosed and sold off the
homes. With the continued
growth in the housing market,
financial institutions were actually
able to make more of a profit
off of selling a home with
increased value then from just
the loans themselves. Seeing this,
many lenders began to give out
loans even more, specifically targeting
the sub-prime market. Then, the inevitable happened.
After a 10-year high, the housing
market began to drop dramatically.
The demand for homes
simply wasn’t there, and the
marketplace adjusted the prices.
The market dropped from $20
trillion in value to merely $12
trillion. Houses plummeted in
value, month after month,
becoming, in many scenarios,
worth less then the original
value of the loan.
The defaulting continued to
occur during the housing market
crash. Just as predicted, the subprime
market was not able to
pay off the unfair loans given to
them by the lenders, and more
and more banks received foreclosed
homes, this time, worth
less then their initial investments.
With thousands of homes in
their possession that were relatively
worthless compared to the
loans issued, and more loans
continuing to default, banking
institutions began to sink into
debt, unable to make back the
investments they lent just a few
years prior.
The first sign of trouble was in
March 2008, when Bear Stearns,
one of the largest investment
firms, collapsed. The Federal
Reserve tried to save the brokerage
firm by issuing an emergency
loan. In the end, it did not
matter; Bear Stearns stock
dropped, and JP Morgan bought
Bear Stearns for a measly $10 a
share.
In just a few short months,
other financial institutions began
to see the same effects. As debt
began to build up, banks had
begun to drop like proverbial
flies. By September 2008, there
were enough banks in financial
distress that there was a risk of a
loan freeze.
Worries about accumulating
more debt forced firms to simply
not give out as many new loans.
There was a slow crawl in loan
issuing, to the point that it risked
the financial stability of the
entire country.
The bread and butter of the
American economy is in loans.
Bank-issued loans provide
employers with the liquid assets
to pay the salaries of their workers
regularly, for local counties
with short-term cash funds to
pay for civil services, for homes
to be bought, for leases to be
upheld. This economic engine
relies on the liquid flow of loans
from our banking institutions.
The systematic destruction of
established banking institutions
caused Wall Street to crumble.
With worries that loans were
going to freeze, shareholders
began to frantically sell their
stocks from some of the largest
companies.
The frenzy of selling forced the
stock market to drop to its lowest
levels in years.
The Emergency Economic
Stabilization Act of 2008, better
known as the “Bailout plan,” was
designed to try to prevent a
freezing of the lending industry.
By providing $700 billion to loan
to the banks, it, in theory, would
provide the banks with a safety
net from bankruptcy. Without
fear of bankruptcy, the firms
would be able to continue to give
out loans.
The success of the bailout is
not yet apparent. Stocks continue
to plummet as investor confidence
hits an all-time low. The
world market has been shaken
by the financial crisis, and shortly
after the bailout was
approved, the Dow Jones
Industrial Average dropped 700
points.
The question now remains, is
this the end of the turbulent
times for our economy, or is this
just the eye of the storm?