According to Professor Winnie Monsod, in the GMA-7 News and Public Affairs television documentary, “Walang Pera”, which aired last March 22, 2009, “the global financial crisis of 2008–2009 resulted from a combination of stupidity and greed.”
It stemmed from the US housing crisis. This started when banks began to grant housing loans even to those who had lesser ability to pay. They called these sub prime mortgages. According to Wikipedia, “the term sub prime often correlates with non-conforming loans, or those that do not meet the guidelines… Sub prime borrowers are more likely not to pay the money back, such as those who have a history of not paying loans back, those with a recorded bankruptcy, or those with limited debt experience.”
Experts believe that government policies encouraged this high risk lending practice. The reason for this was that the increase in loan incentives such as easy payment terms and the anticipated increase in housing prices encouraged borrowers to assume high-risk mortgages thinking that they could easily refinance these loans later at favorable terms. However, the problem broke out when interest rates increased instead and housing prices started to drop by 2006 and 2007. Refinancing became unviable which caused default in payments and foreclosures. Wikipedia says, “During 2007, nearly 1.3 million US housing properties were subject to foreclosure activity,” which was a 79% increase from 2006.
Now banks, thrifts in particular, approved too many high-risk loans because they used these sub prime mortgage papers to acquire more capital infusions from bigger financial institutions as mortgage-backed securities (MBS). It has been a practice in the US during the past 60 years for lenders to sell the right to receive payments on the mortgages that they issued through the process called securitization. They called the resulting securities mortgage-backed securities. However, due to the widespread mortgage delinquencies, which resulted to foreclosures, these MBS had lost their value, which resulted in a heavy decline in capital of many banks and financial institutions. This credit crisis in big financial institutions in the United States and Europe also caused a chain of economic slow down worldwide. Several large United States-based financial firms underwent conservatorship (or the temporary legal control by government of private corporations). The insolvency (or the inability to pay debts) of more companies in the US yielded to a recession and a decline in stock market prices around the globe, which further aggravated the crisis.
The United States went to a shocking economic recession. The Lehman Brothers, Merrill Lynch and the American International Group (AIG) were the first to absorb the knock out blow. Apparently, no one could deny the connection of many of the world’s economies with the US market. America sneezed and the world fell ill.
The US economic reforms began with the signing of the US$787 billion Economic Stimulus Bill by President Obama last February 17, 2009. The rest of the world's governments went along with their own economic stimuli packages.
References:
- GMA-7 News & Public Affairs Documentary, “Walang Pera” March 22, 2009 GMA-7
- http://www.wikipedia.org
