The Market Crash of 2008:

The Great Recession

Done by:
Pranav Sreejith - 25016
Kapeesh Deshpande - 25194
Daya L M - 25070
Ruhan Majithia - 25005

Mentor name: Pratima N Katti

Intent

The intent of choosing this topic was to go into depth about a crisis that shook
the world economy to its core. Learning more about this can help us avoid
something like this ever happening again and can save countless jobs. In this
report, we are going to talk about what led up to the crisis and what we could
have done to prevent it.

Introduction
In 2008, the US housing market had crumbled; jobs were lost, and banks
closed down. The global economy was at an all-time low. It is estimated that
over 8 million people lost their jobs due to this crisis. Many policies have been
put into place after this crisis to ensure that something like this never happens
again. We are going to go in depth about how it happened, why it happened,
and what we could have done differently.

Unemployment rates, 2007 - 2008

Methodology

We conducted our research using newspaper articles, official government

reports, and online archives.

Analysis and Interpretation

In the beginning of the 2000’s, there was a significant amount of growth in the
housing market in the US. This was mainly exacerbated by soaring home
prices. The housing market was at an all-time high due to the widespread
belief that it would continue growing. Almost everyone in the US owned a
home at the time. Big investors saw this as a new investment opportunity and
were hoping to utilise it. At the time, the main investment was bonds.

Changes in housing prices 1890-2010 in the US.

A bond is basically when you lend money to a borrower (typically governments

or huge corporations looking to raise money for huge infrastructure projects).
This money is then given back to you after a certain period of time with a fixed
interest rate. Bonds are very low-risk, especially government bonds.

The problem with bonds is that they give very low returns, and investors were
looking for something low-risk but also with a high return rate. This is where
the idea of investing in mortgages came into place. What is a mortgage? Well,
a mortgage is essentially a type of loan that you take out from a bank
specifically to buy a house or land. An interesting thing about mortgages is
that it is not necessary that the bank that gave out the loan receive the
monthly payment; anyone with the mortgage paper receives the payment. As
a result of this, banks usually sell these mortgage papers to different banks or
investors.

So, investors wanted in on the housing market via mortgages. But they did not
want to invest in single mortgages. So, banks bundled up mortgages and sold
them as shares to these investors. These were called mortgage-backed
securities (MBS).

After a while, the banks started getting greedy; they gave out loans to people
who had no means of paying them back. This led to the subprime crisis

Before talking about the subprime crisis, we need to understand what a

subprime mortgage is. A subprime mortgage is a type of mortgage that is
given out to borrowers with low credit histories and credit ratings (around 620
credit score or less). This increased the risk for lenders. With the increased
risk came increased interest rates. There are two types of subprime
mortgages: adjustable-rate mortgages and fixed-rate mortgages. Adjustable-
rate mortgages, or ARM's, are loans that start off with a low interest rate to
entice the borrower but, later on, increase the interest rate, making them
riskier for the borrower. Fixed-rate mortgages start off with a higher interest
rate.

Between the years 2000 and 2006, U.S. home prices increased by an average
of 85%. It went from an average of $128,000 per house in 1997 to $227,100 in
2006. At its peak, the national home price was 13 times the total household
income. Due to the increase in demand, lenders started giving out more and
more subprime mortgages. By 2006, the subprime mortgage market had
ballooned to an astonishing $1.3 trillion, up from just $332 billion over the
course of three years. Many banks made millions of dollars out of this; even
government backed corporations such as Fannie Mae and Freddie Mac joined
in. Subprime mortgages made up 20% of all the mortgages in the country at
the time. Even insurance agencies took advantage of the situation by
providing packages for all the people who could not pay back their mortgages.
 Subprime mortgages in the U. S

After a while, borrowers started finding it difficult to pay back their mortgages.
This led to a surge in loan defaults and foreclosures, resulting in a foreclosure
crisis where over 3.1 million homes were foreclosed in the U.S. This led to an
excess of homes and no one to buy them. The market crashed, and houses
sold for half their value. Something that could have been easily predicted
broke the entire economy of a country. Major corporations, such as Lehman
Brothers, filed for bankruptcy almost overnight, insurance agencies collapsed,
and the stock market tumbled. The U.S. was in recession.

Foreclosure rates on Subprime mortgages

 Changes in stock prices, 1996-2009

Conclusion

In conclusion, the crisis took the world by surprise. Something so avoidable

sent one of the biggest countries in the world into recession. There is a lot that
we can learn from this crisis, which is still prevalent to this day. The crisis had
an impact on India as well, with the stock market going down and challenges
in the banking sector. While some of the effects were mitigated by the Indian
government, India faced a decline in export demands. Many jobs were also
lost, especially in the banking sector. The Indian government provided fiscal
stimulus packages for all those affected.

Reflection

In my opinion, this entire crisis happened only due to greed. If the banks
hadn’t given out subprime mortgages, the entire crisis could have been
avoided. Since then, a lot of measures have been taken to ensure that banks
are kept in check, and we can all learn something from this for the future.
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