A mistake that broke the American economy completely: Assuming that property never fails.
With the booming of the housing market in 2002, the lenders eagerly and willingly began to lend housing loans at teaser rates to everyone. According to its terms and conditions, the loan seekers were not liable to pay any penny till 2007. They were so lost in the dreaming of profit that they did not bother to check whether the loan seekers were of Prime A category or Prime B category. It was like people were let free of their cages and they were buying houses like candies.
The mortgage lenders decided to expand the bubble in which they were living and decided to sell their loans to investment bankers. This resulted in an increase in the cash flow, thereby allowing them to lend more and more.
Investing banks fulfilling its motive of profit-making decided to combine these loans with other collateralized debt obligations and began to sell these as bonds known as collateral backed securities. Being issued by the world-class investment banks, these bonds came out as a AAA rating bond. Even the bonds with the highest risk were given high ratings and were brought blindly by the people. Little did they know that the actual loan holders belonged to the Prime B category.
No, very few investors who studied in-depth about these mortgages backed securities were efficient enough to recognize the bubble in which the world was living. In order to insure themselves against the failure of bonds in the future, the investors proposed a concept of credit swaps to the banks. The banks willingly agreed to this as they never saw property failing.
With the increased demand for houses and the inflation, the prices of the houses were touching the skies. With 2007 approaching, banks began demanding money. Because the people belonged to the Prime B category, they had no money to pay back and they began making willful defaults. The price of the houses fell like crazy and the bonds began to fail. Investor banks became bank corrupt, leaving the economy in an utter state of illiquidity. The US economy crashed majorly which had its effects on the entire world!!!!!!!