Name: Oliver Al-Rehani
The Financial Crisis
The global financial crisis is a major financial crisis, the worst of its kind since the Great Depression. It became prominently visible in September 2008 with the failure, merger or conservatorship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.
The main cause of the credit crunch goes back to around a decade ago, a problem was going on that did not seem like a problem at the time it seemed beneficial for banks to do was going on. This problem is called subprime lending and still goes on today. Back in the 1990s, taxes were low at the rate of around 2%, in America which meant more people could afford to buy houses and take out mortgages from banks. But as tax raised, the current jobs that people had so many years ago could not support the mortgage they had to pay. Banks had to do something about it since they had so much unpaid debt which people are calling toxic debt. Toxic debt is basically a debt were the bank knows it can not be paid off so they are unable to make a profit. They decided they will sell the debt to other banks and told them how much the debt is worth once it is all paid off, but the bank buying the debt did not know how much of the debt was toxic. It was not just one bank that was doing this, it was all the banks. Until now, nobody has realised that such practices has been going on within the banks, each bank is left with huge amounts of toxic debt which means that each bank will eventually liquidise from the loss of the money. This is why the current financial crisis is happening, because many private sector companies had invested heavily in subprime mortgages.
