Credit Crisis

Banks, securities firms and other financial institutions had invested heavily in the booming housing market of the early 21st century. When the housing market began to falter, so did the banks. Banks did not have enough capital assets to borrow and lend money. When the securities company Bear Stearns folded, other banks began to follow at a record rate and home foreclosures continue to increase.¹²

Fast Facts

1. Banks are insured by the FDIC, but securities firms and mutual fund firms are not³
2. Believed to be caused by a combination of subprime mortgage lending, unethical lending and business practices and the subsequent insolvency of major banks and lenders⁴
3. The Fed has lent and continues to lend money to certain financial institutions to attempt to lessen the impact of the crisis
4. Rate of inflation has increased during the crisis⁵
5. More than 1 million homes currently in foreclosure⁶
6. At least 11 banks have closed since 2007¹

Tipping Point

Although the subprime mortgage crisis began before 2007, the demise of securities firm Bear Stearns on August 1, 2007, is generally thought to be the start of the credit crisis. Up to that point, individuals were facing foreclosures at record numbers but financial institutions had not been as affected. When JP Morgan bought Bear Stearns, it set off a cascade effect that worsened the subprime mortgage crisis.⁴ As of August, 2008, more than 10 banks had folded.¹

Categories