Around one year ago, a mortgage crisis arose. In a sense there was too much loose money. Interest rates were historically low and it seemed almost anyone could get a mortgage in order to buy a house. People who were unable to pay back these mortgages even were able to take them out. Forclosure rate thus sky-rocketed. The rates of forclosure directly impacted the ability to get money or loans. The value of the mortgages has since dropped like lead because people were unable to pay the loans back. This caused the companies who owned these mortages to lose a lot of money. As these companies had less tangible money, or liquidity, the rating agencies (such as S&P) lowered their ratings, which means that the companies it rated had to put up more money. This virtually stopped the flow of money, causing a sense of panic and a tendancy of people to sell and get back their money.
Recently, our government has bailed out companies such as Fannie Mae and Freddie Mac using the tax payers money. We even lent AIG a two year loan of almost $80 million. But does this solve our problem? The market HAS started to a small rally as shown in the above graph, but according to the New York Times our problems are far from over. Investors are now weary, if not afraid of investing and there is still potential for more battered firms to fail. Foreign nations are also now skeptical about our market. Also, loaning all of this money out puts our country farther in debt. Hopefully this crisis will be completely averted, but I think that we have merely put a band-aid on an open wound. What do you think?
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