I never believed for once that it was simple "greed" that caused the morgage lending crisis...however I was later introduced to the Community Reinvestment Act theory...Which basically states that banks were forced to engage in subprime lending to meet the regulations wihch forced them to give out loans to lower income families...but apperntly the bill dosent necessarily force them to give out these loans it merely incentivizes these banks by giving them approvals for applications for new bank branches or for mergers and acquistions...
Could someone please explain to me the real reason why this bubble developed and bursted in detail?
I take it you're new here? Welcome!
Mark Thornton has a good piece called The Housing Bubble in 4 Easy Steps. Also the Bailout Reader link in the top right of the Mises homepage is good.
I'm also flabbergasted at the explanations that are given for the bubble/bust. It seems that cogent economic analysis takes a back seat to "greed", "animal spirits" and "irrational exhuberence".
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MatthewWilliam: I take it you're new here? Welcome! Mark Thornton has a good piece called The Housing Bubble in 4 Easy Steps. Also the Bailout Reader link in the top right of the Mises homepage is good. I'm also flabbergasted at the explanations that are given for the bubble/bust. It seems that cogent economic analysis takes a back seat to "greed", "animal spirits" and "irrational exhuberence".
I'm pretty sure it was the horrible influence of jazz music.
"Keynesianomics is a Ponzi scheme."
"You are correct in that Capitalism does not help with poverty, because it eliminates poverty altogether..."
"That wonderful strawman: greed."
Inequality bad.
MatthewWilliam: I'm also flabbergasted at the explanations that are given for the bubble/bust. It seems that cogent economic analysis takes a back seat to "greed", "animal spirits" and "irrational exhuberence".
I think the new one is "the computers are panicking".
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Well i am new to the forums but i have been taking advtanage of this sites amazing store of knowledge for a while but thanks for the answer ill start reading up on it ^^
Mark Thornton: All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.
All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.
I would like to get a more in depth explanation of the 4th step...Why exactly did they "Have" to be extedned to people with worse credit ratings. My belief would be that these banks assumed that house prices would continue to rise and that if they gave loans to people with low incomes that they would be able to pay for the loans 4 years in the future by simply refinancing their house. Is this accurate??
Politicians have been obsessed with the idea that home ownership was the American Dream, and it sure didn't hurt your re-election chances by touting how you "helped" millions of Americans achieve this dream. They continually pushed Freddie/Fannie to lower the standards and pump out more mortgages.
The Fed obliged with cheap credit. The banks knew Freddie/Fannie would buy up these bad mortgages, so there wasn't much risk in them giving them out.
Wasn't there some law passed in the USA that stated banks couldn't discriminate against customers with poorer credit ratings?
I'm not American so I'm not certain about this.
The CRA. Arguably its role is minor.
-Jon
To darkness I condemn you...
Glitch: I would like to get a more in depth explanation of the 4th step...Why exactly did they "Have" to be extedned to people with worse credit ratings. My belief would be that these banks assumed that house prices would continue to rise and that if they gave loans to people with low incomes that they would be able to pay for the loans 4 years in the future by simply refinancing their house. Is this accurate??
Not necessarily. Imagine that you're a loan officer at a lending institution. Because of a flood of new money, mortgage interest rates have been driven below 5%. In other words, you have an abundance of product with a very low profit margin. The only way that you're going to contribute to the profits of your institution is by selling as much product as possible. In other words, you must originate as many mortgages as you can. Your performance will be gaged by how many loans you make. Since your institution plans to sell these mortgages to another company shortly after they are originated, they are not particularly concerned about underwriting. The only underwriting standard that must be met are those of the buyer. These buyers will securitize their pool of mortgages and, since they have developed complex derivatives that they believe eliminate risk, they have lowered their underwriting standards.
The only way that you'll keep your job is by originating as many loans as possible. If you expect housing prices to collapse you might start looking for another line of work but, in the meantime, you'll have to continue to push loans in order to maintain the lifestyle to which you've become accustomed.
ooo very interesting now couldnt that be attritbuted to the free market?
Glitch: ooo very interesting now couldnt that be attritbuted to the free market?
I don't think so, I believe more risk was being taken on account of fannie and freddie. Fan Mae and Fred Mac were buying these loans and repackaging them. Since fan and fred have the backing of the federal government more risk was taken on then would normally in the free market. If it hit the fan taxpayers would fund a bailout. Normally these type of practices would drive a financial institution out of business.
Andrews Environmental Management
just like fractional reserve banking lol =( our government fails
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