In the decades before the crisis, US policy had deregulated financial markets. Banks could exploit loopholes with unregulated institutions abroad to take more and more risks and make high profits.
The terrorist attacks of 11 September 2001 and the falling share prices of the new internet companies at the turn of the millennium -> DotCom crisis threatened to plunge the country into an economic crisis. The central bank FED tried to prevent this by printing more and more money from 2001 onwards, with interest rates falling at the same time.
As a result, many people with low incomes found themselves in a position to take out loans and buy real estate, although many could not show any collateral that would fall to the banks in the event of a default. The “American Dream” of owning a home was to come true for as many people as possible. For the banks, this was an attractive development because they earned money on every loan granted. The fact that this business was risky – in the USA interest rates are only fixed for a short time – did not bother them much at first, because they could bundle the loans with other, better products into securities and resell them worldwide. The risk that a loan would not be paid off thus lay with the buyer, i.e. mostly with the next bank.
Such risky transactions are actually supposed to be limited by rating agencies that give bad marks to unsafe financial products. Before the financial crisis, the big agencies therefore rated packages of real estate loans as “low risk” – even if they were not covered. Thus, many “bad” loans came into circulation and a so-called real estate bubble was created. Later, the US government even sued Standard & Poor’s, one of the big rating agencies, for wrong ratings that allegedly contributed to the crisis.
After some time, the US Federal Reserve raised the base rate, which also caused mortgage rates to rise and many borrowers could no longer repay their mortgages. They had no choice but to sell their new homes, as many had no other security. At first this was easy because property prices were still booming. With the sold house, the loan could be paid off without making big losses. However, the more debtors had to sell their houses again, the more property prices fell throughout the country. The sale of the property thus no longer brought enough money to pay off the loans. The banks could no longer get back the money they had lent – one bank crash followed another.
Development of the S&P500 between January 2007 and December 2009
Progression of the crisis
Measures to cope with the crisis
In early October 2008, a package to rescue Wall Street was approved, consisting of, among other things, the capital increase of the banks, the purchase of toxic assets and financial lifelines for the two mortgage lenders Fannie Mae and Freddie Mac.
In response to the Wall Street crash, the major stock exchanges in Europe and Asia also collapsed. After the crash, the New York Stock Exchange (NYSE) introduced new regulations. The computer system was given a safety brake to prevent massive selling.
The Dow Jones is also monitored more closely. If it drops by more than 350 points, trading on Wall Street is interrupted for 30 minutes – at 550 points even for a whole hour.
Before the crisis, the companies of the Neuer Markt are still valued at 300 billion euros. In 2003, four billion of that is left. The DAX falls to about 2,000 points and has thus lost 75 percent of its value.