Considered by economists to be the worst financial crisis since the Great Depression of the 1930s, the financial crisis brought with it a threat to bring down numerous financial institutions. In order to prevent this, a bailout was performed by banks of the national governments, however this only provided a means to prevent the crisis from escalating, what it did not remedy was the drop of the stock markets.
The crisis has long since pasted but we take a look back at what caused the crisis to happen.
Ripples in the Economic Pool
Prior to the financial crisis, interest rates started to spike up and ownerships of homes were at a saturation point, this was also accompanied by early distress signals. The year 2004 saw homeownership in the United States rise to 70%. However, by the final quarter of 2005, home prices started to plummet causing a chain reaction that lead to about a 40% decline in the United States Home Construction Index the year after. This did not only affect new homes but also numerous subprime followers who could not endure the increasing interest.
This catastrophe caused the year 2007 to start with ill news from numerous sources and every month saw at least one subprime lender file for bankruptcy. By the month of February and March around more than 25 subprime lenders filed for bankruptcy, which paved a way for a tide.
One thing led to another and news regarding the problems of the subprime markets began to spread and piquing the general public’s interest. Eventually, horror stories about the problem began to leak out.
The 2007 news reports narrated how financial firms who had ownership of more than $1 trillion in securities along with the backing of the now failing subprime mortgages was enough to start the economic tsunami that would eventually lead to the financial crisis of 2008.