In 2007 and 2008, both the housing industry and financial sector experienced a major lapse in performance. These two sectors, which are major players in the economy, had a great impact on the overall economy that was experienced by everyone. This essay will use the radio program by the name “the big pool of money” in order to explain the events that led to the drop in performance by these two sectors.
The housing sector was hit hard with the happenings that took place during the recession with rates for mortgages soaring the roof tops and many people lagged behind with their mortgages. This was caused by the Collateral Debt Obligation (CDO) which is an instrument used as surety to pay investors their money since it taps the cash flow from these investments. This instrument operates in such a way that the people at the bottom of the chain experience the effect of a decline first and pay the highest cost . The investors who are at the top of the chain experience it last and the effect is not as harsh to them as compared to everyone else in the chain. It came to be famously referred to as the subprime crises since the CDO was on non-prime mortgages. In this long chain there are investors, brokers, bankers and the homeowners. The crisis occurred when the people at the top of the chain made an attempt to bend the rules of banking which put the entire world in the greatest crisis that was only matched by the crisis that took place in the 1930’s. The idea was to allow people to borrow loans that were on an adjustable rate instead of a fixed rate. Banks were loaning people money without checking if the borrower had the capacity to pay. The product was referred to as NINA to mean no income no asset, the rate was fixed and the term of these loans we stretched to long periods of up to 30 years. Most people took these loans that were above their ability to pay against their houses. Banks allowed people to borrow money without checking people’s credit status and their ability to pay the banks. A few months later most people couldn’t pay and they were facing the eminent danger of losing their houses . The pool of money is at the Monetary Fund where insurance companies are saving pension plans to take care of retirement and others which amounts for a figure of around 10 billion. The economy had not been growing so well in the past years but the figure doubled in 2006. As a result, there was a lot of money to invest, but the investors were running short of ideas. These led to the loss of confidence in their strongest investment which was Mortgages. Investors were lending money to anyone with houses and buy houses as collateral. This caused them to use mortgages as both lender and borrower causing a large gap which caused the recess for both banks and mortgages since they did not secure their security.
In conclusion the financial crisis occurred when people got overwhelmed with the amount of money that was available for investment. In attempt to make the most out of investments and in the excitement of the moment they pulled out of their most profitable field of investment in mortgages using the same mortgages. This lead to a point where these mortgages became both borrower and lender to the point when they started making immense gaps which were felt throughout chain of the investment process.
Works Cited
Glass, Ira. This American Life. 2008. Transcript. 19 March 2016.
