What caused the economic downturn in U.S ?

really to get the best explanation watch all the videos of Peter Schiff interviews on youtube

he predicted all this stuff and everyone was laughing at him at the time

Leverage -- borrowing in excess of assets on hand. When a business deal is profitable, the more you borrowed to make it happen the greater your profit. The opposite happens when you borrow and the deal losses money -- a 10% down turn can very quickly turn into a 100%, 300%, 500% loss.

Interlocking, unregulated, financial agreements -- Losses were magnified when agreements between companies to cover such losses fell through because no one (not the companies, the governments, the insurance agencies, nor the financial regulatory agencies) bother to do the research to see if the companies providing such agreements had the money on hand to pay for them.

Panic -- the global financial system depends on a huge amount of trust plus a pinch of government oversight and a dash of auditing & research. When nobody trusts anyone, the system will shut down. It simply cannot function without full faith and trust. (Think of it like car traffic in a major city in America -- if you stopped believing that most people will stop for the red light, how would you proceed through a busy intersection? If everyone did what you just did...traffic throughout the city would simply...stop.

Bad loans, badly managed companies

Bank being forced to make mortgages to undeserving borrowers.

Leveraged borrowing amoung institutions

one word: Greed.

that's where it all began

low interest, massive borrowing and lending without worring of consequences..well, we are pay for that now..thanks a lot to those who abuse the system and those who just love to buy stuff when they dont have the money for.

thanks a lot greedy americans

Forced lending of assets(houses) to those who could not pay the mortgage. People bought a house they could not afford, then pulled money out of the house to buy toys. The value of the house went down, the people no longer wanted the house, so they stopped paying the mortgage. They then got foreclosed on, kept the toys, walked from the house, then the government picked up the tab. The biggest scam in history and most people did not even realize that they were a participant.

To answer this in a detailed manner would take hours, so I'll give you the short, unbiased version. While many claim it's the housing downturn, reality is more complicated. Over the past many decades, and especially this decade, there has been a credit bubble building. Not only have consumers and government been building up debt (look at how much Americans have in credit card debt), financial firms have been using leverage (borrowing money) to enhance returns. These firms created complex products like credit default swaps and collateralized mortgage obligations, levered them heavily (sometimes up to forty times--that is, for every one dollar the firm had on the books, they had forty dollars borrowed) and traded the products amongst themselves. Housing debt was perhaps the most popular type of investment amongst these firms, and they bought as much housing debt as they could. It was really easy for people to get a loan because the mortgage broker new that as soon as he gave a loan, he could turn around and sell the mortgage to Fannie and Freddie, who could in turn sell the mortgage to Goldman Sachs and Lehman Bros., all before the ink dried on the original mortgage application. This was all great so long as housing prices kept going up. Like all good things, this came to an end.

Now there are a lot of investment firms sitting on a lot of housing debt that is heavily leveraged. Imagine a firm has $20 invested in a product and are leveraged 19 to 1 (for every $1 they invested, they borrowed $19 to invest). If the product goes down by $1, they have lost 100% of their own investment but still owe someone else $19. What if that investment goes down $2, $3, $5. Suddenly, these firms freak out and won't lend any money to eachother because who knows who owes what to whom. At the same time, these firms are scrambling to get all this leveraged debt off of their books (hence the original intent of the $700 billion bailout). Firms that aren't in the financial business aren't lent to either. This is how the credit crisis occurred. The huge wave of fear hit as Fannie, Freddie, and AIG had to be rescued and Lehman went under. People sold everything (stocks, corporate bonds, municipal bonds, money markets) and bought U.S. Treasuries in a flight to safety.

What we have now is the aftermath of credit markets where no firm would lend (these markets are still tight though not as bad as before), falling housing prices, a high number of homes for sale but few buyers because people can't get a loan and/or prices haven't come down far enough, the aftermath of very high commodities prices that went straight to many companies' and consumers' bottom line, and a lot of fear that is preventing investors from getting back into the markets.

forcing the banks to issue loans to "minorities" for overpriced housing that they could not buy and afford without hybrid interest only loans.

poor leadership, disparity among the classes, poor lending practices, the deregulation of the securities industries and financial industries, fear, greed, etc.

Corrupt business practices, bad loans, war.

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The Causes and the Results. 0.024
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