“The Federal Reserve lowered interest rates dramatically during the early 2000s, thereby making it much easier for banks to borrow and lend money. The greatest real estate bubble in history then formed, as anyone could get a loan at a low interest rate and no one had a stake in the eventual success or failure of the mortgages. They could just be securitized and sold to investors around the world or dumped on Fannie Mae and Freddie Mac and the toxic risk would be spread around the world. If the system collapsed, all of the players knew that the Fed and the government would step in to provide bailouts to prevent the recognition of the failure of the industry.
There is no doubt that the Community Reinvestment Act, and other factors played a role in inflating the bubble and keeping housing prices rising far beyond sustainable levels, just as corrupt real estate brokers, mortgage brokers, and appraisers helped to overvalue properties in local areas. BUT all of these played merely supporting roles to the subprime lenders, Wall Street firms, bond insurers, ratings agencies, and the central bank that helped create and sustain the illusion that the housing market was in a phase of perpetual growth.
I feel there were two key components. Firstly Greenspan 'allowing' the bubble to over-expand, by not cooling it with increased interest rates ... the 'It's just froth ... the market will self regulate (I guess that's what a bust is, then).
Secondly, 'the insurance' (the Credit Default Swaps), that insured against loss and that justified the AAA ratings.
Without even one of those items, in your well delineated sequence of events, I believe the bubble would not have been able to grow as big and as world wide ...
“Hundreds of local, regional, and national subprime mortgage lenders borrowed money from Wall Street investment firms to make loans to people buying or refinancing a house. When there were no borrowers left with good credit and stable income histories, these lenders gave mortgages to people with extremely poor credit, no credit, no income, and no assets. Loans were sold to Wall Street upon origination.
Firms like Lehman Brothers and Merrill Lynch provided subprime lenders with easy access to cash to make loans, then buying these loans from the lenders in order to securitize them for future sale as bonds. Investment companies charged investors to make these mortgage-backed securities, which investors thought were high-quality investments.
Bond insurers played a part by providing insurance on mortgage-backed securities, based on Wall Street firms' assurances that the mortgages were high quality when packaged together. With rising home values, the houses where families were unable to stop foreclosure by refinancing could be sold on the open market for more than the mortgage had been worth. So insurance companies charged a little bit to guarantee the securities, thereby making them look even safer.
Rating agencies played their part by giving these bonds very high ratings, making them look to be very low risk, even though the bonds were promising to pay high interest rates. The favorable ratings meant investors were willing to keep buying the securities. These agencies also had no stake in the success or failure of the loans.
“You forgot to include the people that had good credit, good income and that had assets, but they got varible rate loans because the interest rate was much lower than the fixed rate. People that had a 5.5 rate mortgage refined and got 4.75 with a variable rate loan, and when Bush admin. started raising that interest rates, almost weekly it seemed, guess what credit got tight and people could not get out of those varible loans. So that group needs to be included as well.”
“The Federal Reserve lowered interest rates dramatically during the early 2000s, thereby making it much easier for banks to borrow and lend money. The greatest real estate bubble in history then formed, as anyone could get a loan at a low interest rate and no one had a stake in the eventual success or failure of the mortgages. They could just be securitized and sold to investors around the world or dumped on Fannie Mae and Freddie Mac and the toxic risk would be spread around the world. If the system collapsed, all of the players knew that the Fed and the government would step in to provide bailouts to prevent the recognition of the failure of the industry.
There is no doubt that the Community Reinvestment Act, and other factors played a role in inflating the bubble and keeping housing prices rising far beyond sustainable levels, just as corrupt real estate brokers, mortgage brokers, and appraisers helped to overvalue properties in local areas. BUT all of these played merely supporting roles to the subprime lenders, Wall Street firms, bond insurers, ratings agencies, and the central bank that helped create and sustain the illusion that the housing market was in a phase of perpetual growth.
“Uh, kitten? I get that it's cool to blame Obama for pretty much everything but you seem to have forgotten that it was your man George W Bush who put up $700 billion for rescuing all those failing financial institutions in Sept. 2008.”
I agree though--it's not like the housing market is going to bounce back up into the stratosphere. It will probably be flat for a decade or two, much like Japan's housing market did.”
“Let's see... the dot com bubble grew and burst under Clinton's watch, and then the Housing Bubble grew and burst under Bush's watch. I'm not sure that dawg will hunt, pudding.”
“Seems like Jeffrey S. Wiesenfeld needs to lose his trustee position for being a hysterical, simple-minded, reactionary knob. Kushner is in the right, and has handled this very well.
PS Anyone who hasn't seen Angels in America should rent it. It's long and brilliant.”
“Can we assume that you are just as passionate in pushing for GOPers to be prosecuted for their alleged misdeeds? You've got quite a few on your side of the aisle--before we even get into paranoid, crazy, manufactured nonsense like you are claiming about Clinton.
“Yes but some of those technologies are not where they need to be, just yet. (I am FOR clean and renewable energies. I wish we could all switch over immediately.)
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