It all started on 9/11/2001. The attacks on the downtown skyline of New York left a country in shock and the possibility of an economic slowdown was inevitable. People began thinking they should save for that emergency that all of the advisors told them may come. But, with pressure (possibly from the Bush administration – I am a conservative though!!), the fed began lowering rates below what they thought necessary to show that we are a strong country that can bounce back from an attack of those measures. This began the debt driven boom of the early 2000's.
With the cost of borrowing at it's cheapest levels since the 1960s, the debt driven economy began to expand. Memories of the stock market crash were fresh in people's mind, and people wanted to find an investment that was safe. Savings accounts were yielding merely 1-2%, money markets weren't much more… People began to realize that they could then save money by buying a home instead of renting. People began flocking to the residential real estate market to purchase homes. With the limited regulation, lenders began to find that this was very profitable and began lending to anyone who could afford it. Not before long, lenders then introduced creative mortgages in order to help those that couldn't afford a home, could now afford one by paying interest only over a certain amount of time. Laws of supply and demand played a part in the big metro areas, where people wanted to live the most – where the jobs were. Home prices began rising, and with that people began to feel wealthier. Inevitably, people began spending more as they felt like they could afford it. The roaring 20's couldn't match the early 00's, as the American dream became owning investment properties and renting them out. Jobs were plentiful with the spending habits of Americans and savings rates were the lowest in years.
There were moderate price corrections in parts of the country by the end of 2006, but it all started when regulators began imposing stricter policies to have lenders qualify potential mortgages. This sent a variety of lending companies bankrupt. Even the CFO of Countrywide said that 60% of their customers that had these creative mortgages wouldn't qualify under these new guidelines for underwriting. By mid to late 2007, there wasn't much of a change – But, the numbers were increasing in delinquencies of mortgage payments, foreclosures and prices of homes began coming down.
The economy began slowing down in early 2007, but the fuel for the boom became the anchor for the bust. The mortgage industry led to a large number of job growth. With real estate prices dropping, people began spending less and saving more, but what they didn't realize is that they already have forgone the majority of their future wages due to increased financing through vehicles, equities, and mortgages. As the economy became more unstable, the yield of bonds came down as the demand rose, and this gave people the idea that they could refinance their homes. For those that got in the game late, the price of their home dropped below the price they paid, and they weren't able to refinance at the lower rates. Not only that, but because of regulation, the ones that got into the game moderately late couldn't refinance because they couldn't qualify. This led to an increase in homes for sale and foreclosures, which brought the price of homes even lower. The homeowner had felt the effects of buying on margin… You can make a lot, but you can also lose a lot.
With consumer spending drying up, the economy slowing down because of this, and the price of homes dropping to a level never thought seen, deflation began coming into play. What was once a half a million dollar home was now for sale as a foreclosure or on deep discount. Many small businesses began closing because the prices that were demanded in the market place couldn't support the costs associated with doing business. This caused more unemployment and sent the economy into a recession. Since the majority of people already committed their future earnings to their debt through financing, people began to feel the pressure associated with financing. Some tried to seek refuge through bankruptcy protection, but because of the new bankruptcy laws, it made it harder for people to walk away from their debt. Unemployment was at an all time high because of the consumer spending drying up and the personal savings rate at an all time low.
It wasn't until the economy was seen unstable by the major bond holders – China, India, Japan, etc. Baby boomers began retiring and the strain of the unemployment on the federal government's revenue through taxation began affecting the national debt. There were huge amounts of money going out, and not enough coming in – because of the unemployment and the recession that the country was in. The government began raising taxes since they needed the increased revenue. The government also tried lowering the fed funds rate, but people were stripped too thin from their borrowing habits. The depression hit when the price of the bond dropped as the major holders began selling out because it was seen as too risky. The U.S. then didn't have the funding needed to support the programs that were in place to help those that needed it most during this recessionary period. The depression hit and hit hard. Spending was at an all time low and unemployment was at an all time high.
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