WHAT CAUSED THE CURRENT ECONOMIC CRISIS IN THE UNITED STATES?

The U.S. economy is probably experiencing its worst crisis since the great depression of 1929. Today’s economic crisis has extended to almost all sectors, affecting everyone. The crisis started in the home mortgage market, especially the market of the subprime mortgages; this was a combination of high speculation and easy access for credit.

I was living in the U.S. when everyone started to buy houses around 2004, it was a time of prosperity and happiness, but people were not only buying house to achieve that long quest of the “American dream” of being able to buy a house, a car and even a boat, everyone was buying houses because prices were rising, interest rates were low and banks were giving off loans as easily as buying a carton of milk at the supermarket. But how did the U.S. got to this situation? To answer that we have to trace a few years.

The U.S. Federal Reserve Bank in September 11, 2001 decided to lower interest rates at 1% to keep the economy strong, this led to banks on Wall Street to borrow from the Federal Reserve for 1% and other surpluses from other economies like Japan, China and other countries of the Middle East created and abundance of cheap credit for banks. Eventually investors entered the business with banks creating the credit bubble.

By this time everyone had access to easy credit, with low interest rates, this led to a major buy and sale of the housing business, for example a house that cost 80,000 dollars, someone with a $15,000 investment (down payment) would get a loan for $65,000 and only in a few months they would sell it for 90-100 thousand dollars, and because there was a big demand for houses, everyone was buying and selling. Mean while in Wall Street banks and investors were dividing the mortgages depending on their risk (safe, ok and risky) this strategy for making tons of money was that banks would sell millions of mortgages to investors, it was an easy was to make money for everyone, but what nobody knew was that they had created a time bomb.

The turning point was when loans were giving to people of high risk, this were the subprime mortgages and eventually this home owners started to default on their payments, on the bride side banks and investors would get the house, but then thousand of home owners defaulted in their payments and thousands of houses were up for foreclosure, this led to a collapse of the prices of the houses , on the other side home owners that could pay their houses realize that it didn’t make sense to pay a mortgage of  200,000 dollars when their home was worth 80,000, eventually they started to default too.

Now everyone in Wall Street (banks, investors) had a thousand of houses in their possession but no money to pay the billions of loans that they had, and people in Main Street had loss their house and their life time savings, the time bomb exploded! The result was millions of houses for sale and zero buyers, banks and investors were bankrupt, asking for a bail out. This was the down turn of the U.S economy that included unemployment, millions in debt and the wake up moment from the American dream.