The Global Economic Crisis
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The Global Economic Crisis
(Note: This is a simplified account of the global economic crisis that began with the subprime mortgage crisis of 2007.)
Capitalism is based on complete freedom in the marketplace. This includes the freedom of money lenders to lend money to whomever they choose and to demand repayment according to their own terms.
In the United States, this took the form of lending people money to buy houses at interest rates that were far below the norm. These "subprime" mortgages were offered to people on very easy terms. For example, borrowers often did not have to prove they had an income, that they had any assets, or that they had the ability to repay the money they borrowed. On these new and easy terms, many people borrowed heavily in order to buy houses that they could not really afford. This led to a housing bubble, in which thousands of people began to buy homes, fuelling a building boom and increasing speculation in real estate, driving up the selling price of homes. People then began to refinance their homes, borrowing against the increased value of their homes, effectively living on money borrowed against the equity in their homes. The housing bubble peaked in 2005.
Banks often sold the mortgages they held to other lenders. Interest rates went up, and people could no longer afford payments on their mortgages. Consumer spending decreased. Housing prices dropped. The equity that homeowners had borrowed against no longer existed. Mortgages were foreclosed, forcing people out of their homes. Banks were left with houses that were worth less than the loans that had been established to pay for them. People lost confidence in the banks and the stock market. Don't forget that banks don't just lend money. They also hold people's savings and handle their investments. If banks fail, people lose their life savings and pensions. As well, other major corporations invest through the financial sector. If the banks fail, that can bankrupt other corporations. This led to a spiralling downturn in the global economy.
In 2008 Lehman Brothers, a large investment bank, declared bankruptcy. AIG, a huge insurance firm that had insured a number of large banks, threatened to follow. Governments then stepped in to bail out these larger firms, and soon there was a line up of major corporations asking for assistance. Just before the U.S. Presidential election of 2008, the government agreed to step in by providing a bailout package worth 700 billion dollars, with no strings attached. . Many financial institutions were temporarily taken over by the government or have been heavily subsidized. In early 2009, General Motors filed for bankruptcy and was taken over by the U.S. Treasury and to a lesser extent, the Canadian Investment Corporation, a crown corporation as part of the Troubled Asset Relief Program.