An Explanation of the Current Financial Crisis
Between 2000 and 2008, banks had loaned out many subprime mortgages, which are risky loans for the bank with high interest for the customer.
Many of these loans could not be repaid, and created massive amounts of foreclosures and "toxic debt," which is debt that is unlikely to be repaid to the lender.
2008 Started out very badly, with the subprime mortgage crisis and the dropping value of the dollar weakening many large financial institutions.
On September 5, the US Department of Labor reported that unemployment rose to 6.1%, the highest increase in 5 years.
Over the Weekend of September 13 and 14, Lehman Brothers, a Multibillion dollar investment banking firm, filed for bankruptcy. AIG, a major insurance company, also asked the government for an $85 billion loan to stay solvent.
Many major financial companies were gobbled up: Bank of America bought Meryl Lynch, and Citigroup bought Wachovia.
The trouble on Wall Street triggered a major selloff across the stock markets, causing them to plummet.
To save the banks, the government proposed a $700 billion bailout, which is a complex package of loans, tax relief, and purchases of some of the toxic debt.
Congress drafted the Emergency Economic Stabilization Act of 2008, they could not come to an agreement.
On September 29, Senate Majority Leader Nancy Pelosi announced that an agreement on the Bill had been reached.
Shortly thereafter, news broke that the bill failed.
The Markets quickly saw a huge downturn, with the Dow Jones Industrial average falling 777.68 points, or 6.81% of it's volume.