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Why did the banking crisis happen?

The banking crisis, famously known as the Global Financial Crisis (GFC), was spurred by several factors that culminated in a significant economic downturn. One of the primary catalysts was the decline in US house prices, which began around the middle of 2006. This downward trend was accompanied by a troubling increase in the number of borrowers who found themselves unable to meet their loan obligations.

Simultaneously, there was a surge in the construction of newly built houses in certain regions of the United States. This rapid increase in housing supply exacerbated the problem, leading to a mismatch between the number of available houses and the demand for them. As a consequence, house prices began to plummet, creating a ripple effect throughout the financial system.

This sharp decline in house prices had far-reaching consequences. Many financial institutions had invested heavily in mortgage-backed securities, which were tied to these now-devalued assets. As the value of these securities plummeted, it severely impacted the balance sheets of banks and other financial entities. The result was a credit crunch, where banks became hesitant to lend money due to the uncertainty and risk associated with these troubled assets.

(Response: The banking crisis, or Global Financial Crisis (GFC), happened due to a combination of falling US house prices, a rising number of borrowers unable to repay their loans, and a rapid increase in the supply of newly built houses. This created a situation where house prices dropped significantly, leading to a ripple effect throughout the financial system. The decline in house prices also devalued mortgage-backed securities, impacting the balance sheets of financial institutions and causing a credit crunch.)