American Economic Collapse of 2007-2008
This type of fractional banking and fiat currency has caused problems in the economy several times in history. In the fall of 1929, the stock market and subsequent banks crashed. The country was spun into over a decade of depression. The cause was over stipulation, poor banking practices and many underlying wealth distribution issues. The economy was injected with money by the Federal government eventually and the economy bounced back (Goldfield & others, 2011).
More recently, the economy and the stock market took a nose dive once again. While most critics and economists will argue may aspects of the crash and what caused it, they all agree it stemmed from the housing market (Henderson,2011). The housing market was full of mortgages that people could not afford and as default rates climbed to 15-16%. Sub-prime mortgages in particular gave loans to many that simply should have never gotten one. They were not in a stable financial position to do so and the lack of down payment can make last-minute decisions easier (Hanweck, 2011).
“Subprime mortgage use instruments such as interest-only loans, teaser rates and adjustment rate mortgages (ARMs) for borrowers whose credit history is not sufficient to get a conventional mortgage” (Henderson, 2007). Since our economy needs more debt to grow according to GDP, banks were pressured to make credit more available. This method was once repeated in the twenty’s when credit first became popular, and like before, it ended badly. So yes it was easy for everyone to secure the “American Dream” , however the cost was more than many could bear.
The banks had done what banks do, they sold all of those subprime mortgages and high-risk debt to other investors. These debt were packaged up as stock options and bonds, and America seen these investments as safe.
Some economists blame those individuals and couples that did not pay their bills. They believe that if the borrowers had merely paid their balances, then none of the 2008 collapse would have happened. However critics from the other side would suggest that the subprime mortgages were predatory in nature. Most of the beginning payments are almost pure interest, so the bank will get its money back as quickly as possible. These loans usually had extremely high interest rates and once again, were highly top heavy (Henderson, 2007).
The economy had issues before the housing market went belly up, inflation was eating up the value of the dollar and purchasing power was being stripped. Credit was also so much easier to obtained, so many Americans were literally drowning themselves in debt. The average household was already paying over five thousand dollars a year on credit payments. Even worse, the largest part of these payments were of interest (BLS,2013).
Unemployment rates before the crash of 2007-2008 were pretty stable, ringing in at just below five percent. However after the crash of the housing markets and subprime loans, unemployment more than doubled in the two years following the episode. Unemployment rates went even higher before they finally started to crawl back down, to the levels of 2010 (BLS,2013). Paired with inflation and the plummeting rates of the housing market, very few individuals had any chance of extra money to spend. With our economic structure, the American economy shrunk even further. As goods were not sold or sold at a lower rate, many Americans were laid off, only to compound the problem.
To stop the shrinking of the biggest and seemingly strongest economy in the world as of current, federal government performed bail-outs to many large companies. Many think that the banks were bailed out, but in reality over 920 companies were bailed out and the most money was given to Freddie Mac and Fannie Mae. These were both governmentally ran and funded companies who were notorious for bad debt. Between these two companies and five years later, they still owe over 100 billion dollars between the two. AIG received the third most amount with 67 billion dollars received from the federal government. They put a large amount of their assets into these bad debt bonds, but have since at least been able to pay their debt back.
The American automotive industry was hit hard by the crash and General Motors, along with Chrysler both received a sizeable chunk of the bail out money, while Chrysler still owes half of it five years later. Although the banks were not the only types of businesses that needed a bail out funded by the taxpayers, banks were by far the most needed type of the roster. The two biggest financial institutions in the country, Bank of America and CitiGroup, both received 45 billion dollars in bail out money, when they are worth so much more. JpMorgan and Chase also received a large chunk of money, 25 billion apiece (Bailout, 2013).
Many people wonder where the money comes from, most will say the taxpayer. However, this is not quite true. As we have learned from the look of our economy, the government merely makes the money they need by borrowing funds from the FEDS. This has exacerbated the problems of the economy because now money is worth less with every extra dollar that is printed.
Bailout List: Banks, Auto Companies, and More | Eye on the Bailout | ProPublica. (2013, May 22). Retrieved from http://projects.propublica.org/bailout/list
Bureau of Labor Statistics Data. (n.d.). Retrieved from http://data.bls.gov/timeseries/LNS14000000
NOVA |(1996) The History of Money. (n.d.). Retrieved from http://www.pbs.org/wgbh/nova/ancient/history-money.html
What is GDP and why is it so important?. (n.d.). Retrieved from http://www.investopedia.com/ask/answers/199.asp on 5/13/2013
The Dollar in Your Wallet Is Only Worth 18 Cents | Jeff Clark | Safehaven.com. (2012, October). Retrieved from http://www.safehaven.com/article/14737/the-dollar- on 5/15/13
Clark, J. (2012). HowStuffWorks "How much actual money is there in the world?". Retrieved from http://money.howstuffworks.com/how-much-money-is-in-the-world.htm on 5/17/13
Cynic (2012, July). Frackin’ Reserve – “How” Fractional Reserve Banking Creates Money and “Why” it is Fraudulent (3/6) | Cynic.me. Retrieved from http://cynic.me/2012/05/28/frackin-reserve-how-fractional-reserve-banking-creates-money-and-why-it-is-fraudulent-3-6/
Hanweck, G. A. (2009). Individual borrower and regional factors contributing to subprime and prime mortgage delinquency and default rates: An analysis by origination vintages and projections for 2009. Rochester, Rochester: doi:http://dx.doi.org/10.2139/ssrn.1443298
Henderson, D. R. (2011, June 1). The Roots of the 2008 Economic Collapse | Hoover Institution. Retrieved from http://www.hoover.org/publications/policy-review/article/80211
Goldfield, D., Abbott, C., Anderson, V., Argersinger, J., Argersinger, P., Blarney, W., & Weir, R. (2011). The American Journey (6th ed.). upper saddle river, New Jersey: Pearson Education, Inc.