The Senate report’s executive summary outlined four practices that they discovered led to the financial crisis. These were high risk lending strategies, lack of regulation, credit rating fraud, and investment bank abuse. The individuals and institutions that participated in the financial collapse did so for their own profit, without care for American citizens, the world economy, or even the clients whom they immediately served.
In a second article, the Center for American Progress defended the government policies that supported homebuyers and blamed predatory, unregulated markets for the collapse. They showed that government programs had very little influence on the market at the time of the crisis, and were there to hold up the economy when private markets failed.
One statement stood out to me in the Executive Summary: “…bet on the failure rather than the success of U.S. financial instruments.” This is the choice that individuals and institutions made all along the way. In contrast, the FHA and other government policies bet on the success of the country.
Banks bet on failure by choosing to take a chance with high risk loans for higher profits. Again, they knew they were taking a risk, but they did not see that in the long term, they stacked the cards against the U.S. economy and themselves. The homeowners they deceived were counted on by the economy to pay their mortgages, yet institutions consciously allowed them to default. A video by Jonathan Jarvis illustrates how banks were unconcerned with defaults because they could just resell the house: The Crisis of Credit. Banks bet on the failure of their customers, without understanding that those people were the bedrock of the economy in the long-term. The executive summary described investment banks as institutions that “help to channel the nations’s wealth into productive activities that create jobs and increase economic growth.” Setting homeowners up for failure does not sound productive.
While private institutions bet on failure in the decades leading up to the crisis, government policies had long been in place to bet on success. The FHA was established in the thirties to help the country out of the Depression and reassure banks that loaning was possible again. The Community Reinvestment Act, passed in 1977, supported the reduction of discriminatory mortgage lending. The government wanted people to pay their mortgages and benefit from the financial and social advantages that homeownership brings. Whatever mistakes they made or risk they introduced to the market, they still bet on the everyday homeowner, who the economy depended on, and who risk-taking institutions set up for failure.