There are several factors that caused this crash but the main reason was the supreme mortgage crisis. The stock exchange is a simple system to comprehend and was established centuries ago. The history of the stock exchange dates back to 1 790 in Philadelphia, Pennsylvania. This would be the first time trading stocks was done in an organized fashion instead of at random like it was done prior. This location deemed successful for 30 years before it was moved to its permanent location on Wall Street in New York City. The stock market remained successful until it crashed on Black Tuesday in 1929.
This crash resulted in the loss of billions of dollars and marked the beginning of the great depression. The great depression would last for about ten years and put America’s economy in the worst shape it has even been . During this period, Stocks would drop to record lows, half of the American banks would perish, and the unemployment rates would sky rocket. The Depression would finally recede after World War II. The next crash would not occur for decades but would affect the largest markets on the globe and would be referred to as black Monday. Black Monday, occurred on October 19, 1987.
On this day tock would drop 22% and this drop would send the global economy into a tailspin. 19 of the 20 largest markets throughout the world, would all see at least 20% drops. Luckily, the crash did not trigger a recession and would only result in the loss in a large number of financial careers. However, the blame of the crash would be pointed at the politicians rather then those in the financial world. It is difficult to understand why a stock market crashes without a simple understanding of the subject. The stock market is a group Of companies that meet a certain criteria. The companies are broken down into units.
These units are then broken down and sold as shares; the shares are considered part ownership of the company. But, why would a company sell shares and give away assets? The stock market allows companies to finance themselves without taking out commercial loans known as debt financing. Debt financing results in large interest fees, which is why it is referred as “debt’ financing. However, equity financing allows the companies to sell stocks to cover the costs of the company it also allows them to finance their company risk free. Both types of financing have theirs pros and cons, depending on ones taxation.
With the understanding of these simple topics it becomes easier to understand the stock market. With little understanding of the stock market, we can still comprehend the reasons behind the crash. There where many events that lead up to the crash of 2008 and it all started with supreme mortgage crisis. A us prime mortgage is given to someone with a low credit rating. In 2006, private sectors wrote out about 12 million loans worth up to 2 trillion dollars. These loans were given without the usual regulations. These regulations were parted from due to congress wanting to give out more moans.
Unfortunately, this only worked for a short period of time, as many could not afford to pay back their loans with the high levels Of interest. As these loans were not being paid off, banks were running out of money yet continued to loan out more money that they did not have. This ultimately caused a huge financial crisis causing several private lenders and banks to claim bankruptcy. The crisis caused one of the largest and oldest lenders in the country to file for bankruptcy. On September 18, 2008 the Lehman brothers filed for bankruptcy with the largest claim of all time.
The collapse of the Lehman brothers would cause a downward spiral of the economy and lead to the next collapse of the stock market. The loss was devastating to our country as they had existed and succeeded for decades. The company was founded in 1 850, and had survived two previous Stock market crashes but unfortunately, they would be one of the causes of the 2008 crash. The collapse of the Lehman brothers provided the shareholders with a preview of what lay ahead. Ultimately, causing them to sell the shares they had invested in banks. The abundance of those selling their shares caused a umber of falls all around the stock market.
The sudden collapses had a large effect on other countries as well. Affecting countries all across the globe but having its greatest impact on Iceland who almost went completely bankrupt. The stock market crash of 2008 had the entire globe in crisis. Every country involved had to figure out a way to save themselves from a large recession. To get organization back in the stock market the United States had to bail out all the banks and large companies to allow them to give loans again. Ultimately, allowing them to restore a balance in our economy. Fortunately, we had to borrow a significant amount of money from other countries further increasing our debts with them. As for prevention, there have been a few laws and regulations added. First off, shorting stocks is now illegal. Shorting a stock is borrowing money from an investor and then when the stock is dropping or sold not replenishing their loan. Another regulation is forcing lenders to stick to their strict regulation when giving out loans. Also interest has been lowered substantially in order for new business to expand and grow without an absurd amount of debt.
While the reasons for the stock market crash in 2008 aren’t completely pointed in one direction. Most of the evidence lies on the supreme mortgage crisis. Without this crisis, the Lehman brothers would have never been bankrupt, companies wouldn’t be in a scramble to buy each other out, and shareholders wouldn’t have short sold all their bank shares. Ultimately, if lenders stuck to their normal regulations while giving out loans this entire situation could have been avoided. Which would have saved our country billions of dollars. Citations 1. Brian, M. , & Ross, D. (n. D. ). “How Stocks and the Stock Market Work”