Question

write about 2009 financial crisis in 400-500 words. and do not copy from google write in your own words.

Answer 1

After dotcom bubble, fed chairman Alan Greenspan lowered interest rate close to zero, which meant that people were getting loans without needing to pay any interest on it. This led to increase in amount of loans given to the public. Now when a bank loans out money, it is basically creating more money in the system. For example, if bank has given loan to you for buying some property, then to buy the property you will handover the money to seller, he might deposit that money or will fulfill some of his desire and pass on the money to other services seller, who then might deposit the money, so whichever the path, but loaned money would return to the bank. From that deposit bank will loan out more money, hence in a nutshell, 1 unit of money loaned out can create multiple amount of money in the system.

When money supply was increasing, value of single unit of money went down, hence if something before could be purchased for 100 units of money, now it would consume more than 100 units of same money. Hence prices of entities like house started rising.

Loans were mostly in that time (2002–2007) were house loan, and since prices were skyrocketing people had to pay more in installment. Because value of money had decreased, employees demanded more money to catch up with rising rates. Now, generally for a company, it is difficult to rise amount spent on employee, that too in such a short time. Hence they started process of layoff, leaving many unemployed. An unemployed cannot pay his installments on time, hence he started defaulting. Because there was cumulative such happening all over the US economy. Banks were running in losses. Now banks form a very crucial part of any economy, hence stumbling of them meant wobbling economy.

This was the major reason why financial crisis was witnessed in 2009.