Why Did the American Banking System Fail

2387 WordsOct 28, 201010 Pages
1. Introduction To understand the development and the impact of the financial crisis, the following paragraph gives a general overview about the timeline of the financial crisis and the series of reactions which caused, at the end, the failure of the American banking system and led to a worldwide economic downturn with the result of the global economic crisis. The topic of this paper is the failure of the American banking system, but as the banking systems of the whole world are interdependent, the whole situation and the whole crisis has to be investigated. 2. Timeline of the economic downturn As a result of the declining U.S. house prices in 2006 and 2007, refinancing became more difficult and as adjustable-rate mortgages began to…show more content…
It is hard to identify only one responsible party or institution, it is more a complex interaction of ignorance, megalomania and greed which lead to the collapse of the American and international banking system. 4. The dream of owning a house The “American Dream” of owning an own house can be stated as one basic issue leading to the financial crisis. The issue is that banks borrowed money to individuals and families who had a relatively low income. This was possible because the interest rates were low and at the beginning, they did not even have to pay any interests. This fact allowed even poorer families to afford their own houses. This system worked well for a long time, because interest rates were low and house prices were growing steadily. This system of lending money from a bank and paying very low interest rates also worked in other areas despite the housing sector. But this system was predicted to fail at a certain moment. Interest rates began to increase and many of the house owners could not pay the money back which they borrowed from the banks. As a result, many house owners had to sell their houses which led to decreasing house prices on the market. The major problem in this vicious circle was that the banks partly had sold their outstanding receivables of their own clients to investment banks and funds. As some house owners could not pay their money back, this caused a mistrust amongst several

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