What Caused This Financial Crisis

If you have read any newspaper, watched any news station or listened to any talk radio station, there has been a lot of talk about the financial crisis that our economy is currently in. I explained in an earlier blog about what happened with the American International Group (AIG) and if they failed that we could have already been in a depression. Now what the average person wants to know is how did we get to this spot that we are currently in and what can we do to get out of it?
There are many different issues that could explain where we are today but one big issue that surrounds all of the financial worries on Wall Street have to do with the two biggest mortgage lenders in the United States, Freddie Mac (FRE) and Fannie Mae (FNM). Freddie Mac is a company that engages in mortgage purchasing and credit guarantee and portfolio management in the United States. Fannie Mae is the primary mortgage liquidator to help insure mortgage companies, savings, loans, commercial banks, credit unions, state and local housing financial agencies have enough money to lend to home buyers. In short, these two companies insure loans made by banks and mortgage companies.
George W. Bush made a speech on Thursday September 25th, 2008 on national television that helped explain to the average person across the United States about what is going on. In short, there were plenty of foreign investors outside the United States interested in investing in the United States because the United States is a safe place for business. All of the money that has come in from these outside investors, with low interest rates, made it easier for people to get credit to help families borrow money for whatever they may please. These loans helped people open businesses and as a result more jobs became available. The negatives come in the housing market. With easy credit and the assumption that the price of housing would rise, mainly in Florida, California, Arizona and Nevada. The mortgage lenders like Freddie Mac and Fannie Mae lent out loans that some people would not be able to pay off. These institutions were under the assumption that people could pay off their houses when they would sell in the future. As it turns out this did not occur.
The number of houses that were being built continued to increase and soon there were not more houses out for sale than people willing to buy them. This creates a problem because the supply exceeds the demand and as a result the price of houses dropped. So people who wanted to try to refinance or sell their homes at a higher price would not be able to do so. The people who owned homes would not have enough money to pay off their homes because of the bad loans that were given out. In the mortgage industry today the mortgage companies package mortgage back securities that are sold to investors worldwide. Freddie Mac and Fannie Mae are the leading purchasers of these securities.
These two companies are financed by Congress so many believed that they can borrow large sums of money. There were a lot of questionable investments that took place. This lead to a domino effect and many companies that had ties to these investments, Bear Stearns and Lehman Brothers, collapsed. The next company that could have collapsed would have been Merrill Lynch (MER) before they got bought out by Bank of America.
The US Treasury Secretary, Hank Paulson, is proposing a $700 billion dollar plan to help rescue our financial institutions. This plan mainly says that the US Government is going to try to buy back 10,000 mortgages each day. This would cost the tax payers alot of money. This bill is going to have to be passed or else many bad things could occur. The stock market could go down and go down fast. This is because the market does not like uncertanity so the people who have the most power would sell their stocks.
Now you know what has caused this financial crisis and what we have to do to get out of it.