Root Cause 2008-9 Recession


 

Great Recession 2008-2009

Root Cause:

US Govt over regulated housing market.

This lead to a housing bubble.

 

How:

 

Community Reinvestment Act ( CRA ) extensions in 1996 required banks to issue risky or subprime loans.

 

In 1996, US Govt encouraged investment banks to package subprime loans so as to leverage risks of individual loans. Investment banks were reluctant (yes – read NY Times articles about this). Bear Stearns chose to be first and profited well; many banks followed.

 

In 1999, HUD mandated that by 2007, 55% of Fannie Mae and Freddie Mac financing had to be for “subprime” loans. In 2007 this was realized along with $5.5 trillion in very risky loans, much of this toxic. In Sept 2008 Fannie and Freddie were bankrupt. The US Govt bailed both out. So far $200 billion in tax payer money has been spent for Fannie / Freddie. Eventually as much as $1 Trillion will be spent by taxpayers.

 

Community Organizers protested on lawns of bank CEO’s demanding subprime loans. Bankers were accused of racism if they resisted.

 

Banks largely accommodated to the above requests. Bankers actually formed a fund for Acorn so Acorn would refer potential loan candidates to them. Us Govt heavily funded Acorn (which we learned later was a very corrupt organization).

 

Barnet Frank, from 2003 on resisted several efforts to reign in Fannie / Freddie risky financial leverage. In July 2008, Barney stated both were solvent. This froze many investors who would later be wiped out at time of Fannie / Freddie bankruptcy 2 months later.

 

Economics501

Dec 26, 1010

 

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About economics501

1 - free market Capitalist; 2 - Fitness Entrepreneur; 56 years old, VP at an Investment Bank in NYC, ex Venture Capitalist, happily married with 2 girls. Education: Rutgers and NYU. I allow Ted Hruzd, my friend to blog at will here. He has many posts here. I have known Ted since we were both students at NYU. Ted also works for an Investment Bank as a VP in Equity Global Markets. ------------------------- I was very very Socialist leaning as a 22 year old. I then strongly believed in Gov role in helping the poor. However, as a USDA Child Nutrition Programs, I personally accounted for millions of fraud, abuse, and waste of tax payer money. I came to believe that the poor would be best served with less Gov programs and more with direct aid via tax system. Then after 5 years I became a free market capitalist, was a venture capitalist in 2007 and helped start 2 high tech companies. I dedicate this site to champion free market capitalism as the best road to Prosperity. Please join in. If you disagree, fine, but please post with dignity and class and be civil. Argue with facts always.
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