The Causes of the 2008 Crashes (an Accurate Outline)
27 June 2017 | Pago Pago, American Samoa
The Community Reinvestment Act, Fannie Mae, Freddie Mac, and the federal government played minimal roles in the housing and financial crashes and the ensuing Great Recession.The government did not mandate or induce a housing bubble any more than at any other time, as some claim. The government did, however, allow the financial crisis by removing financial regulations that had successfully prevented it earlier.
Greedy private mortgage brokers nationwide and their equally greedy private lenders caused the bubble for the most part, along with Wall Street, when those brokers and lenders discovered and realized they could abandon their lending standards and sell even their questionable mortgage loans to Wall Street, grabbing and splitting the huge up front mortgage fees involved.
Wall Street in turn became a big buyer of many new bad or questionable mortgages when it found out it could bundle them with with good mortgages into mortgage backed securities (MBS) that it could sell off as investment grade assets to the larger financial community, including pension funds. Goldman Sachs' bogus risk modeling was confirmed as legit by the rating agencies seeking additional fees without review.
This huge and new channel for the creation, sale and purchase of bad and marginal mortgages is what drove housing prices through the roof, along with the bandwagon effect of others jumping in to seek capital gains in the market as well, when they saw prices rise.
When housing prices eventually crashed, Wall Street held a large quantity of bad mortgages off their books that they were going to package into MBS that suddenly became almost worthless and because their books were consequentially bogus no one would loan to them, they would not loan to each other, and all faced a huge liquidity crises, Lehman Bros. went billy up; others, when the government intervened, were acquired, almost by force, by bigger entities, in some instances as a condition for receiving bailout monies. The entire shadow investment banking industry collapsed and disappeared. The government also bailed out the big banks that would have otherwise gone under, too.
The Justice Department and the FBI, after a huge investigation, said it had never seen such massive fraud on a nationwide scale among brokers, lenders and on Wall Street they and they were preparing for nationwide litigation against thousands, but the SEC stepped in and blocked the FBI and Justice Department from acting, by sucessfully claiming exclusive jurisdiction, and then never itself acting. At one point, before the plug was pulled, the FBI had over 400 agents in the field nationwide and in New York investigating and putting cases together with over 150 working in the subprime market alone.
Too many don't understand this and harbor all sorts of silly notions on causation. Libertarians of course blamed government interference, although many were among those earlier pushing for the deregulation that allowed it to happen. Republicans also blamed the government, claiming it encouraged mortgage lending and allowed for easy money by the Fed, although almost 70 percent of the funds were private monies from lenders like Countrywide.
No one was tried, sentenced and went to jail -- no lender, no broker, no Wall Street executive and no rating agency official. Wall Street survivors gave their senior executives big bonuses the next year for what they did.