American Capitalism Is Brutal. You Can Trace That to the Plantation.

Terms in this set (48)

Economic crisis lasting from 2007 to 2010 that resulted from several interrelated real estate and investment market problems occurring simultaneously. During the housing boom in 2000–2006, home values rose quickly. Trusting the market would continue its climb, banks issued high-dollar-value loans to borrowers who did not have the income to afford such expensive homes. The banks were able to charge higher interest, subprime rates to these borrowers because the borrowers’ credit history was poor. Banks knew these borrowers might be unable to make payments for the entire term of the loan, but they approved the loans anyway, happy to collect the higher interest rates in the meantime and confident they could resell the home for a profit if the borrower defaulted on their mortgage.

At the same time, banks had also sold bundles of home loans to investment banks, which issued mortgage-backed securities that promised a steady stream of income as homeowners made their payments. When the housing bubble burst in 2006, home values declined quickly. Borrowers who could not repay their loans had their houses seized by the banks, which were unable to resell them profitably due to the overall housing market decline. As a result, mortgage-backed securities lost their value.

This had a domino effect on the rest of the financial market: investors who held the collateralized debt obligation (CDO) investments filled with subprime mortgages were not just individuals; they included entities responsible for millions of Americans’ financial security, such as pension funds, insurance companies, and mutual funds. Many of these institutions invested in CDOs believing them to be much lower-risk than they actually were. When the CDO values plummeted, so did the value of the institutional funds that invested in them.