The most important thing on many people’s minds now are probably the financial crisis that is occurring. Due to its enormity, the effects, like the companies firing employees to cut costs, can be felt all around the world. As the repercussions are huge, so we must be well prepared.
However, before I go on to the repercussions of the financial crisis, it is essential to know why it occurred. The roots of the crisis can be traced back to the previous years, where the economy was prospering. The Republicans, who were in charge then, overestimated the market’s ability to self-correct. They believed that the lesser government intervention the better, as the market could regulate itself better than the government could. However, an economy needs some discipline, regulation, and oversight too.
Alan Greenspan, who was then the Chairman of the Federal Reserve, had consistently advocated for the “loosening of regulations.” At the end of the ‘90s, when financial derivatives had just begun to take off in the United States, some pointed out that they lacked transparency, and that they should be more strictly regulated. Greenspan, abusing his authority, remained firmly opposed to regulation, believing that it would hurt the economy.
Under this laissez-faire policy, greed and corruption on Wall Street created a growing bubble, eventually leading to the current crisis.
The government encouraged house ownership. Houses were selling like hot cakes. The bankers, in a bid to attract more loans to be taken, further decreased the already-low interest rates for loans. This way, they could earn more money. In short, greed was the start of this whole financial crisis. The greedy bankers wanted more profit, so they did not consider the financial ability of the people who loaned the money.
Many people were lured by their offers and took up loans that they could not afford to pay. When they could not pay, the houses were taken back by the banks. At first, when the economy was good, people clamored to buy houses. After some time, the housing sales went down, so the houses could not be sold. As a result, the houses quickly devalued and the banks lost money. Most of their assets were stuck by these properties. When these properties were sold, the money that the banks got back was not enough to cover up for the amount they lent out. This results in a bad loan. Because the loan is huge, the banks lose a great amount of money.
You may think that the banks will eventually sell the houses for money, so they will not run out of money even if they make a loss. You have forgotten one important aspect of banks. Where do they get their money from? The people who deposit the money in the banks, right? Hence, if they wanted to withdraw a large sum of money, the bank would not be able to...