Few years ago in 2012 I watched a movie named “JEFF WHO LIVES AT HOME”. The lead actor Jason Segel plays the role of a guy who believes that everything in the world is connected. And there are signs that if you can understand could potentially change your life. Well that was a movie but the moral of the story was given too late, 4 years before its release the world went through the worst economic crises since Great Depression when the short sightedness of the American banks lead to the global economy wrecking havoc on the people around the world.
THE CRADDLE OF THE COLLAPSE
The first unidentified signs of this disaster occurred in 2006 when suddenly the prices of real estate started to fall and the economist thought that it’s a market slow down and the prices will become sustainable in some time. But what they missed was that the people who created this pseudo demand of real estate were soon going to become loan defaulters in strength of thousands and thousands and then came 15th September 2008 when the fourth largest investment bank in the U.S. Lehman Brothers was declared bankrupt which was the alarming bell that all is not well in the economics.
WHO STARTED IT
Not going into deep economics let us understand in very lucid way what went wrong in the era of 2000’s the U.S government decided to accelerate it’s growth by the source of Real estate. The government wanted the low income, and mid income people to buy houses and there comes in force The Community Reinvestment Act of 1977 which addresses that the banks do not discriminate while providing loans o the people. But you might be thinking how does it affects such a massive economy to understand that lets first have a view on how banks operate.
THE BANKERS’S BIBLE
Generally while lending loans bank have many criterions among which two stand out: the PLR(prime lending rate) the interest rate for the bank’s favorite customers who never default on any loan payment normally these rates are low as they have less risk and eventually less profit making by the banks. Second is SPLR(sub-prime lending rate) – these are rates for everybody else and for people who have defaulted their loans repayment in past.
THE END OF THE MOVIE
With governments push, the banks got greedy and started to give loans to these sub-prime customers, even knowing that they might fail in their repayments. Then the banks sold those loans as mortgage backed securities to the international investors promising definite returns. The insurance agencies also jumped into this disaster in making and offered credit default swaps which promises the investor to reimburse them in case their money is in danger ultimately the inevitable happened these sub – prime customers started defaulting their loans and the U.S biggest insurance company AIG went bankrupt along with multiple banks causing a financial melt down WORLD WIDE it doesn’t stopped their but this financial meltdown lead to the loss of job and business losses to the prime customers and even the most trusted prime customers started defaulting their loans and situation got even worse as when the banks tried to sell these properties to recover their loans they couldn’t find buyers as all the potential buyers were already defaulters and this cause the burst of the real estate bubble .
At last government had to came in and save these companies and banks by giving them BAILOUT
packages financed by the people of the United States. Due to the greed of the banks millions lost their
job, the world economy took a nose dive and the rest is HISTORY.