Banks

Since the beginning of 2008, there have been about 120 banks that have closed according to the FDIC(Federal Deposit Insurance Corporation). The reason for most of these banks failing is due to the fact that over the past few years they have made very very risky loans. We've talked about this a little bit in class, but i'll go into a little bit more detail here.

One of the large ways that a bank makes it's profit is by giving out loans. Generally, the way that loans are given out is by a person going to the bank and talking to one of the bank's representative and the representative will ask them all kinds of questions like what do they need the loan for, how much money they make in a year, etc. in order to find out if they can pay them back. In the past, only those who could pay the bank back were given out loans. However recently (in the past decade), banks have realized that they can make much more profit if they give out more loans, which is a pretty simple concept. But the way they choose to give out more loans is by giving them to those who might not be able to pay them back, to people who add unnecessary risk to the bank and then many banks choose to sell off these loans to other investors for huge amounts of profit.

In our economy, people take risks all the time. They will take a risk on opening up a store, putting money in the stock market, or investing in a house. But what with these risks, they won't directly effect the economy in a disastrous way like the banks did which is what makes the risks they took "unnecessary". Anyway, then people began to default on their loans for a multitude of reasons so then the banks lost huge amounts of money and since very few of them had any decent amount of capital saved up, they didn't have enough money to survive with their loses and were forced to lose. But since many banks sold off some of these loans, not only were the banks effected but anyone who bought the loans were also effected.