Many people have trouble grasping the economic crisis — and understandably so. Usually, people talk about the crisis with a sea of numbers and use words that aren’t part of a college student’s vocabulary.
To catch up on the vocab, check out our dictionary below. And then to understand the spark that set it off, read on for WSN’s simplified-to-as-simple-as-this-can-get-without-being-totally-wrong guide to the economic meltdown.
Before the economy fell into its current state, banks were offering mortgages to people who couldn’t afford to pay them back. That action is illegal if the banks know that those people can’t pay for it, but that prior knowledge is hard to prove.
But it seems that many bankers did know — or, at least, that they would have had to know — that they were offering loans to people who couldn’t pay them back. It’s enticing to sell loans this way, because it seems like everyone wins. The person getting the loan gets a low-rate mortgage; the bank making the loan makes a sale.
However, that sometimes meant people who couldn’t afford a car were buying homes without even making a down payment. If this had only happened a few times, it would not be such a problem. But clearly it happened a lot more than that — more than many bankers realized — and today we see the results: thousands of people whose homes are being foreclosed upon because they can’t make their mortgage payments. CNN reported in April that one in every 194 households in the United States had received a foreclosure filing so far that year. The number of foreclosures is directly related to the number of loans the banks offered to people who could not afford them.
Banks bundle all of these mortgages together and sell them to financial service firms like Lehman Brothers. Essentially, Lehman is paying the banks for the money the banks are supposed to have gotten from the people who take out the loans.
After Lehman buys the mortgages, they combine them into even larger bundles...