The 2008/09 global recession has its origins from the United States Real Estate bubble. The bubble and bust form of US economy during the last 20 years has seen many blow outs and windfalls at the same time. The US government, regulatory authorities and the banking systems irresponsibility is glaring; but it is the blind greed of Wall Street to inflame the speculative real estate bubble which has lead to global financial meltdown. The world was completely seduced by the opportunity of this market and countries poured in money for short-term benefits leading to a loss of $7 trillion dollars and the loss of over 16 million jobs in a single year.
There are many people who are still wondering how the world’s biggest economy failed to act and allowed its own systems to cause the historic global debacle. Why there was no one in the mainstream media holding the government feet to the fire? We examine the root of the problem and explain the real estate crisis without the complex financial jargon it often hides behind.
In the late 90s US economy was steadily growing in double digits and was enjoying a massive surplus in cash reserves. The banking systems was on hyper drive with the availability of excess global capital. And by 2000 Nasdaq Composite Index touched its highest ever 5000+ mark. The investment banking world buoyed by this robust growth were looking to make even more money.
It did not take too much time to realize that the US mortgage sector was the ideal place to invest. The real estate bubble was near to its zenith and credit started to flow in due to the pressure on high returns. The banking system started to loosen its credit parameters and allowing credit to people with either bad credit history or no income. The regulatory authority turned a blind eye to an even more dangerous strategy of mortgage backed securities.
The United States Real Estate went into hyper mode because of the mortgage backed securities. It is the root cause of the global financial meltdown, we explain it in very simple terms :-
An individual would easily get a mortgage loan from a real estate broker
The broker would sell the mortgage to a bank, the individual would now owe money to a bank
The bank would in turn sell the mortgage to an investment firm (Lehman Brothers, Morgan Stanley and Goldman Sachs)
The investment firms started to receive monthly mortgage checks and now had access a big pile of capital which was long-term as an average mortgage was almost 20 years
The investment banks would sell shares of this mortgage to various institutions and other investors
As the participation of investors grew so did the business and pretty soon international money was flowing into United States Real Estate like never before. But by 2003 the demand for mortgage back securities was far greater than the availability of people who qualified for a mortgage. The somewhat lose mortgage parameters were now going into realm of financial suicide. In shocking new system, the people asking for a mortgage were no longer required to prove their income but in fact just state it.
The banks realized that since they were not keeping the mortgages in any case and selling it to investment companies it worked to their advantage to have as many as mortgages as possible. Therefore the banks did not really care if the individual had credit worthiness as it sold the entire mortgage to the investment banks. It was as if the existing real estate bubble wad given an even stronger shot of steroids!
There were no regulatory authority questioning these practices, the government was more interested to ensure that post 911 the economy quickly recovered with high stock indexes and investor confidence. The only other authority that could have given caution to the wind were the credit rating agencies like Standard & Poor or Moody’s; but in their assessment they came out with full support, quite often giving Triple A which signifies a “no risk” rating. The reason for their rating has been put to incorrect data analysis. But was it really a case of stroking the real estate bubble
The Fall of the Empire – United States Real Estate Meltdown
The people who were getting easy loans without qualification were actually selling it further for profit. Thus the bubble kept growing and real estate prices kept rising. Real estate brokers were making more money that they had done in decades. High real estate prices and double mortgages pushed the economy to the edge. People went into more debt to pay off their previous debt.
But by 2007 the strain from this super-speculative drive started to hit the economy. It was glaringly obvious that the rising United States real estate index was far higher to rise in income or jobs. The markets and banks ignored the early foreclosures and default on loans and the breaking point was near. A chain reaction set-off and people were defaulting on their loans across the US. By 2008 the real estate bubble had been busted and Wall Street firms exposed to this market panicked but it was too late.
Companies like Goldman Sachs and Lehman Brothers were devastated by the returns; the latter filling for bankruptcy which is considered as the watershed event and start of the global financial meltdown. The repercussions were felt all over the world. The European and Asian economies saw billions of dollars eroded in a matter of a few months, it was the fall of the Wall Street empire!