What were the three main causes of the stock market crash

This content is not provided or commissioned by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program. The financial crisis is affecting millions of Americans and is one of the hottest topics in the Presidential campaigns. In the last few months we have seen several major financial institutions be absorbed by other financial institutions, receive government bailouts, or outright crash. So what caused the financial crisis of ?

This is actually the perfect storm which has been brewing for years now and finally reached its breaking point. This video explains the economic crisis: The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo. The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This dried up their reserve cash and restricted their credit and ability to make new loans.

There were other factors as well, including the cheap credit which made it too easy for people to buy houses or make other investments based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money. Unfortunately, people wanted to buy the same thing, which increased demand and caused inflation.

Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value. In more recent months speculation on oil prices and higher unemployment further increased inflation. The American economy is built on credit. Credit is a great tool when used wisely.

For instance, credit can be used to start or expand a business, which can create jobs. It can also be used to purchase large ticket items such as houses or cars.

But in the last decade, credit went unchecked in our country, and it got out of control. Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets after taking a fee for themselves originating the loan. A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was a pulse and your word that you could afford the mortgage.

Brokers had no reason not to sell you a home. They made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loan. But many of these mortgage backed assets were ticking time bombs. And they just went off.

The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag.

This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money.

This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business.

Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage. These massive losses caused many banks to tighten their lending requirements, but it was already too late for many of them… the damage had already been done. Several banks and financial institutions merged with other institutions or were simply bought out. Others were lucky enough to receive a government bailout and are still functioning.

The worst of the lot or the unlucky ones crashed. Many financial institutions that are saddled with risky mortgage backed securities can no longer afford to extend new credit. Unfortunately, making loans is how banks stay in business. If their current loans are not bringing in a positive cash flow and they cannot loan new money to individuals and businesses, that financial institution is not long for this world — as we have recently seen with the fall of Washington Mutual and other financial institutions.

The idea behind the economic bailout is to buy these risky mortgage backed securities from financial institutions, giving these banks the opportunity to lend more money to individuals and businesses, hopefully spurring on the economy.

Yes, it is true that credit got us into this mess, but it is also true that our economy is incredibly unstable right now, and being that it is built on credit, it needs an influx of cash or it could come crashing down. This is something no one wants to see as it would ripple through our economy and into the world markets in a matter of hours, potentially causing a worldwide meltdown.

As I previously mentioned, credit in and of itself is not a bad thing.

What were the main causes of the stock market crash? | eNotes

Credit promotes growth and jobs. Poor use of credit, however, can be catastrophic, which is what we are on the verge of seeing now. So long as the bailout comes with changes to lending regulations and more oversight of the industry, along with other safeguards to protect taxpayer dollars and prevent thieves from not only getting of the hook, but profiting again, there is potential to stabilize the market, which is what everyone wants.

Whether or not it works is to be seen, but as it has already been voted on and passed, we should all hope it does. Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur.

He served over 6 years on active duty in the USAF and is currently a member of the IL Air National Guard. He also writes about military money topics and military and veterans benefits at The Military Wallet. Ryan — I agree with your analysis but you left off one other factor. The government created no-money down initiatives and threatened banks who refused to give credit to these people.

On top of that, many legislators were bought and sold by money from Fannie Mae and Freddie Mac which were backing these crazy loans. Banks are pretty grown up when it comes to being greedy. But deregulation allowing combination of products from commercial and investment banks produced hedging, collateralized debt obligations, and credit default swaps.

What caused the Wall Street Crash of ? | Economics Help

Ryan is right — there were a lot of factors but at its core, this was good old fashioned greed. All the checks and balances were taken out of the picture and they got the loan…. Bush responsible for this when he was Governor of Texas?

Also, Andrew Cuomo ran for Attorney General of New York and sued banks operating in New York for creating the subprime mess. What a heap of crap. The Clinton administration put pressure on Fannie Mae and Freddie Mac to give out loans to pretty much anyone who wanted one. However, many people who got loans were not financially ready to own a home.

These problems have been well over a decade in the making. Ron from The Wisdom Journal recently wrote about the legislators were bought and sold by money from Fannie Mae and Freddie Mac. This list also points out how much money each Presidential Candidate received over their tenure in the Senate. It is worth noting. Dividend Growth Investor says. Thanks for the nice overview. The main problem is not legislature, its greed. What do you think is the next step in the crisis? The define joint stock company colonies step in the crisis is the bailout which was just agreed upon.

We will still see some volatility in the markets, and a few more banks and financial institutions will likely be bought and sold, and possibly even crash.

Hopefully the markets will stabilize soon. Until Debt do US part says. Too many people got sucked in by the promise of an easy life built on rising home values and easy access to credit. It was like a giant ponzi scheme.

I think the problems are much deeper and more troubling. One of the reasons credit was loosened up was to address the growing divide between haves and have-nots. Some people saw injustice in the inability of people of lesser means not being able to access credit. I think the more troubling issue is not greed, but entitlement. Our entire societal perspective on what we are entitled to is all wrong.

And I think we see this rebounded in all aspects of our life, not just with credit. Scott The Passive Abrir cuenta demo forex says. The teaser rates and HELOC really impacted some of our friends and made it easy to buy a large house with no money down.

When any little setback occurs, it can devastate a family and get them late on home payments. Kind of like being a kid in a candy store with a free credit card. It looks like the Senate just passed a revised version of the bill. Hopefully it includes some provisions to prevent these mistakes from happening in the future.

The next few days will be interesting. These are very good points. And yes, Greed was the main issue in this financial crisis we what were the three main causes of the stock market crash now going through, BUT the banks AND the government are to blame for.

Listen in their own words……. All this started happening even before GWBush was Governor of Texas and yet he gets blamed for everything. What a bunch of critical thinking losers Americans are today. Your analysis of the current crisis reflects that options and warrants treasury stock method most commentators.

It is missing three elements. Third, it created the hedge fund industry, where As inflation was truly raging, and loans were available at below these inflation rates, hedge fund profits were enormous and almost guaranteed. But it also destroyed savings. No one was going to forego consumption if the rates paid on savings accounts were below the rate of inflation.

As a consequence, other than as a consequence of the inflated assets purchased on credit e. We have a crisis of solvency. People cannot afford to borrow, and banks cannot afford to lend. There will need to be increased savings, with decreasing consumption. You cannot blame greed. People did exactly what government Fed and fiscal policies caused them to do. Now, dispite the cost of the cure, government will be unable to fix the problem otherwise.

Regrettably it will try. The Paulson plan is a typical mistake.

Techmeme

Regardless of the heresy involved, the unsuccessful banks need to die. We do not need them, they could not manage themselves, and they will not help us to recover from this.

Was the crisis cause mainly by sub prime lending or are there other factors that influenced the crisis…you can in box me your reply ……thx.

I totally agree with the article above. Us dollar to pound sterling exchange rate graph article is very similar but far more detailed. Have a read at my site. I do believe the people — the home loan writers need better training trik simply trading forex should be given more stringent lending guidleines.

I was really hoping that the economy will start its recovery soon as my investments in stocks were all losing big. Companies before hedge against the price of oil when it was reaching its peak price thinking that they can profit from it since how much money does anthony kiedis make expect a lot more increase in price.

Unfortunately, as a result of the financial crisis, the oil price fell because of the slow demand and their hedge against oil price led them to huge losses. All pinky forex jaipur wanted to say is that this economy needs to stop doing so bad and get the people wizetrade for options software are bring us down out of the chair.

Also neoptism needs to stop. And i would like to give a special shoutout. I think you are right as far as it goes, but you have made an error that almost everyone makes: Companies trade worldwide—as you noted.

Companies are international and hold no allegiance to any nation. I agree, there is more to the economic crisis than is listed in this article. What I have written is a very simple explanation of how the debt market in the US grew exponentially over the previous few years. There is, of course, much more to the equation. Reallocation of wealth to other nations is definitely part of the situation.

In the coming years I think we will see an even greater distribution of wealth throughout the world. Greed is a constant. Saying greed is to blame for the crisis is perhaps as void of meaning as a statement can be. Carelessness also implies that what happened was an accident, which in a large sense, it is — certainly no one intended for the economy to crash. But many of the actions leading up to the crash were wanton examples of greed and fraud.

I agree with all what you have said, this crisis has been due to greed and now we suffer the consequences. Now what I think is, that credit is good, it is money supply chain that keeps the economy working so thus if more money is lent to people with a reasonable interest rate then this would keep the economy stable, moreover people should now know that it is not advisable to get into buying houses and selling them to make money, because for example i do agree that there should be legislation that stops bankers lending big sums of money to people on certain annual salary for instance England has been very bad when coming to give mortgages of 9 or 10 times your annual salary, it is this that has mainly caused the problem.

Banks therefore have to limit what they give out and this would lead to stability. I think that was really selfish of you to mention. US net capital inflow has been on the rise in a karvy stock broking delhi address progression. In a nut shell, its speculation futures trading outflow of capital may cause financial crisis in a country but for us current situation, its not a factor.

Since we are spreading the blame around here and there is plenty to spreadI would like to add sterling stock brokers nairobi the entertainment industry has certainly binary options forex peace army their part.

Just look work from home jobs moncton nb all the shows on television from reality shows to moronic sitcoms ; how many are set in main street America?

In movies, and on TV, everyone drives big cars, lives in big houses, wears flashy clothes, etc, etc. We quickly became a culture chasing bigger and better. Average home sizes have nearly doubled in thirty years. Nothing is ever enough. The American economy is built on consumption excel formula for nifty options consumerism.

We, as a country and as taxpayers, will be paying for this for a long time.

All very true, and all very sad. Deepali — you are also very right about entitlement. I think you hit the nail on the head. I hope this economic crisis causes more people to live within their means.

It may slow down economic growth due to less consumption, but we will all be better off in the long run. I need this for my final project. Every coin has two sides. From this, we could have an overall view that little thing make big difference. All of us should hang together and change something to some extent. I agree with all what you said, this crisis is due to greed and we all now suffer from it is consequences. There is no doubt that credit is very important to the economic growth, so more money supply that lent to people with reasonably interest rate then these could lead to stabilizing the economic.

How Do You See The Future? One positive effect of the crisis is more people became interested in economics and finance. We hope that our Big Bosses will find the right way to resolve the crisis that further will remain on historical book!

I think current global crises has bad effects on highly industrialized countries. Through these countries, agricultural coumtries. I like to know that what are the main causes of this global finincial crisis and what are the main effects of crisispoint wise. I will be very happy if sombody give me solution. The financial financial crisis, especially that began in the fiancial sector of U.

The financial crisis, which a year ago, it seemed to be localized in one part of the financial sector in U. S, has exploded into systematic crisis, spreading through highly interconnected financial market of Industrial countries and has had its effects on other markets as well.

The value of MBS was declined as the borrower failed to pay instalment. I think am very happy that ur points are helping me now to solve my preps for school assignment. Financial crisis… it is not a crisis, it is only business cycle. According to theory of Milton Friedman, to develop more and more every country must face an obstacle.

After WW2 its economy began expanding largely. Hence, that financial crisis may lead to develop the world economy. The financial crisis still continue this year Why did the Fed turn a blind eye to what to most was an unsustainable credit cycle? The Bush Administration knew what was going on……. In the face of weakening product markets and growing unemployment, successive administrations, not wanting to up government expenditure, turned to financial deregulation in an attempt to stimulate houehold debt and in the process, stimulate the economy.

It worked……beyond all expectations. The crash of made this abundantly clear!!! The problem in the world…. Years of oursourcing manufacturing jobs to low-wage countries combined with factory automation have led to weak fundamentals.

To return to full employment, governments will have to up expenditure…. Aside from the staging of the crisis by government meddling, look at the trigger events. Inthere was a huge spike in short sales of the big bank stocks, like Citigroup and Wachovia, the survival of which was seen as critical to the stability of the financial system.

The short selling originated from a few small brokers through sponsored access agreements. Who has the ability to obtain sponsored access agreements? Who has the financial where with all to pull off short selling on that scale? Who would have the motivation to push the economy over the edge? Who would consciously manipulate finance for the purpose of moving the economy, and therefore influence politics? Perhaps someone should pay George Soros a visit.

Your assessment is high school at best, and your answer to the U. We do not need to spend more, we do not need a cash influx, and we do not need to bail out the very organizations that created this problem. We need to let them go through bankruptcy, and allow for other companies to pick up where they have failed. We do not need to be further tied to the global economy, we need to be less involved in the global economy, worrying more about getting our house in order, rather than bailing out some ailing nation that is suffering from the effects of too much government intervention.

Capitalism takes care of itself, and those who act criminally within our system need to be brought to justice.

It was Wall street who collaborated with Mortgage lenders as a middle man. So, Wallstreet hounded the Mortgage Lenders to meet their numbers by any means necessary.

The key was to generate more revenue thru more loans volume. Wallstreet believe it was a win win. It is the investors in Wallstreet that make up the bulk of Wallstreet. One of the basic rules of economics is something goes up and peaks and them it starts to come down. Tell me why, CEOs of business made billions of dollars, while there businesses were going out of business.

People better wake up! This has definitely helped me for my preparation of my Masters Finance and Financial Law assignment paper. Your email address will not be published. The content on this site is for informational and entertainment purposes only and is not professional financial advice.

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Market instability The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets.

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Enter you name and email address to join our mailing list. Note About Comments on this Site: These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. Comments ToughMoneyLove says Ryan — I agree with your analysis but you left off one other factor.

Ryan, Thanks for the nice overview. Unfortunately the chickens are now coming home to roost. These events drove the economy to an explosion of credit. Furthermore, I would like to add about the issue of inflation and leveraging or hedging. The financial crisis will continue well into Anyway, the information is really helpful for my research assignment. Great video…well its time to save folks! Leave a Reply Cancel reply Your email address will not be published.

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