FIN crisispdf - investments held by banks and other...

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FINANCIAL CRISIS (This summarizes Fed site info on this topic) What ignited the financial crisis? A rapid reversal of U.S. house prices set off a chain of events that eventually led to the global financial crisis. Housing boom Between 2000 and 2006, U.S. house prices rose dramatically, fueling a home construction boom. Easy credit Lenders made loans on ever-easier terms even to risky borrowers; those loans were sold to investors who underestimated the risk. Housing bust and mortgage meltdown As house prices started to fall, the housing boom quickly turned into a bust, bringing home construction to a halt and creating a vicious cycle that led to delinquencies. Why did the mortgage meltdown threaten the financial system? Banks and other financial institutions faced enormous losses on mortgage loans and related investments, leading to a worldwide pullback in credit. Mortgage-related losses skyrocket The mortgage meltdown drove down the value of residential mortgage-related loans and
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Unformatted text preview: investments held by banks and other financial institutions in the United States and abroad. • Confidence erodes Financial institutions became increasingly worried about the viability of other financial institutions, which made it very difficult for those institutions to obtain short-term funding. • Financial markets panic Following the failure of investment banking giant Lehman Brothers, markets for short-term funding broke down altogether, igniting global financial panic. How did the financial crisis threaten Main Street? Massive losses caused banks to tighten lending and the stock market to crash, sending the economy into a tailspin. • Credit crunch Credit became more expensive and harder to come by. • Plummeting wealth The housing and stock market crashes wiped out over 25 percent of household net worth. • Recession The combination of the credit crunch and plummeting wealth sent the global economy into one of the worst recessions since the 1930s....
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This note was uploaded on 08/13/2010 for the course ECON ECON 222 taught by Professor Jones during the Spring '10 term at Cal Poly.

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