DEEPER THAN DEPRESSION: THE 2009 COLLAPSE OF THE HOUSING MARKET
ABSTRACT
The economic crisis is a part of our economy that takes place due to certain conditions that are indeed created by us. There have been multiple crises that have taken place all around the world and in different economies. The most highlighted are the ones that happened in 1929, 2009, and the recent Covid-19 crisis.
Basically what happens in a crisis is that the economy slows down completely and the stock market crashes pulling down all the stocks with it. That means there are few jobs, people are making and spending less money and some businesses suffer heavily or shut down completely in some worst-case scenarios.
This directly affects the middle and lower class as they are not as financially educated as rich people, the rich somehow generally get away with this as they are aware of the behavior of money on how to make it even in these critical and difficult situations.
THE GREAT RECESSION OF 2009 (HOUSING MARKET CRASH)
How & Why did it Happen?
It happened because of the fact that the banks in the USA became more and more greedy to the fact that anyone with or without the guarantee of repaying the loans could buy their dream house. It initially started in the late 80s with a simple yet brilliant idea which in many cases changed our life for the better but in the end, it all came crashing down. Many companies couldn't handle such kinds of devaluation and ultimately collapsed.
The Housing Market crash happened because of the fact that the number of people selling the houses increased exponentially more than the number of people buying these houses, and as a result of that the housing interest rates nearly fell to 0%.
Lehman Brothers Abrupt Ending:-
One such company was Lehman Brothers, which handled the 1929 crash, the World War 2 crash but couldn’t handle 2009. Even the government couldn’t save the company. Surely the company was a money-making giant but it made all its recent money on false promises. Likewise, many investment banking companies were ripping off people but they all managed to survive except Lehman Brothers.
An unregulated system like CDOs (Collateralized Debt Obligation) was developed by these investment banks. It was a complex system that was specifically developed to confuse people into thinking it was a safe and secure investment. These CDOs were given a rating by hired rating agencies based on the risk factor attached to them and these agencies many times produced false ratings, then these were sold to investors and they were happily buying them because the housing market was the safest investment at the time and they saw it as a profitable venture. Initially, this made a ton of money for these banks but the banks became greedy and started making these OCDs many folds over.
But this was not possible as the number of people who could safely repay the loans started diminishing and demand for housing loan was growing rapidly so now these banks started giving Subprime Mortgage Loans (or SMLs) which was a type of loan that was given to someone who doesn’t have a strong credit history and there was no guarantee of repayment. These rational choices brought down the whole economy with them.
Doomed for Failure:-
The risk of non-payment was avoided by the banks with the selling of mortgage loans to investment banks. And from the investor's point of view, this seemed to be a good investment as these were AAA-rated which were fake in many cases that's why they were still buying it.
If anything were to go wrong, the banks had the full authority to sell these properties and make their lost money, and this is exactly what they did in the unfortunate end.
The problem actually arose when the inevitable happened when the people couldn’t pay their Subprime Morgage Loans and banks did the obvious thing of selling the properties in the market. The non-payment increased exponentially along with the selling of properties. The number of people selling these homes increased many times over than the number of people buying them that resulted in dipping down interest rates and slashing real state rates, which ultimately crashed the market.
The Lehman Brothers were in so deep debt that government couldn’t save the company and some say that the government did it intentionally. The came from the market cap of $45 billion in 2007 to complete bankruptcy in 2008. At the time it was the biggest bankruptcy in US history, in which 25,000 people lost their jobs.
WHO WAS THE BENEFICIARY OF 2009 CRASH
People who were smarter than the rest were benefitted from this. People who were smarter than the government made millions of it. The ones who dared to short (shorting is a process of selling something first then buying it later when the price drops to make a profit) the housing market was profitable even in the crisis. The ones who were shorting the housing market were seen as stupid and delusional but in the end, they came out victorious.
People of Goldman Sachs made billions out of it. But the confusing part here is that they were also the ones who were dealing in these CDOs and on the other hand they making money on the crashing housing market by shorting it. This chaotic situation was dealt with the company paying huge sums of money in fines as they were playing both the roles.
But the thing that nobody can shy away from the fact is that they are one of the best money making minds in the business. In some situations, they have made money even on the fines that they have to pay. And some situations they proved to be clever than the government itself.
During the crash, Amazon stocks fell from $116 to $6 but Jeff Bezos kept it, and now they are worth about $3,200. No wonder he is the richest person in the world.
INTERESTING FACTS AND FIGURES ABOUT THESE CRISES
- There have been 47 recessions in total, some big, some small, and some massive like the ones mentioned above.
- The Great Depression of 1929 was a big market crash and lasted for about 10 years, The recent Covid-19 crash was another huge crash but the market soon recovered and seen growth like never before.
- Even in these difficult times companies like Goldman Sacks made a huge amount of money by shorting the housing market.
VIDEO GALLERY
- I strongly suggest you watch the movie ‘The Big Short’ and ‘The Wolf of Wall Street’.
