The 2008 crash caused one of the worst recessions in history. This has caused a great and long standing debate on what happened, how it happened, and why we didn’t do anything to prevent it.
Full disclosure: I am not an economist, nor am I an expert on the housing market. However, I have done a ton of research and will try to outline what I have learned. I will also list what it is and what it is not. There seems to be a great deal of confusion and misinformation on what lead to the 2008 crash.
It was not one President’s fault.
In fact, every President from Jimmy Carter to George W. Bush had some fault in the 2008 crash. The only President that is not to blame for the crash is President Obama (Gasp!! Yes, I know, I am trying to be honest here).
In order to understand this, we must go back to the beginning. In 1977, The Community Reinvestment Act was signed into law by President Jimmy Carter. The reasoning behind this law was to encourage banks to lend money (mortgages) to lower income individuals (usually minorities).
The President and certain politicians believed that owning a house was the key to the American Dream and that it was unfair for some to not obtain the funds to obtain one. They encouraged banks to lend by backing the loans in case of default.
This all happened throughout a 28 year period. The real estate market began to increase and more minorities began to purchase homes.
During President Clinton’s term, banks began relaxing their standards for lending even more. Freddie and Fannie Mae led the way and began to sell variable mortgages to third parties. This became very lucrative and many third party sites began popping up all over the country.
When President Bush took office, the housing market was in full swing. Couple this with his tax reform, now people had more money to spend. The economy was booming before the crash. Many people, especially in Vegas, were purchasing multiple homes with little to no money down.
This resulted in an artificially inflated housing market. Houses that were once worth $120k, quickly became $350-400k. The waiting list for a home was over 6 months. There was sky high demand and not enough supply. This created a bubble.
In short, people (Banks and ordinary citizens) got greedy.
In 2008, the party was over. Hundreds of thousands of variable mortgages became due, and then…BOOM! People couldn’t pay and defaulted on their mortgages.
Banks began sinking faster than the Titanic, including some of the biggest names (BOA, Wells Fargo, J.P Morgan, etc..). This led to a bailout, because they were “Too big to fail.” So President Bush passed TARP to “help” the failing banks and auto industries.
Now, there is more to the story than just the housing market crash, but the overarching problem was greed. The banks, people, companies and many other industries were greedy. The irony is that politicians demanded more government intervention, when that was what caused this in the first place (“Crony Capitalism”).
Moral of the story: It is a never ending cycle: Government regulates, crash happens because of regulation, government intervenes to prevent another crash. “Wash, Rinse, Repeat.”
For more information on this topic, click “here.”
Thanks for reading!! -Mike