blog 1

„ We had a bubble in housing (and) I really didn’t get it until very late in 2005 and 2006” said Alan Greenspan the chairman of the Federal Reserve System (Fed).

Today the bubble in housing isn’t any longer a problem of the American house market; it’s a problem that concerns the American financial market and therefore the whole financial world. How could such a big bubble developed without being recognizing.

Everything began with the terrorist attack on 11^th September 2001. Infect of the attack the American economists were angry about a recession, because the people became scared and saved their money for bad times, which affect the “ Circular flow model” that means the money wouldn’t flow anymore through all economic organisms and this disturb the economic circle.

To prevent such a recession the Fed decreased the interest rates from 6, 5% (2001) to 1% (2003). Therefore it was easier to getting money even for the people with a low income. So the measure of the Fed was successful, because the people took the chance to get easier money from banks and credit institutions and spend their money instead of saving it and America could avoid a recession.

At this time there was a high demand of houses, because lots of people in the USA want to live in a house with a little garden near by a big city, but the supply wasn’t as high as the demand and therefore houses were very expensive. Infect of the low interest rate a lot of American people took the chance to realize their dreams and took out a credit for buying their own house. Local banks and independence financing people gave credits to “subprime” people, people who have such a low income that it isn’t sure that they can pay back their interests let alone the debt, but the small institutions thought it is a good market with a risk, but also with large profits. So a lot of subprime people got credits for their house mortgages and it developed a house boom, especially in areas California, Florida, New York, Michigan and suburbs of Chicago and the bubble grew.

In August 2005 the boom ended. The supply caught the demand and the Fed started to increases the interest rates to correct the market, because the inflation growths more and more. After all this years, with low rates the Dollar lost on its value and there were a lot of more economic reasons for increasing the interest rates (e.g. war). In America the interest rates are usually fixed for 2 years so when the interest increased a lot of people as especially the subprime couldn’t pay anymore and there were a lot of people who couldn’t pay back, we are talking about billions of Dollars. Therefore the subprime people had to give back their houses to the investment organisations that they couldn’t sell it because of the higher interest rates, the unemployment which increases all the time and the losses of the value in houses infect of the inflation.

So the bubble burst, because the local banks or financing people sell the credits (from subprimers called as well as “fault credits”) to bigger banks and they, to national banks. The big banks crushed the credits into small peaces and mixed the “fault credits” with normal credits together in packages and sell the packages again to others, so that you couldn’t identify “fault credits” and “true credits” anymore. When the bubble burst no bank really knows if they had “fault credits”, too or not and no bank couldn’t trust another, because nobody knew if the other bank is able to pay. So basically the subprime credits gets into the whole financial world and Wall Street investment banks and financial institutions around the world have also been affected in 2006.

So the subprime crisis is a process which took years for develop and nobody really recognised it even the chairman of the Fed, but therefore after 2005 till now everybody knows about it, infect of the big damages and the fear that it will be not only affect the banks.