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  • Sneha Palei

The Great Recession of 2008

The Federal Reserve in the United States cut interest rates to about 1% in the early 2000s, when investors were seeking a solid investment opportunity and eager to invest in treasury bills. As interest rates fell, these investments were less profitable, pushing investors to take more risks to benefit. Banks, on the other hand, were able to borrow money at considerably lower rates as a result of this. As a result, banks began to make large profits by leveraging, or borrowing cheaply and investing the borrowed money in riskier investments to get a higher return. Their profit was the difference between the interest they paid and the interest they got.


While the banks were busy generating money, the US government was working to make homeownership more accessible to individuals. People who wanted to buy a property generally contacted real estate agents who connected them with mortgage lenders. These mortgage lenders provided house owners with loans for the purchase of a home on the condition that failure to repay the loan with additional interest would result in the lender gaining possession of the house.


At this time, Wall Street banks purchased these mortgages in bulk from mortgage lenders (with money obtained on the cheap), gathered them, and sold various sections of them to various investors in the market. The demand for these mortgage properties outstripped supply. This was a significant turning point. Because prime mortgages were unable to fulfil investor demand, mortgage brokers, lenders, and banks began to turn to subprime mortgages (i.e., housing loans given to persons with poor credit histories). However, when more homeowners defaulted, the banks' monthly payments transformed into homes. As a result, there was more supply of properties on the market than demand, causing housing prices to decrease.


Because they were paying more than the house was worth, the homeowners began to fail on their payments, even when they were able to pay the full amount. As a result, the banks were left with a lot of worthless mortgage properties that no one, even investors, wanted to buy. Banks and other financial organizations went bankrupt after failing to repay the massive loans they had taken on to acquire these mortgage homes, resulting in the 2008 economic crisis.


Video Reference: https://youtu.be/N9YLta5Tr2A