Question

Why was the housing market the biggest contributor of the financial crisis in 2008?

Do you think that the government did enough to solve the crisis?

Should the government even intervene during crises or should it allow the economy to self-correct?

Answer 1

1. The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives.

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.

Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets. Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments.”

Thousands of people took out loans larger than they could afford in the hopes that they could either flip the house for profit or refinance later at a lower rate and with more equity in their home – which they would then leverage to purchase another “investment” house.

A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was a pulse and your word that you could afford the mortgage. Brokers had no reason not to sell you a home. They made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loan. But many of these mortgage backed assets were ticking time bombs. And they just went off. Thus the Housing market was the major contributor to the financial crises.

2. The Government definitely did not do enough to curb the financial crises. Federal Reserve’s disruptive manipulations of interest rates, plus massive subsidies and regulations in housing, banking, and mortgages. For years government policy promoted reckless financial practices and moral hazard and then made things worse by bailing out the worst miscreants.

3. The government should definitely intervene during a financial crises to ensure that the regulations are being followed and the assistance where ever required is provided so as to avoid financial panic and ultimately a recession hit on the economy. It can use various tools such as the monetary policy that it has available to curb the further effects.