Why try to make up elaborate explanations when the truth is so simple.
The cause can be summarized with two words: Government intervention
One major issue was the Community Reinvestment Act (passed in 1977 and revised many times) , which was introduced as to "reduce discriminatory credit practices against low-income neighborhoods". It was suppose to provide "affordable housing" for low income families, but by granting sub prime mortgages to basically anyone (people with poor credit) allowing more people to enter the housing market, the price on housing skyrocketed, becoming artificially high, causing a housing boom. So the CRA actually caused un-affordable housing but affordable loans. All while interest rates were kept artificially low.
So what would you expect to happen when the interest rates starts increasing while high-risk lenders with small margins stand there with their over-prized houses to pay for? They have to leave their houses, and as more and more houses are foreclosed, the house prices drop. We have a bust. The bank is unable to get the the money that it loaned out back even by selling the house, since the money they would get back would be much lower than the money the loaned out. Hence, the bank is bancrupt. (If they don't get bailed out)
Banks would be highly unlikely to loan money to someone they thought would be unable to pay it back, at least if they didn't think that they would be bailed out. But because of the CRA, the banks were forced to do so. If not, they would face huge fines.
Had the free market been let to work as it should, we wouldn't be having the problems that we are facing now. Yet, the free market is being blamed for this. And we are demanding more government intervention although this was what caused the crisis in the first place.
This video gives a pretty good explanation to the crisis (although the music is pretty annoying):
The cause can be summarized with two words: Government intervention
One major issue was the Community Reinvestment Act (passed in 1977 and revised many times) , which was introduced as to "reduce discriminatory credit practices against low-income neighborhoods". It was suppose to provide "affordable housing" for low income families, but by granting sub prime mortgages to basically anyone (people with poor credit) allowing more people to enter the housing market, the price on housing skyrocketed, becoming artificially high, causing a housing boom. So the CRA actually caused un-affordable housing but affordable loans. All while interest rates were kept artificially low.
So what would you expect to happen when the interest rates starts increasing while high-risk lenders with small margins stand there with their over-prized houses to pay for? They have to leave their houses, and as more and more houses are foreclosed, the house prices drop. We have a bust. The bank is unable to get the the money that it loaned out back even by selling the house, since the money they would get back would be much lower than the money the loaned out. Hence, the bank is bancrupt. (If they don't get bailed out)
Banks would be highly unlikely to loan money to someone they thought would be unable to pay it back, at least if they didn't think that they would be bailed out. But because of the CRA, the banks were forced to do so. If not, they would face huge fines.
Had the free market been let to work as it should, we wouldn't be having the problems that we are facing now. Yet, the free market is being blamed for this. And we are demanding more government intervention although this was what caused the crisis in the first place.
This video gives a pretty good explanation to the crisis (although the music is pretty annoying):
And an interesting article
http://www.lewrockwell.com/woods/woods111.html
Were the policy makers so stupid that they didn't understand what effect these policies would have on the economy?
http://www.globalresearch.ca/index.php?context=va&aid=13551
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