2008 Financial Crisis Essay
Last night (past perfect), I was trying to explain to someone in very simple terms, what caused the 2008 financial crisis.
“Interest rates were pretty low. Investors were desperate to lend their money out at a halfway decent interest rate, and they didn’t really think about the risks involved. So when they had the chance to buy up other people’s mortgages, they jumped at it.
“Meanwhile, the brokers who actually organised the mortgage loans, got paid for writing the loans. They didn’t care if they were repaid or not. So no one bothered to check if the people who were actually borrowing the money could pay it back.
“It turned out that they couldn’t. And that’s, in a nutshell, how the financial system blew itself up in 2008.”
Hmm. Cheap money,
…show more content…
One problem is that lenders have been lending over a longer period of time, which means that by the tail-end of the loan period, there’s been a big drop off in the car’s “equity” value, potentially leaving the borrower owing a lot of money.
These loans have been parcelled up and sold on to investors, just as with the last subprime crisis (you know, that one with the mortgages that caused a minor kerfuffle in the economy a few years back). And just as with the last subprime crisis, demand from investors for stuff to invest in has seen lending standards plunge across the industry.
Notes Bloomberg: “Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories.” And as a result, a lot of those loans are now going bad.
The biggest difference here is that the scale is not considered large enough to disrupt the entire financial system. And I’m sure that’s true. On their own, car loans are not going to bring the financial system to its knees.
What concerns me is that there’s such a dispersion of bad debt either bubbling up or just waiting to happen. How many dominoes need to tip over before a really important one
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