Financial Crisis: What Happened and Why

NETWORK: A national Catholic social justice lobby group based in Washington, D.C., explains the circumstances that led to the financial crisis, beginning in the United States. The JPIC Office is a member of the NETWORK organization and supports its efforts.     

WASHINGTON, D.C. —The financial crisis had multiple, simultaneous causes, including the securitization of subprime mortgage loans, lax and predatory lending practices, inaccurate ratings of the risks of investing in new financial products, and little regulation and lack of transparency of those products.

Because so many commercial and investment banks and insurance firms have failed, a climate of distrust has developed. Banks and other financial institutions hesitate to lend to businesses or to each other because they don’t believe in the solvency of other financial institutions and fear they won’t be repaid. In addition, trust in the competence and credibility of the credit ratings agencies has been badly damaged.

The financial crisis is affecting the real economy in many ways. For example, when businesses cannot borrow to fund their operations, layoffs occur, causing unemployment to rise ever higher. In addition, retirees relying on 401K retirement accounts have seen their nest eggs shrink. Even states and municipalities are being adversely affected by the crisis, and will likely be forced to make budget cuts.

For more details about the economic situation from Wall Street to Main Street, visit the NETWORK Web site at: http://www.networklobby.org/issues/index.html.