As funny as this is, it got me thinking about how many people out there know what caused the worldwide recession. Sure we all know it had to do with the banks messing up since we're the ones bailing them out, but how did we get into this position?
Well one of the causes of the current recession was that governments were slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans.
Cause of Current Recession
In 2006, when higher rates finally kicked in, declining housing prices caught many homeowners who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. This meant that the banks were repossessing houses which they couldn't sell. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses. Here's a video released by UBank, an Australian Bank which summarises how the credit crunch happened:By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to a $700 billion bailout, and bankruptcies or government nationalization of AIG and Freddie Mac in the US, a £500 billion bailout in England and a €7 billion bailout of AIB, Bank of Ireland and Anglo Irish here in the Emerald Isle. Here's a link to a slideshow which gives a humourous account of how the banks got us into this mess:
http://files.filefront.com/MortgageMessExplainedpps/;13410857;/fileinfo.html
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