Causes of the 2008 Credit Crunch

In essence, we the American people did with the help of overzealous bankers and credit lenders. Here is how it played out…the late 90’s saw what was a boom in the American economy. Stocks were soaring; home prices were rising swiftly and recovering well from the mid 80’s; and American’s were just beginning to realize that company’s like Visa held the answers to all their material affluent dreams. Meanwhile, in Washington, a republican led congress saw the need to give large corporate businesses tax breaks as incentives to keep jobs and business in the US. (There were some major loop holes that allowed them to go offshore anyway, but let’s not loose sight of the intent of the congress less I am accused of any political party affinity.)

Round after round of tax breaks, regulation cuts, and corporate loop holes later and you create large corporations that have the ability to operate on their speculated earnings. Not a new concept by any means, but there was some newer regulations cuts that allowed this to happen at unprecedented new levels. In many ways, this allows free capitol to flow and large investments/development possible. At the same time, however, housing prices were being wildly over-speculated as we saw housing prices almost double in a ten year period. When the housing bubble hit it’s peak towards the end of 2007 and home prices feel, suddenly banks speculative holdings/assets where diminished. (Face it, you don't own your home until it's paid in full to your bank.) Across the board, homes were worth less but the mortgages on them remained the same leaving banks with a lot less assets and more debt than their checkbooks were meant to handle. Washington Mutual was a perfect example of a bank who lent out (bad) mortgages with variable interest rates.

(From here I’m still a bid fuzzy as to how to tie in the entire world market/economic outlook, but from what I’ve learned I think I can explain what is happening in the US market.)

As mortgage interest rates rose, many homeowners couldn’t afford to continue paying (a compounded result from a 4+% (6% in some regions) unemployment rate, wage stagnation and the rising cost of living). So, bad loans were dumped bank into the laps of the banks thereby further burdening the banking sector. Banks, finding it hard to balance their books, had a increasingly hard time lending money to individuals or business alike which caused an almost cyclical effect where more individuals and businesses ran out of money and defaulted on more mortgages/loans. Wall Street, being the reactionary force it is, realized the imploding problem and not surprisingly stock prices dropped. This in turn has caused even greater lending fears and what we now understand is the credit crunch.

So while the $700 Billion aimed at the banking industry seems like an unfair bailout strategy, it’s only fair to keep in mind we (the American people) have been operating on speculated earnings ourselves rather than relying on what we actually have in the bank. According to a resent survey by Career builder, more than half of Americans live paycheck to paycheck. That means half of us operate purely on speculative earnings. A fair point to remember when blaming Wall Street & banks for supporting bad credit habits like your own mortgage, visa, store credit cards, auto loans, school loans, and other private debt.