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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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588 Words | 3 Pages

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1854 Words | 8 Pages

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