What caused the current economic crisis in the U.S.?

The 2008 financial crisis is considered to be the worst economic crisis the world has faced since the great depression (1930) the effects of the crisis go from the risk of a total collapse of the greatest financial institutions, the need of government to invest money to save banks and enterprises in order to recover confidence in investors and well linked to globalization, there were also falls in the world markets.

The previous effects affect the macroeconomic scope, but talking about microeconomics, the percentage of unemployment in the U.S. rose up to 9,7% during 2010 (when the crisis was supposed to be over), families were pushed away from their homes into streets, and the index of suicides also rose because of the instability and uncertainty.

What happened?

To understand how the situation got so dramatic, even to affect the European Union by contagion dragging them into the fall of 2 economies (Greece and Spain), let’s look at the causes:

Easy credit conditions to buy homes.

Lenders and Real Estate companies lend money to basically anyone who asked for a loan for a mortgage, by this when the prices went high and the home owners were unable to pay the mortgage the whole cycle of lending and paying broke and banks crashed. To counter this, when the situation got extremely dramatic the Government was practically forced to subsidy this by giving money from the Federal Reserve to banks.

Incorrect pricing of risk

When the Real Estate companies and the investors made the plan of lowering restrictions for home owning they knew they had risks, as in any other business, the thing is that they did not made a long term analysis of the worst case scenario, so when the crisis started they were not covered up with solutions. Almost 6% of mortgage loans are in debt, when the historical record is of 0.25%.

Is it over? The banking crisis yes, the economic crisis NO.

SOURCE:

http://www.aim.org/guest-column/the-cause-of-the-2008-financial-crisis/

http://www.indexmundi.com/es/estados_unidos/tasa_de_desempleo.html

http://www.globalissues.org/article/768/global-financial-crisis