 The signs were everywhere, but now it's official we are in a recession. The research is going bankrupt in financial markets. I think this is the most significant financial crisis in the post-war period. Fifteen years ago, the world's financial system collapsed. It came to be known as the biggest financial crisis since the Great Depression of 1929. It caused a global stock market meltdown, which wiped out a large chunk of savings of millions of people across the world. It caused a massive economic slowdown even in countries like India, which were relatively insulated from the global financial system. Now, once again, banks are failing or are on the verge of failure. It's happening in the US, it's happening in Europe, and the governments and central banks there are trying to intervene and stem the tide. But the question is, are these yours? Or are they just band-aid solutions that only deal with visible cuts and bruises with cannot heal the real problem? What happened in 2008 tells us that just saving a few banks, arranging mergers or sales of banks that are on the brink of disaster, cannot save the overall financial system if there's a rot in it. The rot, as we will see over the course of the next few videos, is finance capital itself. Today, we will revisit 2008 of what happened then and why it happened. The roots of 2008 go back to the late 1990s and early 2000s, when a series of laws were passed in the US, which basically allowed banks and finance companies to do whatever they wanted with virtually zero regulation or governmental supervision. So, what did banks do? They gave home loans to everyone they could lay their hands on. Now, earlier, when home loans were regulated closely, if a person came to a bank asking for a loan to buy a home, the bank executive would want to know how much that person earned to see if they could be able to pay their EMIs or mortgages. Some banks would want to know in what industry the person worked to see if the job was stable enough for them to continue to pay their EMIs. They would want to see a decent amount of down payment to make sure that the borrower had something real to lose if they couldn't pay the loan back and ended up having to give up the house they had bought. Once the regulations were relaxed, banks gave loans without checking whether the borrower would ever be able to pay back. In fact, a large number of loans that were pushed out were to risky borrowers, some of whom even had a record of not paying back their credit card debt. These kind of home loans were called subprime mortgages. They came with a higher interest rate to compensate for the possibility that the borrower might not be able to pay back with default but more importantly, the payments were structured in such a way that for the first couple of years the interest rate was very low and then it shot up sharply. So borrowers were lulled into believing that they'd got a very easy deal, very easy terms, higher rates kicked in and the EMI increased dramatically suddenly. There were home loan brokers in every small town trying to sell these subprime mortgages to poor people because the brokers earned higher commissions on subprime loans because they carried higher interest rates. A growing family with a lot of debt, a young couple with no down payment, a business owner whose income was hard to document, every one of them was turned down for a home loan by three different lenders. I'm with countrywide and I got them all approved. Often the borrowers didn't realize what they were getting into. The real interest rate was hidden in the fine print of the loan papers they signed and brokers deliberately lied to them about how much they would have to pay. In some cases as it came out after the crisis that some borrowers didn't even know how to read English so they had no clue as to what they were signing up for. What were the big banks doing at this time? They were taking these loans and combining them and converting them into marketable securities called CTOs or collateralized debt obligations. Let me explain this a little. Imagine that there are a thousand home loans that have been issued by a bank with an average value of 10 bank rupees. The bank expects these loans to be repaid over let's say 20 years. Now the bank says okay let's combine all these loans which total to 100 crore rupees and break them up into 1 crore units worth 100 rupees each. Each of these units can then be sold to people as debt based securities just like bonds for instance where an investor gets a fixed coupon rate or interest rate on their investment. These securities based on the home loans would have the homes as collateral. If the borrowers didn't pay back their loan the bank could take over that house and sell them to recover their money. That is why these securities are collateralized debt obligations. In the case of mortgage backed securities the home acted as the underlying collateral. On the face of it mortgage backed CTOs seem to be completely risk free because if the loans aren't repaid there are real homes which can be sold to recover the money lent. The trouble was that the CTOs were based mostly on high risk subprime mortgages given to people who had no chance of paying their loans back and because subprime loans flooded the market the demand for homes shot up and this created a real estate price bubble a house that was actually not worth more than let's say 10 lakh rupees was selling for 25 lakhs that means that the underlying collateral of the CTOs was worth only a fraction of the loan value but investors had no way to know this because all of these CTOs were getting the highest ratings from credit rating agencies from the middle of 2007 the higher interest rates kicked in for a bulk of the subprime home loan borrowers and as soon as that happened borrowers started defaulting because they simply didn't have the money to pay their mortgages anymore banks started taking over homes what in the US is called foreclosure but they soon realized that there were no buyers for these homes there was no way of getting the money back without taking a big loss on the home value in the meantime something else was happening big insurance companies began to ensure the mortgage back series through insurance products called credit default swaps lenders could reduce their risk by buying these credit default swaps as insurance against the loans they had given out but unlike other forms of insurance where you needed to own an asset to ensure it anyone and everyone could buy a credit default swap as an investment they didn't have to be a lender think of what that means suppose if along with you 10 other people who you don't even know could ensure the house you own then the insurance company would earn insurance premiums from 11 people including you but if your house burnt down what would happen the insurance company will have to pay insurance to all of these 11 people this is exactly what big insurance companies like AIG were doing with the credit default swaps and because they were virtually unregulated they didn't have to set aside any real cash to pay for insurance claims in case the housing market collapsed meanwhile investment banks which had invested large amounts of money in mortgage back CDOs were beginning to realize that the real estate bubble was about to burst so they started betting on the credit default swap insurance hoping to make more money in case the home loan borrowers defaulted in fact both these things were happening at the same time banks were selling mortgage back CDOs to investors and at the same time betting against these CDOs without ever revealing to these investors as to where what they were doing without telling them that they had no faith in mortgage back CDOs they were selling the banks were literally cheating their investors which included big pension funds one of these investment banks Goldman Sachs for instance bought so many credit default swaps from the insurer AIG that they got worried that when the housing market collapses AIG would go bankrupt because it was simply not be able to come up with the money to pay for the insurance claims so Goldman went to another insurer to insure themselves against AIG just look at the level of speculation here big money goes into giving risky subprime loans in the form of CDOs big money goes into betting against these same loans in the form of insurance or credit default swaps and then big money is spent on insuring against the insurers now all this was bound to come falling down one day the process began slowly from the middle of 2007 as home loan companies began to go bankrupt and then from early 2008 big mortgage companies and banks began to go bankrupt as well trillions of dollars got stuck stock markets crashed across the world wiping out again trillions of dollars of savings companies couldn't get loans to run their businesses and couldn't raise money from the stock markets so what happened they had to cut back or shut shop millions of people lost their jobs and millions became homeless it was the worst economic crisis since the great depression 80 years earlier 15 years have gone by since then and the global economy has still not recovered fully and already we're seeing the first signs of another big banking crisis that could hit the world pretty soon we will tell you more about that in our next video so subscribe to our channel and press the bell icon so that you get to know as soon as new videos are uploaded and if you like this video show your love by pressing the like button and also sharing the video with your friends and family that's it for now see you soon goodbye