Summary: We're in one of the worst crisis since the Great Depression, with global repercussion. This crisis involves financial and real crisis. Financial markets have become bigger and financial crises also became deeper. In this article, I'm analyzing the most important factors which have affected our actual crisis, caused because of the housing bubble's crash.
Between 2000 and 2002, the US lived a Financial Crisis called the .com crisis, caused by the technological business' decrease. To solve the effects of this financial crisis, the Federal Reserve of US reduced the interest rates, which made everything cheaper. This reduction made house buying really attractive, because then it was really cheap to buy without high interest rates. So banks started to give lots of credits and housing also grew, what made houses price rise.
When banks saw that house prices would keep growing, they made easier for people to buy a house. This was due to the fact that if those people couldn't pay the house, they would sell it in the future for a bigger price. This kind of mortgage was called subprime mortgage or trash mortgage. So, this way, affordable credits for families and businesses grew a lot, making mortgages bigger. So, this way economic agents became indebted seriously.
To affront the great bills that companies and families had to pay, banks recurred to securitizing: The mortgages they'd sold became negotiable securities in interbank markets, known as the CDO's. These securities were backed with other mortgages, so if people didn't pay, they would lose a high part of their value.
This is the way how they made mortgages into securities:
1) The bank gives a mortgage loan.
2) Then, the bank sells this mortgage to a company depending on the risk they have, which is gauged by a Rating Agency.
3) Finally, this mortgage is sold to investors who don't know anything about them.
By the end of 2005, the interest rates had grown a 5%, so houses prices had grown a lot too. Because of this, banks started giving less loans. So this caused a decrease on the price of houses: the financial bubble had just exploded in 2006. Because of this, a big number of non-payments started to happen, and this provoked the financial sector to be mistrusted. This led to the decrease of the active CDO's. In 2007, all financial institutions were trying to sell their CDO's, what made CDO's prices decrease, and made US economy falter. Because of this, banks stopped giving loans, so houses' prices became even lower.
What started being a sectarian crisis (in financial and housing) became then a Real Crisis, affecting the other sectors. Which made US GDP decrease between 2008 and 2009 (see graph above).
By Noé Rodríguez Daporta
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