Lots of reasons. Oil prices, war, a grossly under-regulated American banking system.
The crisis began with lawmakers massively deregulated the banking system during the early Bush 43 administration. This let the market basically do whatever it wanted to create the illusion of wealth, including to combine loans taken through individual banks and sell them as packages to spread the risk so that the individual loans were no longer accessible to the original lender. But the problem was compounded when the government also allowed nearly any financial entity to insure these loan packages, even if they didn’t hold the actual packages themselves.
When England first allowed the selling of insurance, people would take out insurance on other, uninterested parties, setting themselves up as beneficiaries...and then kill them. It’s a bad structure, but the U.S. allowed a similar problem: a lot of people were betting on a “sure thing” using the “mortgage money.” When one of those bets eventually went bad, the whole house of cards fell. People stopped sending premiums and started demanding their claims…which the over-leveraged masses couldn’t pay.
So businesses ran out of money, got sued, couldn't borrow. Money dried up, institutions became squeamish about lending more because the market was so volatile, and no one could get a simple overnight loan to meet a small capital problem, so more business failed. That was the "capital crunch." A lot o money stuffed in corporate mattresses, and very little doing any work.
But the reason for those claims goes to a different cause. First, bad mortgages. In the interest of making as much money as possible, banks started issuing “subprime mortgages” to high-risk borrowers. A lot of these were Adjustable Rate Mortgages. These plans failed when interest rates climbed and wages froze.
Meanwhile, OPEC attempted to get more European-level prices out of the U.S. by squeezing supply while the U.S. started a second war in Iraq, a major oil-producing nation, while still in Afghanistan, causing oil prices to skyrocket. These prices cramped every American business, causing them to freeze wages, cut staff, and stop hiring. In turn, people’s incomes didn’t climb to match their increasing mortgage payments, which responded both to timed “steps up” and upwardly-adjusted rates as interest rates soared. That meant massive defaults and foreclosures.
This was bad enough, but the issuing banks no longer had control over the loans since they’d “sold” them as packages, so they had little or no leeway to renegotiate the loans. That meant there was a near zero-tolerance for delinquency, so foreclosures were high in number. This, in turn, put massive amounts of property on the market, depressing sales of new homes and quashing prices. This had a two-fold effect: it halted construction, leading to further layoffs, and it crushed the values of all homes - even those owned by people who were not subprime borrowers, and even people who owned their homes outright. Trillions of dollars of material value was lost by the American middle- and lower-class, and their consumption ceased. That meant that imports slowed to a trickle, and world markets crashed. Without the massive consumption of the world’s wealthiest nation, other nations started to suffer losses too.
Now we find ourselves taking out massive government loans (which must eventually be repaid by American taxes at some point) to bailout giant financial corporations (these allowed by further deregulation that allowed big guys to swallow up lots of little guys, stifling competition) because those conglomerates are “too big to fail.” What does that mean? Let’s take a look at an even greater financial vulnerability than the mortgage crisis: the derivatives markets.
A Derivative is a “bet” on something financial. It could be anything, like how much damage hurricanes will do this season, or how many government coups will lead to oil shortages. It’s like a big sports book. And you can leverage your bets - put, say, $100 million on a bet with only $5 million of actual cash to back it up, paying “calls” on the bet to make up the difference if your bet starts to go against you, in a similar fashion to playing commodities futures.
Chase bank, the largest in the world, is leveraged to the tune of some $70+ TRILLION. Yes. With a “T.” How much is $70 trillion? That’s greater than the Gross Planetary Product. Of EARTH. For a YEAR. That’s the total labor of every man, woman, and sweat-shop working child alive for 365 days, just to pay off that bet if it goes wrong. And that’s ONE BANK. Who’s bailing THAT out if it goes wrong?
All of us, I’m afraid.
It’s entirely possible that there is no good solution to the current financial crisis. But if there is, new regulation, massive taxes, and a whole lot of suffering for many, many years, will be a part of it.
There simply is no alternative.