General idea
On September 15, 2008, Lehman Brothers (a financial services company) collapsed, and was considered the largest bankruptcy in the US, marking the beginning of the crisis. Precedents like this occurred all over the world but… why?
Future scenario
We can say that the origin of the 2008 financial crisis occurred after the 9/11 attack in 2001. Everything was going well until this event, which generated pessimism and instability in all aspects, both ethical and economic.
It was then that the central banks had to react, and tried to reactivate the economy by lowering the reference interest rates (explained in the previous post), in order to encourage families and companies to consume and invest to a greater extent.
In 2001, the interest rate was fixed at 6.5%, and the FED lowered it to 1%. The interest rate was so low that there was an excess of spending by Americans, which was mainly destined to the purchase of homes (either for living or for speculation).
Banks thus began to grant mortgage loans to customers without financial backing, i.e. customers with a high risk of default. It was at this point that subprime mortgages, “sub-optimal” mortgages, which consisted of granting mortgages to people with a low credit rating, high risk, arose.
Everything seemed to be going well, profits were being generated and GDP was rising, so the central bank decided to create new financial instruments related to the real estate sector, since it was the one that was having the biggest boom.
All the families were asking for loans to buy houses, since the interest to be paid back was very low, so the demand for housing skyrocketed and, with it, the supply.
Everything worked well if everyone could pay their mortgages and the price of housing was rising due to demand, but the FED saw that inflation was soaring, so it decided to raise interest rates in 2004 to control it, from 1% to 5.25%.
A high percentage of mortgages are variable rate, as we explained in the definition of Euribor in previous posts, what does this entail?
If your mortgage is variable rate it means that it varies according to the interest rate established by the central bank of your country.
It is clear that the FED, by raising interest rates, wanted the population to stop taking out mortgages in such an excessive way. What they did not consider was the number of people who had already taken out such a loan and could not afford to pay such a high interest rate.
So the debtors stopped paying their mortgages and the demand began to fall, being the supply much higher than the demand, so housing prices began to fall.
As we had started the post, on September 15, 2008, Lehman Brothers declared bankruptcy, revealing a debt of more than 6,000,000 million dollars, and the New York Stock Exchange plummeted.
The high volatility in the markets was further exacerbated after that day, especially with U.S. real estate securities, which were scattered all over the world.
No one wanted those securities, no one wanted to buy houses and millions of people, investors and banks were going broke. That was when the global crisis of 2008 had begun.
Conclusion:
In conclusion, everyone, absolutely everyone, is responsible for this crisis. The buyers, for buying mortgages even though they knew they could not pay them back, the financial institutions for taking such high levels of risk, the banks for not checking the capacity of their clients and the regulatory authorities for not anticipating and visualizing the problem.
