The Crisis of Credit

? 2008 was the year the entire US financial system collapsed in a downward spiral from the very basis that built the foundation of America. Credit, and the crisis of misuse and abuse of credit in America. My concluding essay evaluates and describes events and actions created by individuals and company banks that lead to the financial recession of 2008. This essay pertains the logistics of the housing market related to the financial market and how it evolves into the crisis of credit for America as a hole. Through your Macroeconomics class my high school level economics knowledge broadened, my essay revolved around the United States as a hole coinciding with MACROeconomics as a wide spectrum to economy.

The Crisis of Credit brings together the Homeowners and Investors through Wall St. along with borrowing money from the fed at 1% interest return rate, making credit on Wall St. abundant. Wall Street takes out tons of money on credit growing extremely rich with Investment banks borrowing even more money from Wall St. In result Sub-Prime mortgages start circulating through the banking system more readily leading to Investment banks and lenders needing more money. Lenders start adding risk to Sub-Prime mortgages knowing their already bought out. Leading to the mother of all deficits with huge percentages of defaults on home mortgages spurring a national need for the financial district to once again be bailed out.

The Crisis of Credit brings together Homeowners and Investors, which represent mortgages and money from insurance company’s mutual funds, pension funds representing large institutions and a house for homeowners brought together through the financial system. In the wake of the .COM bust of 911 Federal Chairman Allen Greenspan lowers interest rates to 1% to keep the economy strong. 1% is a very low return rate on investments with a flipside of Banks on Wall St. can borrow money from the Fed. at 1% creating an abundance of cheap credit.

This abundance of cheap credit at 1% return rate by the Federal Reserve makes borrowing money for banks easy exceeding with leverage: borrowing money to amplify the outcome of a deal. Which is a major way all banks make their money turning good deals into great deals. Wall St. takes out tons on credit makes great deals and grows tremendously rich, then pays back the Federal Reserve. Investors see this and want a part of the action connecting Homeowners to Investors through mortgages.

Through mortgages Investment Banks then borrow more money from the Federal Reserve. Investment Banks start buying 1000’s of mortgages collaborating it into a Collateralized Debt Obligation separated into three groups SAFE, OKAY, and RISKY. The CDO Safe section is insured by a Credit Default Swap at a 4% rate of return AAA rating, with the Okay section at 7% rate of return and 10% for the risky section. Collateralized Debt Obligation works as three cascading trays