The Great Recession Part 1

The Great Recession Part 1

In recent conversations with staff at Hancock International College some of our ESL students have been recalling the events of the Great Recession. We believe American culture will continue to learn from our history, so today we want to share the story about how this tragic phenomenon changed America in hopes it will remind another person of the direction we may be headed today so they can decide to turn things around.

Thebalance.com says, “The 2008 financial crisis is the worst economic disaster since the Great Depression of 1929. It occurred despite Federal Reserve and Treasury Department efforts to prevent it.

It led to the Great Recession. That’s when housing prices fell 31.8 percent, more than the price plunge during the Depression. Two years after the recession ended, unemployment was still above 9 percent. That’s not counting discouraged workers who had given up looking for work… The first sign that the economy was in trouble occurred in 2006. That’s when housing prices started to fall. At first, realtors applauded. They thought the overheated housing market would return to a more sustainable level

Realtors didn’t realize there were too many homeowners with questionable credit. Banks had allowed people to take out loans for 100 percent or more of the value of their new homes. Many blamed the Community Reinvestment Act. It pushed banks to make investments in subprime areas, but that wasn’t the underlying cause.

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

Realtors didn’t realize there were too many homeowners with questionable credit. Banks had allowed people to take out loans for 100 percent or more of the value of their new homes. Many blamed the Community Reinvestment Act. It pushed banks to make investments in subprime areas, but that wasn’t the underlying cause.

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

… Hedge funds and other financial institutions around the world owned the mortgage-backed securities. The securities were also in mutual funds, corporate assets, and pension funds. The banks had chopped up the original mortgages and resold them in tranches. That made the derivatives impossible to price. Why did stodgy pension funds buy such risky assets? They thought an insurance product called credit default swaps protected them. A traditional insurance company known as the American International Group sold these swaps. When the derivatives lost value, AIG didn’t have enough cash flow to honor all the swaps. The first signs of the financial crisis appeared in 2007. Banks panicked when they realized they would have to absorb the losses. They stopped lending to each other. They didn’t want other banks giving them worthless mortgages as collateral. No one wanted to get stuck holding the bag.  As a result, interbank borrowing costs, called Libor, rose. This mistrust within the banking community was the primary cause of the 2008 financial crisis.

The Federal Reserve began pumping liquidity into the banking system via the Term Auction Facility. But that wasn’t enough.”

Full Article: https://www.thebalance.com/2008-financial-crisis-3305679

Idiom of the Day

Turn Something Around

Meaning: to cause a situation or organization to change in a positive direction:

Example: They were losing badly but they turned things around in the second half of the game.