How did the housing market crash in the U.S. lead to a global financial crisis?
Answer (1)
The U.S. housing market crash between 2006 and 2008 started as a local problem but quickly became a global financial crisis. Let’s see what happened and how it affected the world.First, many people in the U.S. were given subprime mortgages—loans for buying houses even if they had low incomes or poor credit. These loans had high interest rates and hidden fees. People took them because they believed house prices would keep going up, and they could sell or refinance later.Second, banks combined these risky loans into financial products called CDOs (Collateralized Debt Obligations) and sold them to investors around the world. These investors included banks in Europe and Asia, insurance companies, and pension funds. The CDOs were rated as safe, but in reality, they were full of high-risk loans.When house prices in the U.S. stopped rising, many borrowers couldn’t repay their loans. Houses were foreclosed, meaning banks took them back. But now there were too many houses and not enough buyers. Prices dropped further.As a result, CDOs lost their value. Banks that had invested in them suffered huge losses. Some banks collapsed. Trust between banks disappeared—they stopped lending to each other. Businesses couldn’t get loans to continue operations. People lost jobs.In Asia, the crisis came through exports. Countries like China, Japan, and the Philippines depend on selling goods to the U.S. and Europe. But during the recession, people in those countries bought less. Factories in Asia had to slow down or close. Some OFWs lost jobs as companies abroad cut costs.So, a crash in one country’s housing market affected the whole world. This shows how connected the global economy is. One sector—housing—caused a domino effect: from borrowers to banks to businesses to workers. It reminds us why financial stability and good regulation are important, not just locally but globally.
