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2008 Financial Crisis Essay

430 Words2 Pages

The Financial Crisis of 2008 was the largest global financial crisis that has ever occurred, even being compared to the Great Depression of 1929. It cost the United States economy around $22 trillion USD in 2008 alone, according to a study by the Government Accountability Office. This initiated the domino effect - an effect that produced a global financial crisis after other markets began to collapse - and it forced the VIX (CBOE Volatility Index) index to rise up to 80% at one point. Financial institutions and the government were directly responsible because the government regulation on financial institutions failed, the government authorized financial institutions to give loans to unqualified people, and the government un-necessarily bailed …show more content…

According to Thayer Watkins, a prestigious professor of economics at San José State University, in the 1990s, under the reign of Franklin Raines, an appointee of the Clinton Administration, Fannie Mae began to demand that the mortgage lending institutions that it made deals with were not “redlining”. This demand pushed banks to lower their standards on the “down payment” and “income” of the person filing for a loan. Additionally, this allowed banks to charge those borrowers at a “higher interest rate,” sometimes reaching 30%. Watkins point ties to the thesis because the government under the Clinton Administration allowed Fannie Mae to push banks to give out subprime mortgage loans. Many of the people who applied were not qualified nor financially secured. The government also pushed subprime loans through more regulation. According to FFIEC (Federal Financial Institutions Examination Council), the Community Reinvestment Act (CRA), enacted in 1977 in Congress, intended to help meet the “credit needs” of the communities, regardless if they are low-income neighborhoods, in which they operate. The FFIEC's claim ties to Watkins claim as they both show that the government-backed financial institutions to give subprime loans. Both claims point to the fact that lending firms and banks were encouraged to give loans towards normally unqualified homeowners. They were even paid with kickbacks for participating in giving loans to unqualified

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Overall, the federal government was never really hands on in housing, that changed in the 1930’s when the Federal Housing Administration (FHA) was created to be apart of the New Deal. After the Great Depression, the FHA sought to rebuild the housing market by introducing the mortgage lending system, that is still used today. The FHA actually did quite the opposite, “instead, the FHA adopted a racial policy”, that took advantage of racial covenants and insisted properties that were insured by them to use those covenants. The FHA introduced redlining policies in many American cities and with the Home Owners Loan Coalition (HOLC), a federally-funded program created to help homeowners refinance their mortgages, it seemed that it would never end.

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However, it is particularly interesting to note that the new structure has not been proven to provide adequate protection, and more importantly, has done little to legislate the protection of the borrower in the first place (Watkins, 2011)With that in mind, in 1938 government set up Fannie Mae (The Federal Nation Mortgage Association

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72 Words | 1 Pages

During the Great Depression new organizations formed from the National Housing Act of 1934. Organizations like HOLC and FHA (Federal Housing Administration) were placed to assist homeowners unable to pay their existing mortgages and boost the overall housing market. Residential Security Maps were created by HOLC and the practice of redlining was implemented by FHA to categorize mortgages and loans according to desirability for investment and promote a ‘systematic place-based appraisal

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1285 Words | 6 Pages

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1150 Words | 5 Pages

In “African Americans and the New Deal, the documents starts with, “Most New Deal programs discriminated against African Americans” This was only the beginning. The article goes on to say that the FHA had lower pay scales for Black Americans (African Americans and the New Deal 1). This is discrimination to give higher pay for Whites and not Blacks. One of the New Deal’s program called the AAA, “forced 100,000 blacks off the land in 1933 and 1934”

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781 Words | 4 Pages

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588 Words | 3 Pages

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439 Words | 2 Pages

During the 1930’s the Federal Housing Authority partnered with banks and backed loans on houses in order to encourage more people to buy houses (27:11). The FHA was able to bring the down-payment needed to tavke out a mortgage from 50% to 10-20%, and the amount of time needed to pay it from 5 years to 30 years (27:54). There were particular people that were allowed this opportunity and those were White people. Neighborhoods with primarily minorities were said to be volatile to invest in and therefore were “red-lined” by organizations such as The National Appraisal System (33:12).

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2511 Words | 11 Pages

The government became involved with the concept of redlining with the National Housing Act of 1934 (Madrigal 2014). The government color coded neighborhoods based on their viewed riskiness, so green areas were the most likely to be invested in while red areas were considered undesirable for loans and investment. These red areas, which mostly consisted of Hispanic, immigrant, or black communities, were systematically denied access to mortgage, insurance, credit, loans, and other financial services. Due to banks denying resources to these neighborhoods, businesses and other investors followed their lead, creating a cycle of disinvestment. As a result of this disinvestment, the redlined communities suffered from higher unemployment rates, lower property values, and a lack of access to capital.

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632 Words | 3 Pages

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1097 Words | 5 Pages

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1854 Words | 8 Pages

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