In 2007 and 2008, the United States was plunged into a financial crisis that started in the housing market and quickly spread across the entire economy. Homes went into foreclosure, thousands lost their jobs, and some of the country’s biggest banks had to be bailed out by the federal government.
In the wake of so much financial chaos, people wanted to know: what just happened?
While economists and bankers have explained how something so catastrophic came to be, most people don’t have a firm grasp on what happened. The mix of factors like sub-prime mortgages, money market paralysis and complex derivatives are all a bit too complicated to someone without an education in finance.
The first installment of Academic Services’ Winter 2016 Lecture Series aims to fix that.
On Tuesday, February 9th from 11:00am-1:00pm, Professor David Birkett will be lecturing on the financial crisis and how it came to be.
“The goal of the lecture is to demystify the subject for a non-financial crowd,” says Prof. Birkett, who teaches Business at the University of Guelph-Humber.
Professor Birkett’s lecture will start by explaining a dangerous new trend that emerged in financial markets in the early 2000s: the sub-prime mortgage. With a booming housing market, there was a push to get more people into more homes, and soon the restrictions on receiving a mortgage began to relax.
“These were people who should never have moved from renting to home ownership,” says Prof. Birkett. “There was often no down payment and no vetting of their assets and earnings. These people were set up to fail.”
The plan hinged on a continued housing boom, allowing banks to seize the homes of those who defaulted on their mortgage and resell them at a higher price. In 2007, defaults began — first just a few, but quickly more and more homeowners were unable to make their mortgage payments. The trickle became a torrent and the market was suddenly flooded with homes that people couldn’t afford to live in anymore.
“There soon developed a massive oversupply of housing which caused the bubble to burst, precipitating an incredible financial collapse. It was Economics 101 - when there’s greater supply than demand, prices fall,” says Prof. Birkett. The crisis that began in housing led to huge consequences for financial markets as well.
Around that same time that sub-prime mortgages were in vogue in housing, financial institutions started to create and sell complex derivatives. As their name implies, complex derivatives were tricky bundles of investments that took their value from a mix of different parts. They might have stocks from one company, some bonds from a distant country, some foreign currency products and usually contained sub-prime mortgages too.
“Credit agencies often granted complex derivatives a strong rating, when in reality it was almost impossible to determine with any precision just how risky they were. What ensued was a domino effect as these products proliferated but eventually failed. Consequently to avoid a devastating collapse in financial markets, the American government had no option but to buy up toxic mortgages and provide bail-outs to the large financial institutions” says Prof. Birkett.
To hear the rest of the story of the financial crisis that shook the world, come to The Perfect Storm: How sub-prime mortgages precipitated the Economic Crisis of 2008
Date: Tuesday, February 9th
Time: 11:00am-1:00pm
Location: GH424
Seats at the lecture are limited, so RSVP to academicservices@guelphhumber.ca to save your spot.