The Recession-- According to Ellis

In 2006 our economy was in full throttle; the stock market was climbing, innovation was greater than ever before in the United States, and all seemed to be going well. That is, until, as said by Time magazine’s Kurt Andersen, "we started gambling (and winning!)" – our economy went downhill from there. Banks were forced to foreclose, the prices of houses plummeted, and Americans found themselves either in debt or unemployed – or maybe both. But how did our economy go from such a prosperous era to an 'economic crisis'?
In the past few years, the values and prices of housing increased dramatically. Housing was not only growing in price but also in size, increasing by half its original size. The stock market was booming; people were bringing home more money than ever – so why not buy a nicer, larger house? "We started living large," as said by Andersen, "literally as well as figuratively."
Another factor of American’s having more spending money was the FED's efforts to stimulate the demand in the economy after September 11th. They lowered interest rates, to stimulate borrowing and spending and to promote growth. By doing this, there was more money to be spent – and over production. People were buying new houses, buying new cars, and utilizing new innovations – such as the internet, to purchase laptops and iPods – most likely rarely paying in cash under any circumstance.
With this promotion for growth, our economy became demand induced – with the ability to spend more. People wanted to live larger than ever before – maybe because there was more to purchase or invest in than ever before; this is when we turned to the banks. Americans looked to the banks for assistance in purchasing their dream home or their new Lexus – and the banks granted them mortgages and/or loans. Not only did this ultimately put Americans in potentially great debt, but the banks were in a situation as well. Many banks gave loans to unqualified people, meaning that some people were unable to pay back these loans which caused the banks a lot of trouble and loss.
With people easily being granted loans for mortgages, there was an increased demand for housing. Naturally, because the demand increased, the supply increased. More houses were built everywhere and because loans were so easy to come by, affordable housing was created – which did not necessarily seem like a bad idea at the time, but many of the loans utilized for mortgages were unable to be paid back to the bank.
But the banks seemed to balance out their losses from bad loans by investing in the housing market. Prices were still high. Therefore, the banks began investing in Mortgage-Backed Securities. These securities were highly profitable as long as the prices of housing remained sustainable. Banks invested in these and were profiting from them left and right. Unemployment was low, banks were prosperous, Americans had more money than ever (and spending more than ever too) – but all aspects of everything good in our economy, seemed to disappear.
The FED's plan to synthetically stimulate the demand completely backfired; it caused a great flow of money – which resulted in overspending in every category possible. Due to false assumptions on continued growth in the economy, consumers were in debt. The prices and values of the housing market declined steadily due to the overproduction of housing – and the easy process of receiving loans. But as the economy began to slow down, the loans were not being paid back – by the unqualified people they were granted to in the first place. Banks lost money and could not continue lending at the same levels as before.