Debt relief or debt cancellation is the partial or total forgiveness of debt , or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.
114-596: From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and freeing of debt slaves. In World War I the United States Treasury made large loans to the Allies that were postponed, reduced and finally paid off in 1953. In the late 20th century, it came to refer primarily to Third World debt , which started exploding with the Latin American debt crisis (Mexico 1983, etc.). In
228-513: A Poverty Reduction Strategy satisfactorily for at least one year. Under the goal of reducing inflation, some countries have been pressured to reduce spending in the health and education sectors. While the World Bank considers the HIPC Initiative a success, some scholars are more critical of it. The Multilateral Debt Relief Initiative (MDRI) is an extension of HIPC. The MDRI was agreed following
342-422: A conflict between debtor farmers and creditor bankers. A 2024 study found that debt relief for debtors leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth over subsequent decades. Another 2024 study found that debtors who receive debt relief are more likely to support incumbent governments. Debt relief plays a significant role in some artworks. In
456-655: A country (such as the US) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the U.S. to finance its imports. All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend either because they had very high personal savings rates (as high as 40% in China) or because of high oil prices. Ben Bernanke referred to this as
570-416: A creditor initiates this. As part of debt restructuring , the terms of the debt are modified, which may involve the debt owed being reduced. In case the debtor chooses bankruptcy despite being able to service the debt, this is called strategic bankruptcy . Certain debts can be defaulted on without a general bankruptcy; these are non-recourse loans , most notably mortgages in common law jurisdictions such as
684-447: A further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral , and provide banks with enough funds to allow customers to make withdrawals. In effect, the central banks went from being the " lender of last resort " to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered
798-488: A global economic shock, resulting in several bank failures . Economies worldwide slowed during this period since credit tightened and international trade declined. Housing markets suffered and unemployment soared, resulting in evictions and foreclosures . Several businesses failed. From its peak in the second quarter of 2007 at $ 61.4 trillion, household wealth in the United States fell $ 11 trillion, to $ 50.4 trillion by
912-479: A housing bubble to replace the Nasdaq bubble". Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis. Additional downward pressure on interest rates was created by rising U.S. current account deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman Ben Bernanke explained how trade deficits required
1026-516: A maturity of 20 years. On 3 October 2010 the final payment of €69.9 million was made on these bonds, the last payment by Germany on known debts from both world wars. The negotiations started with the Allies creating a Commission. The Commission's key role was to determine the types of debts that would be addressed by the London Agreement. During the process, the two sides negotiated the terms of
1140-427: A new arrangement regarding Germany's External Debts. The content of the dispatch made the main points of discussion clear from the start. The dispatch contained the following texts. "4. The three Governments, in order to make an overall settlement of German debts possible, are prepared to modify the priority of their claims in respect of the post-war economic assistance which they furnished to Germany, on condition that
1254-552: A number of ancient societies: If the debtor is in difficulty, grant him time till it is easy for him to repay. But, if ye remit it by way of charity, that is best for you if ye only knew. In the United States, the first serious movements to create debt relief were rooted in debtor farmer grievances against creditors. In the early 19th century, legislators created pathways for indebted farmers to take creditors to court to erase what they owed and enable them to start over. The first federal bankruptcy law, passed in 1841 and repealed in 1843,
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#17330855477421368-545: A really bad economy. In other words, the borrowers did not cause the loans to go bad-it was the economy. Between 1998 and 2006, the price of the typical American house increased by 124%. During the 1980s and 1990s, the national median home price ranged from 2.9 to 3.1 times median household income. By contrast, this ratio increased to 4.0 in 2004, and 4.6 in 2006. This housing bubble resulted in many homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by
1482-404: A significant increase in subprime lending . Subprime had not become less risky; Wall Street just accepted this higher risk. Due to competition between mortgage lenders for revenue and market share, and when the supply of creditworthy borrowers was limited, mortgage lenders relaxed underwriting standards and originated riskier mortgages to less creditworthy borrowers. In the view of some analysts,
1596-489: A single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid
1710-457: A vast web of derivatives linked to those MBS, collapsed in value . Financial institutions worldwide suffered severe damage, reaching a climax with the bankruptcy of Lehman Brothers on September 15, 2008, and a subsequent international banking crisis . The prerequisites for the crisis were complex. During the 1990s, the U.S. Congress had passed legislation intended to expand affordable housing through looser financing. In 1999, parts of
1824-457: Is based ), the climactic event is the destruction of credit card records, dramatized as the destruction of skyscrapers, which allows for debt relief. The television series Mr. Robot (2015–2019), follows a group of hackers whose main mission is to cancel all debts by taking down one of the largest corporations in the world, E Corp. London Agreement on German External Debts The London Agreement on German External Debts , also known as
1938-697: Is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type. The twenty largest economies contributing to global GDP (PPP) growth (2007–2017) The expansion of central bank lending in response to
2052-665: Is today considered a form of "modern day slavery " in international law, and banned as such, in Article 1(a) of the United Nations 1956 Supplementary Convention on the Abolition of Slavery . Nevertheless, the practice continues in some nations. In most developed nations, debts cannot be inherited. Debtors' prison has been largely abolished, but remains in some forms in the US, for example if one fails to make child support payments. In modern times,
2166-575: The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed, overhauling financial regulations. It was opposed by many Republicans , and it was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The Basel III capital and liquidity standards were also adopted by countries around the world. The recession was a significant factor in the 2010s European debt crisis . The crisis sparked
2280-526: The Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and the September 11 attacks , as well as to combat a perceived risk of deflation . As early as 2002, it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create
2394-741: The G8 's Gleneagles meeting in July 2005. It offers 100% cancellation of multilateral debts owed by HIPC countries to the World Bank , IMF and African Development Bank . One of the targets of the UN Sustainable Development Goals , specifically Goal 17 , is to "assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring ". This will help poor countries "reduce debt distress". Debt relief existed in
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#17330855477422508-604: The Glass–Steagall legislation (passed in 1933) were repealed , permitting institutions to mix low-risk operations, such as commercial banking and insurance , with higher-risk operations such as investment banking and proprietary trading . As the Federal Reserve ("Fed") lowered the federal funds rate from 2000 to 2003, institutions increasingly targeted low-income homebuyers, largely belonging to racial minorities , with high-risk loans; this development went unattended by regulators. As interest rates rose from 2004 to 2006,
2622-614: The Great Depression . Causes of the crisis included predatory lending in the form of subprime mortgages to low-income homebuyers and a resulting housing bubble , excessive risk-taking by global financial institutions , and lack of regulatory oversight, which culminated in a " perfect storm " that triggered the Great Recession , which lasted from late 2007 to mid-2009. The financial crisis began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate , as well as
2736-601: The Great Depression . This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 ... While many banks are obviously at
2850-667: The Great Recession , which, at the time, was the most severe global recession since the Great Depression. It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis , which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. It
2964-631: The London Debt Agreement (German: Londoner Schuldenabkommen ), was a debt relief treaty between the Federal Republic of Germany and creditor nations. The Agreement was signed in London on 27 February 1953, and came into force on 16 September 1953. On 24 May 1951, the US and UK Departments of Foreign Affairs respectively, informed the Allied Countries involved in the settlement, about
3078-564: The Mortgage Forgiveness Debt Relief Act of 2007 provides that debt forgiven on a primary residence is not treated as income, for debts forgiven in the three-year period 2007–2009. The Emergency Economic Stabilization Act of 2008 extended this by three years to the six-year period 2007–2012. The primary mechanism of debt relief in modern societies is bankruptcy , where a debtor who cannot or chooses not to pay their debts files for bankruptcy and renegotiates their debts, or
3192-708: The Republic of Ireland , Italy , Liechtenstein , Luxembourg , Norway , Pakistan , Spain , Sweden , Switzerland , the Union of South Africa , the United Kingdom of Great Britain and Northern Ireland , the United States of America , and Yugoslavia . The states of the Eastern Bloc were not involved. Some amounts owed by Germany arose from its efforts to pay war reparations, and others were associated with large scale loans by
3306-566: The Treasury Department to purchase troubled assets and bank stocks. The Fed began a program of quantitative easing by buying treasury bonds and other assets, such as MBS, and the February 2009 American Recovery and Reinvestment Act , signed by newly elected President Barack Obama , included a range of measures intended to preserve existing jobs and create new ones. Combined, the initiatives, coupled with actions taken in other countries, ended
3420-580: The United States . Choosing to default on such a loan despite being able to service it is called strategic default . If a debt cannot be or is not repaid, alternatives that were common historically but are now rare include debt bondage —including debt peonage : being bound until the debt is repaid; and debt slavery , when the debt is so great (or labor valued so low) that the debt will never be repaid—and debtors' prison . Debt slavery can persist across generations, future generations being made to work to pay off debts incurred by past generations. Debt bondage
3534-545: The United States House Committee on Financial Services held a hearing, at the urging of the administration, to assess safety and soundness issues and to review a recent report by the Office of Federal Housing Enterprise Oversight (OFHEO) that had uncovered accounting discrepancies within the two entities. The hearings never resulted in new legislation or formal investigation of Fannie Mae and Freddie Mac, as many of
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3648-453: The mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies . In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage supply chain , from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them. By approximately 2003,
3762-403: The "buyer of last resort". During the fourth quarter of 2008, these central banks purchased US$ 2.5 (~$ 3.47 trillion in 2023) trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action in world history. Following a model initiated by the 2008 United Kingdom bank rescue package ,
3876-450: The 1930s, but which Germany decided to repay to restore its reputation. This money was owed to government and private banks in the U.S., France, and Britain. Another 16 billion marks represented postwar loans by the U.S. According to several commentators, the total of debts arising before World War II were 16.1 billion marks, while debts after the War were calculated to be 16.2 billion marks. Under
3990-415: The 1970s. Germany continued to pay the fixed amount until the last payment was settled in 1983. Part of the agreement concerned debts to be paid after the reunification of Germany . For many decades this seemed unlikely to transpire, but in 1990 Deutsche Mark 239.4 million in deferred interest became due. These claims were repaid by means of "Fundierungsschuldverschreibungen" (Funding Debt Securities) with
4104-722: The 2008 financial crisis, consumer regulators in America have more closely supervised sellers of credit cards and home mortgages in order to deter anticompetitive practices that led to the crisis. At least two major reports on the causes of the crisis were produced by the U.S. Congress: the Financial Crisis Inquiry Commission report, released January 2011, and a report by the United States Senate Homeland Security Permanent Subcommittee on Investigations entitled Wall Street and
4218-546: The Agreement “as equals”. The first conference was held in Bonn, in June 1951. The next conference was held in London in July 1951. In February 1952 another conference occurred. This was the most essential moment of the entire negotiation process. The total amounts of debts and the compensations’ deadlines were the main topic of conversation. Germany’s negotiating skills played a huge role in
4332-519: The CRA. They contend that there were two, connected causes to the crisis: the relaxation of underwriting standards in 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001. Both causes had to be in place before the crisis could take place. Critics also point out that publicly announced CRA loan commitments were massive, totaling $ 4.5 trillion in
4446-542: The FTC. As the disposition of personal debt is a highly regulated industry, consumers are urged by the FTC and other trade organizations to do significant research and find an independent credit counselor to guide them through the process. In 2019, the Texas Legislature forgave an estimated $ 2.5 billion in debt when it abolished its "Driver Responsibility Surcharge" in all but driving while intoxicated (DWI) cases. This surcharge
4560-480: The Financial Crisis: Anatomy of a Financial Collapse , released April 2011. In total, 47 bankers served jail time as a result of the crisis, over half of which were from Iceland , where the crisis was the most severe and led to the collapse of all three major Icelandic banks. In April 2012, Geir Haarde of Iceland became the only politician to be convicted as a result of the crisis. Only one banker in
4674-483: The LMI borrowers targeted by the CRA, especially in the years 2005–2006 leading up to the crisis, nor did it find any evidence that lending under the CRA rules increased delinquency rates or that the CRA indirectly influenced independent mortgage lenders to ramp up sub-prime lending. To other analysts the delay between CRA rule changes in 1995 and the explosion of subprime lending is not surprising, and does not exonerate
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4788-510: The Legislature eliminated red-light cameras statewide and effectively canceled those debts, and re-defined "undue hardship" in the Code of Criminal Procedure to allow judges to waive traffic-fine debt for more people. In US tax law , debt forgiven is treated as income, as it reduces a liability, increasing the taxpayer's net worth . In the context of the bursting of the United States housing bubble ,
4902-573: The London Agreement "spurred economic growth in three main ways: creating fiscal space for public investment; lowering costs of borrowing; and stabilising inflation." It allowed Germany to enter international economic institutions such as the World Bank and the International Monetary Fund . Another study has shown that the London Agreement can be associated with a "rise in real per capita social expenditure in health, education, housing, and economic development". The stabilization of inflation
5016-417: The London Agreement, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact. An important term of the agreement was that repayments were only due while West Germany ran a trade surplus, and that repayments were limited to 3% of export earnings. The amounts set by the Agreement were meant to be paid by
5130-428: The London Agreement. Claims arising by countries damaged by Germany during World War II were not included. The debts to be settled by the London Agreement included; The Agreement was based on three important conditions. Firstly, the total amount that Germany was obligated to pay would be greatly reduced. The repayments’ timeframe should be stretched long enough in order to help Germany’s economy grow. Last but not least,
5244-705: The London Debt Conference) was held between 28 February and 28 August 1952. The Agreement reached at the Conference was signed in London on 27 February 1953. The Agreement was ratified by the United States, France, and United Kingdom on 16 September 1953, at which point the agreement came into force. The Agreement was firstly turned down by the Bundestag and then approved on a following vote. The parties that were involved besides West Germany included Belgium , Canada , Ceylon , Denmark , France , Greece , Iran ,
5358-589: The SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $ 2 trillion. In the early and mid-2000s, the Bush administration called numerous times for investigations into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, 2003,
5472-469: The U.S. housing market, were on the verge of collapse; the Housing and Economic Recovery Act enabled the government to take over and cover their combined $ 1.6 trillion debt on September 7. In response to the growing crisis, governments around the world deployed massive bail-outs of financial institutions and other monetary and fiscal policies to prevent a collapse of the global financial system . After
5586-545: The U.S. to borrow money from abroad, in the process bidding up bond prices and lowering interest rates. Bernanke explained that between 1996 and 2004, the U.S. current account deficit increased by $ 650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that
5700-409: The United States did not have wealth declines at all during the crisis because they generally did not own financial investments whose value can fluctuate. The Federal Reserve surveyed 4,000 households between 2007 and 2009, and found that the total wealth of 63% of all Americans declined in that period and 77% of the richest families had a decrease in total wealth, while only 50% of those on the bottom of
5814-480: The United States served jail time as a result of the crisis, Kareem Serageldin , a banker at Credit Suisse who was sentenced to 30 months in jail and returned $ 24.6 million in compensation for manipulating bond prices to hide $ 1 billion of losses. No individuals in the United Kingdom were convicted as a result of the crisis. Goldman Sachs paid $ 550 million to settle fraud charges after allegedly anticipating
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#17330855477425928-455: The United States. Chancellor Konrad Adenauer decided that permanent good will required their resumption. The 1953 Agreement on German External Debts , which resumed German's war reparations , is a notable example of international debt relief. Debt relief for heavily indebted and underdeveloped developing countries was the subject in the 1990s of a campaign by a broad coalition of development NGOs , Christian organizations and others, under
6042-661: The United States. In total, 80 percent of Germany’s external obligations were owed to the United States, the Netherlands , the United Kingdom, and Switzerland. The Agreement covered loans arising from external investments due to the Dawes Plan , and loans from economic aid to Germany. The support was provided by two major programs, the GARIOA and the Marshall Plan . Debts that would be settled by different arrangements were excluded from
6156-459: The above, despite being obligated to pay the total amount of war reparations (with interest) prior to the London Conference and despite the presence of an Arbitral tribunal . Financial crisis of 2007%E2%80%932008 The 2007–2008 financial crisis , or the global financial crisis ( GFC ), was the most severe worldwide economic crisis since the 1929 Wall Street crash that began
6270-554: The bailout to Fannie Mae and Freddie Mac exceeds $ 300 billion (c. $ 401 billion in 2023 ) (calculated by adding the fair value deficits of the entities to the direct bailout funds at the time). Economist Paul Krugman argued in January 2010 that the simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of
6384-527: The bailouts, such as in the case of the AIG bonus payments controversy , leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis. Alistair Darling , the U.K.'s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of "a breakdown of law and order" the day that Royal Bank of Scotland
6498-474: The bankruptcy of Lehman Brothers , the fourth largest U.S. investment bank, on September 15, the next day the Fed bailed out the American International Group (the largest U.S. insurance company), and on September 25 the government seized Washington Mutual (the largest savings and loan firm ). On October 3, Congress passed the $ 800 billion Emergency Economic Stabilization Act , which authorized
6612-464: The banner of Jubilee 2000 . This campaign, involving, for example, demonstrations at the 1998 G8 meeting in Birmingham , was successful in pushing debt relief onto the agenda of Western governments and international organizations such as the International Monetary Fund and World Bank . The Heavily Indebted Poor Countries (HIPC) initiative was ultimately launched to provide systematic debt relief for
6726-726: The brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $ 6 trillion in housing wealth and an even larger amount of stock wealth. ... the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity
6840-690: The bubble burst, Australian economist John Quiggin wrote, "And, unlike the Great Depression, this crisis was entirely the product of financial markets. There was nothing like the postwar turmoil of the 1920s, the struggles over gold convertibility and reparations, or the Smoot-Hawley tariff , all of which have shared the blame for the Great Depression." Instead, Quiggin lays the blame for the 2008 near-meltdown on financial markets, on political decisions to lightly regulate them, and on rating agencies which had self-interested incentives to give good ratings. Lower interest rates encouraged borrowing. From 2000 to 2003,
6954-496: The committee members refused to accept the report and instead rebuked OFHEO for their attempt at regulation. Some, such as Wallison, believe this was an early warning to the systemic risk that the growing market in subprime mortgages posed to the U.S. financial system that went unheeded. A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $ 467 billion of mortgage lending
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#17330855477427068-585: The cost of mortgages rose and the demand for housing fell, causing property values to decline. In early 2007, as more U.S. mortgage holders began defaulting on their repayments, subprime lenders went bankrupt, culminating in April with the bankruptcy of New Century Financial . As demand and prices continued to fall, the contagion spread to worldwide credit markets by August, and central banks began injecting liquidity . By July 2008, Fannie Mae and Freddie Mac , companies which together owned or guaranteed half of
7182-403: The crisis and selling toxic investments to its clients. With fewer resources to risk in creative destruction, the number of patent applications was flat, compared to exponential increases in patent application in prior years. Typical American families did not fare well, nor did the "wealthy-but-not-wealthiest" families just beneath the pyramid's top. However, half of the poorest families in
7296-446: The crisis in commercial real estate and related lending took place after the crisis in residential real estate. Business journalist Kimberly Amadeo reported: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects." Denice A. Gierach, a real estate attorney and CPA, wrote: ... most of the commercial real estate loans were good loans destroyed by
7410-437: The crisis was not only confined to the Federal Reserve 's provision of aid to individual financial institutions. The Federal Reserve has also conducted a number of innovative lending programs with the goal of improving liquidity and strengthening different financial institutions and markets, such as Freddie Mac and Fannie Mae . In this case, the major problem among the market is the lack of free cash reserves and flows to secure
7524-571: The crisis. As part of national fiscal policy response to the Great Recession , governments and central banks, including the Federal Reserve , the European Central Bank and the Bank of England , provided then-unprecedented trillions of dollars in bailouts and stimulus , including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid
7638-509: The crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes. Countering Krugman, Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates." Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than
7752-450: The debt, either in full or in part. The first method is declaring bankruptcy, which has the immediate effect of stopping any payments made to creditors. In the United States, the two primary avenues of bankruptcy for an individual are Chapter 13 bankruptcy and Chapter 7 bankruptcy. Another option is to consolidate these debts into a single loan, commonly known as debt consolidation . Debt relief, on an individual level, refers mainly to
7866-491: The early 21st century, it is of increased applicability to individuals in developed countries, due to credit bubbles and housing bubbles . War debt payments by World War I Allies to the U.S. had been suspended in 1931—only Finland paid in full—and American public opinion demanded repayments resume as a condition of U.S. postwar aid. Germany had suspended its reparations payments due under the 1919 Versailles Treaty and payable to Britain, France and others, as well as loans due to
7980-464: The end of the first quarter of 2009, resulting in a decline in consumption, then a decline in business investment. In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%. The U.S. unemployment rate peaked at 11.0% in October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since
8094-553: The end product." Essentially, investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using derivatives called credit default swaps, collateralized debt obligations and synthetic CDOs . By March 2011, the FDIC had paid out $ 9 billion (c. $ 12 billion in 2023 ) to cover losses on bad loans at 165 failed financial institutions. The Congressional Budget Office estimated, in June 2011, that
8208-473: The federal funds rate to drop below where it was supposed to be. However, in October 2008, the Federal Reserve was granted the power to provide banks with interest payments on their surplus reserves. This created a motivation for banks to retain their reserves instead of disbursing them, so reducing the need for the Federal Reserve to hedge its increased lending by decreases in alternative assets. Money market funds also went through runs when people lost faith in
8322-426: The financial system and got banks to start lending again, both to each other and to people. Many homeowners who were trying to keep their homes from going into default got housing credits. A package of policies was passed that let borrowers refinance their loans even though the value of their homes was less than what they still owed on their mortgages . While the causes of the bubble and subsequent crash are disputed,
8436-457: The government began collecting the data in 1964. The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand. Toxic securities were owned by corporate and institutional investors globally. Derivatives such as credit default swaps also increased
8550-506: The governments of European nations and the United States guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $ 1.5 trillion newly issued preferred stock in major banks. The Federal Reserve created then-significant amounts of new currency as a method to combat the liquidity trap . Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending. Significant controversy accompanied
8664-421: The higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, approximately 9% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. After
8778-578: The linkage between large financial institutions. The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of developing countries were due to falls in trade, commodity prices, investment and remittances sent from migrant workers (example: Armenia ). States with fragile political systems feared that investors from Western states would withdraw their money because of
8892-489: The loans. The Federal Reserve took a number of steps to deal with worries about liquidity in the financial markets. One of these steps was a credit line for major traders, who act as the Fed's partners in open market activities. Also, loan programs were set up to make the money market mutual funds and commercial paper market more flexible. Also, the Term Asset-Backed Securities Loan Facility (TALF)
9006-428: The losses suffered in the United States when the 1997–2007 [bubble] deflated." According to Wallison, the reason the U.S. residential housing bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans—generally with low or no downpayments. Krugman's contention (that the growth of a commercial real estate bubble indicates that U.S. housing policy
9120-626: The majority report of the Financial Crisis Inquiry Commission, conservative American Enterprise Institute fellow Peter J. Wallison stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the United States Department of Housing and Urban Development (HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Based upon information in
9234-590: The market. To keep it from getting worse, the Fed said it would give money to mutual fund companies. Also, Department of Treasury said that it would briefly cover the assets of the fund. Both of these things helped get the fund market back to normal, which helped the commercial paper market, which most businesses use to run. The FDIC also did a number of things, like raise the insurance cap from $ 100,000 to $ 250,000, to boost customer trust. They engaged in Quantitative Easing , which added more than $ 4 trillion to
9348-438: The most common alternatives to debt relief in cases where debt cannot be paid are forbearance and debt restructuring . Forbearance meaning that interest payments (possibly including past due ones) are forgiven, so long as payments resume. No reduction of principal occurs, however. In debt restructuring, an existing debt is replaced with a new debt. This may result in reduction of the principal (debt relief), or may simply change
9462-401: The negotiation for a reduction of a debt by either the consumer or a debt settlement agency. Through this arrangement, consumers agree to pay the creditor a fixed amount of money (generally a discount on their outstanding debt) either in a lump sum or under a payment plan. The debt settlement industry has had significant regulatory scrutiny since its inception with changes implemented in 2010 by
9576-510: The non-housing personal debt market and ease with which one can obtain personal credit has led to some consumers falling behind on payments. As of Q3 2017, student loans have the highest rates of serious delinquency (90 or more days delinquent) with approximately 9.6% of all student loan debt falling into this bucket. Credit card debt and auto loan debt have serious delinquency rates of 4.6% and 2.4% respectively. When consumers begin to fall behind on payments, they have several options to discharge
9690-430: The owed amounts. This way, the Allies also acknowledged the willingness of Germany to compensate Israel . After the five-year mark, Germany was under obligation to pay a fixed amount of 765 million Marks per year. As time went by Germany’s exports increased significantly, making fulfilment of payments a lot easier and reducing their negative effects on the economy. Debts covered by the Agreement were almost paid off during
9804-401: The play The Merchant of Venice by William Shakespeare , c. 1598 , the heroine pleads for debt relief (forgiveness) on grounds of Christian mercy . In the 1900 novel The Wonderful Wizard of Oz , a primary political interpretation is that it treats free silver , which engenders inflation and hence reduces debts. In the 1999 film Fight Club (but not the novel on which it
9918-494: The poorest countries, whilst trying to ensure the money would be spent on poverty reduction . The HIPC programme has been subject to conditionalities similar to those often attached to International Monetary Fund ( IMF ) and World Bank loans, requiring structural adjustment reforms, sometimes including the privatisation of public utilities , including water and electricity. To qualify for irrevocable debt relief, countries must also maintain macroeconomic stability and implement
10032-518: The precipitating factor for the Financial Crisis of 2007–2008 was the bursting of the United States housing bubble and the subsequent subprime mortgage crisis , which occurred due to a high default rate and resulting foreclosures of mortgage loans , particularly adjustable-rate mortgages . Some or all of the following factors contributed to the crisis: The relaxing of credit lending standards by investment banks and commercial banks allowed for
10146-501: The price appreciation. In a Peabody Award -winning program, NPR correspondents argued that a "Giant Pool of Money" (represented by $ 70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as
10260-418: The profit resulting from German exports, not from stockpile or new loaned amounts. This gave Germany's creditors a powerful incentive to import German goods, assisting reconstruction. After the settlement came into force, for the next five years, until 1958, Germany had to pay only debts arising from unpaid interest . This is another example of attempts made to help Germany’s economy grow before starting to pay
10374-451: The promotion of thousands of small mortgage brokers, and by their close relationship to subprime loan aggregators such as Countrywide . Depending on how "subprime" mortgages are defined, they remained below 10% of all mortgage originations until 2004, when they rose to nearly 20% and remained there through the 2005–2006 peak of the United States housing bubble . The majority report of the Financial Crisis Inquiry Commission , written by
10488-400: The pyramid suffered a decrease. The following is a timeline of the major events of the financial crisis, including government responses, and the subsequent economic recovery. There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since
10602-447: The reduction in the nominal value of currency, reduces the real value of debts. While lenders take inflation into account when they decide the terms of a loan, unexpected increases in the rate of inflation cause categorical debt relief. Inflation has been a contentious political issue on this basis, with debasement of currency a form of or alternative to sovereign default , and the free silver in late 19th century America being seen as
10716-416: The relatively conservative government-sponsored enterprises (GSEs) policed mortgage originators and maintained relatively high underwriting standards prior to 2003. However, as market power shifted from securitizers to originators, and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated. The riskiest loans were originated in 2004–2007,
10830-524: The settlement plan is acceptable to them." "5. The arrangements contemplated relate to Germany's pre-war public and private indebtedness and to the German debt arising out of post-war economic assistance; they do not relate to claims arising out of the war which can only be dealt with in connexion with a peace treaty." In response to the Allies, Adenauer informed them about Germany’s desire to repay its debts. The Conference on German External Debts (also known as
10944-471: The settlements’ outcome. In the last parts of negotiations, some “intergovernmental debts” were settled and “detailed technical reports” were produced that were included in the London Agreement. The agreement significantly contributed to the growth of the post-war German economy and re-emergence of Germany as a world economic power. A 2018 study in the European Review of Economic History showed that
11058-610: The six Democratic appointees, the minority report, written by three of the four Republican appointees, studies by Federal Reserve economists, and the work of several independent scholars generally contend that government affordable housing policy was not the primary cause of the financial crisis. Although they concede that governmental policies had some role in causing the crisis, they contend that GSE loans performed better than loans securitized by private investment banks, and performed better than some loans originated by institutions that held loans in their own portfolios. In his dissent to
11172-581: The start of 2003 to a peak of $ 2.71 trillion in Q4 of 2008. It was not until Q3 of 2012 that unsecured personal debt reached this level again. Since that time, unsecured personal debt has risen steadily to $ 3.76 trillion at the end of the third quarter of 2017. The other large change in unsecured personal debt is that an increasing portion of it is now student loan debt, from 12% in Q1 of 2003 to 53% in Q3 of 2017. The increasing size of
11286-464: The supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards. The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into
11400-419: The terms of repayment, for instance by extending the term (replacing a debt repaid over 5 years with one repaid over 10 years), which allows the same principal to be amortized over a longer period, thus allowing smaller payments. Personal debt that can be repaid from income but is not being repaid may be obtained via garnishment or attachment of earnings , which deduct debt service from wages . Inflation,
11514-526: The total that was supposed to be paid per year was associated with Germany’s “ability to make transfers ”. It can be described as a broad based Agreement as it settled just about every kind of German debt arising from the period before and after the Second World War. The total under negotiation was 16 billion marks of debt resulting from the Treaty of Versailles after World War I which had not been paid in
11628-545: The worst of the Great Recession by mid-2009. Assessments of the crisis's impact in the U.S. vary, but suggest that some 8.7 million jobs were lost, causing unemployment to rise from 5 percent in 2007 to a high of 10 percent in October 2009. The percentage of citizens living in poverty rose from 12.5 percent in 2007 to 15.1 percent in 2010. The Dow Jones Industrial Average fell by 53 percent between October 2007 and March 2009, and some estimates suggest that one in four households lost 75 percent or more of their net worth . In 2010,
11742-617: The years between 1994 and 2007. They also argue that the Federal Reserve's classification of CRA loans as "prime" is based on the faulty and self-serving assumption that high-interest-rate loans (3 percentage points over average) equal "subprime" loans. Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio magazine, Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for
11856-464: The years of the most intense competition between securitizers and the lowest market share for the GSEs. The GSEs eventually relaxed their standards to try to catch up with the private banks. A contrarian view is that Fannie Mae and Freddie Mac led the way to relaxed underwriting standards, starting in 1995, by advocating the use of easy-to-qualify automated underwriting and appraisal systems, by designing no-down-payment products issued by lenders, by
11970-540: Was a major benefit for the German economy . West Germany's new currency, the Deutsche Mark , was highly unstable until 1953. After the signing of the agreement, it stabilized due to the debt relief. The transition of West Germany from a debtor to a creditor by the middle of the 1950s had an impact on Germany's economic growth as well. The agreement's outcome can be described as a German economic miracle. Germany achieved all of
12084-524: Was among the five worst financial crises the world had experienced and led to a loss of more than $ 2 trillion from the global economy. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $ 10.5 (~$ 14.6 trillion in 2023) trillion. The increase in cash out refinancings , as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined. Many financial institutions owned investments whose value
12198-732: Was an extra three-year civil penalty added onto certain criminal traffic infractions like DWI or driving without a license or insurance. Surcharges were created in 2003 to pay for a roadway network that was never built, and instead half the money was diverted to hospitals, which became reliant on the money, with the rest going into the state treasury. However, the majority of drivers who had surcharges assessed could not pay them. Many people who could not afford either surcharges or insurance continued to drive and racked up huge sums in debt they could never expect to pay. A little-advertised amnesty program and an indigence program that still required partial payment helped some, and were criticized by some who felt it
12312-450: Was bailed-out. Instead of financing more domestic loans, some banks instead spent some of the stimulus money in more profitable areas such as investing in emerging markets and foreign currencies. In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the United States to "promote the financial stability of the United States". The Basel III capital and liquidity standards were adopted worldwide. Since
12426-542: Was based on home mortgages such as mortgage-backed securities , or credit derivatives used to insure them against failure, which declined in value significantly. The International Monetary Fund estimated that large U.S. and European banks lost more than $ 1 trillion on toxic assets and from bad loans from January 2007 to September 2009. Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices in late 2008 and early 2009. The crisis rapidly spread into
12540-550: Was made by Community Reinvestment Act (CRA)-covered lenders into low and mid-level income (LMI) borrowers and neighborhoods, representing 10% of all U.S. mortgage lending during the period. The majority of these were prime loans. Sub-prime loans made by CRA-covered institutions constituted a 3% market share of LMI loans in 1998, but in the run-up to the crisis, fully 25% of all subprime lending occurred at CRA-covered institutions and another 25% of subprime loans had some connection with CRA. However, most sub-prime loans were not made to
12654-508: Was not the cause of the crisis) is challenged by additional analysis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis." Other analysts support the contention that
12768-515: Was put in place thanks to a joint effort with the US Department of the Treasury. This plan was meant to make it easier for consumers and businesses to get credit by giving Americans who owned high-quality asset-backed securities more credit. Before the crisis, the Federal Reserve's stocks of Treasury securities were sold to pay for the increase in credit. This method was meant to keep banks from trying to give out their extra savings, which could cause
12882-416: Was re-introduced and expanded in 1867. At the time, this was a comparatively radical approach to debt relief in the world, making the United States one of the most debtor-friendly countries. In the United States of America for the years preceding the financial crisis of 2007–2008 , non-housing personal debt (auto loans, credit cards, student loans, etc.) rose significantly from approximately $ 2.05 trillion at
12996-450: Was unfair that they paid and others didn't. But local sheriffs began to complain that the law was causing the jails to fill up with people driving on suspended license, and the judiciary insisted the law was unfair and counterproductive to public safety. Finally, in 2019, the Legislature found different sources to fund hospitals and eliminated the surcharge, along with around $ 2.5 billion in debt owed by around 1.4 million people. The same year,
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