Beginning in the summer of 2006, the collapse of the housing bubble in the United States led to a worldwide financial crisis that we are still seeing the affects of today. The main factor that caused the collapse of the housing bubble and subsequently lead to the financial crisis of 2008, also know as the Great Recession, was precarious lending practices in the form of subprime mortgages (Tan and Cheong 1; Goswami et al. 77; Morrow 751), which lead to extreme levered losses. Although many policies were used to alleviate the housing crisis, such as flooding the banking system with reserves, the government needs to restructure the financial system, so that the burdens of lending are split equally between the banks and households, and future housing bubbles and financial crises are prevented. Yet what exactly is a housing bubble? A housing bubble implies a period of time where economic principles …show more content…
This was extremely problematic and a major issue, because if house prices were to decline, as they did in the collapse of the housing bubble, then everyone would lose their home equity, and therefore their total wealth. However other forces contributed to the bubble and housing prices, which included “construction costs, loan-to-value and price-to-rent ratios, interest rates, lending standards, [and] demographic variables” (Damianov and Escobari 2). Furthermore the existence of piggyback lending, the growth in mortgage secularization, the inflation of home prices, and the excessive increase in spending lead to the Great Recession. When the bubble finally burst “housing prices fell $5.5 trillion,” which was significant “especially considering the annual economic output of the United States economy is roughly $14 trillion” (Mian and Sufi