Reading Response 1 / Rachel Kraimer

The first article,  illustrates an inside perspective of the financial institutions and regulatory agencies that contributed to the ultimate demise of the United State’s economy in 2008. Not only were Wall Street power-houses taking part in high risk mortgage lending as well as other ethically deficient practices, but offices put in place to prevent unsound actions such as these declined to do so. This behavior ultimately boils down to a failed system of checks and balances, truly calling into question the conduct that took place behind closed Wall Street doors. The key factors that played extensive roles in the economy’s 2008 crash consist of high risk lending, regulatory failure, inflated credit ratings, and investment bank abuses. Washington Mutual Bank and Long Beach Mortgage Corporation truly set the tone and influenced system corruption as they engaged in questionable lending practices that curated billions of revenue dollars in poor quality mortgages. By consciously choosing to value volume and speed over loan quality in order to make a quick dollar, these corporations failed to consider the lasting consequences their actions would have. Instead of taking meaningful enforcement against WaMu and Long Beach, even after violations had been identified, the Office of Thrift Supervision turned a blind eye to their regulatory duties. This was a very pivotal moment in the storm of financial crisis factors, adding to the severity of damage that could easily have been halted early on. Credit inflation proceeded to mask security risks as is apparent in the actions of credit rating agencies, Moody Investors Service Inc. and Standard & Poor’s Financial Services LLC. By ignoring unsustainable rises in housing, risky loans, and mortgage fraud and continuing to issue AAA ratings to thousands of securities, financial markets experienced extreme shock when downgrades and losses ensued. Finally, investment banks such as Goldman Sachs and Deutsche Bank continued to instigate economic instability by steadily streaming funds to lenders generating poor quality loans, and profited from corrupt mortgage related structured finance products. The United States economy is a structurally convoluted system that would be able to withstand some of these factors, but it is the interconnectedness and force of all these components that simultaneously destroyed the country’s financial system.

While “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse” takes on the perspective of private banks who played key roles in the financial crash, “The 2008 Housing Crisis” takes on a new viewpoint revolving around the role of the federal government during this time. While some critics chose to blame federal housing policy for the downfall of the United States financial system, it has actually provided long-term benefits to both the economy and consumers through its promotion of liquidity and affordability. These policies stem from the after-effects of the Great Depression, and have served critical roles in the lives of many Americans as they seek to establish homeownership. By intervening in the frozen mortgage market in the 1930’s the federal government was able to bring forth much needed stability to the national housing market, including the establishment of the Federal Housing Association (FHA), national mortgage associations, and the GI Bill. With the formulation of the FHA the government created an insurance policy on mortgages to help protect banks against losses on FHA-specific loans. Along with the Federal Housing Association’s foundation, national mortgage associations also became required principles, which served as another layer of economic security promotion. When the United States faced financial stress after World War II, it was the GI that fueled the Veteran’s Administration to provide government backing for affordable mortgages to millions, ultimately stimulating impressive economic growth. Unfortunately these benefits did not apply to all Americans for the better half of the 1900’s, as families of color were excluded from such federal investments in homeownership. It wasn’t until the 1960’s and 70’s that civil rights legislation required such adverse and toxic policies to be reversed, bringing about changes in the FHA’s lending practices and the establishment of the Fair Housing Act and the Community Reinvestment Act. But despite these corrections, years of discrimination have garnered irreversible damage that has heavily contributed to racial household wealth gaps in our country today. While the federal housing policy certainly hasn’t always been the most ethically sound entity over the years, it still cannot be credited with inducing the financial crisis of 2008. Predatory private mortgage lending and unregulated markets ran rampant on Wall Street leading up to the crash, placing an unsupportable strain on the economy. Meanwhile federal housing policy bolstering access, liquidity, and affordability has continued to generate high rates of homeownership following the 1930’s failure in the housing market.

Although 10 years have past since our country has experienced economic turmoil at such a severe extent, economic recessions are not short-term events, and have lasting effects that are still prevalent today. According to an article published during the midst of the economy’s tumult, long-term consequences include negative effects on educational achievement, opportunity, private investment, and entrepreneurial activity and business formation. Education is a fundamental value of our country, but income losses or even unemployment induced by the crash can reduce families’ abilities to cultivate a supportive learning environment, threatens early childhood nutrition, and can force a delay or abandonment of a college career. As you can see in the images below, the correlation between parents and children comes at a high-degree and can last for many generations to come.

Children from higher income families are more likely to pursue a higher education in their future, and downfalls in the county’s economic state can have very damaging effects on families who feel the brunt force of this. Not only do individuals and families suffer lasting effects but investment levels plummet, reducing the development of future innovations and severely deteriorating small/new business in years to come. Together these articles should serve as a lesson that history is prone to repeating itself, and if we as citizens and consumers don’t remain educated and promote regulation for the occurrences on Wall Street and of our economy, then another financial crisis will certainly be looming in our country’s future.

Resources Used:

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse

The 2008 Housing Crisis

Economic Scarring: The Long-Term Impacts of the Recession

Reading Response 1 / Emma FitzGerald

“Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” is an depth report done by the US Senate released in 2011. They touched on four major areas of concern that lead to the failure of the financial system: high risk mortgage lending, failure of regulators to stop such practices, inflated credit ratings, and abuses of the system by investment banks. They primarily blame two sides of the collapse, blaming both the large institutions such as Washington Mutual, an aggressive mortgage lender the collapsed during the crisis. They added an in depth view of the corruption that was going on behind closed doors. While also placing blame on loose government regulations by groups such as the Office of Thrift Supervision. This document also included 19 recommendations for changes to regulatory and industry practices.

The second article, “The 2008 Housing Crisis” takes a defensive stance on the issue, explaining why the federal government and the Federal housing programs are not to blame.  Conservatives try to place blame on the government programs enacted after the Great Depression, such as Federal Housing Administration, or FHA; eliminating the Community Reinvestment Act, or CRA. But there is a lot of evidence this isn’t true. These programs were put in place to bring stability to the national housing market, and with Federal support for the mortgage market, homeownership blossomed. FHA loans were safer and performed better over time compared to the subprime loans. Many times brokers would push their clients into these loans for a quick sale. These loans often came from private mortgage lending groups and they were notorious for predatory lending and poor regulation, which ultimately was the true cause of the 2008 financial crisis.

Before reading these articles, I didn’t have a good grasp on the subject, and did some additional research to put things in context. While searching I found a great infographic on Co.Design’s website about the effects on our country between the year of the collapse, 2007, and 2010. The infographic shows the change in a variety of things such as “Daily Consumer Spending” to “Approval Ratings of Obama”.

That infographic was made 4 years ago, and second article was written earlier this year. It’s crazy to think we still need to people to understand the main cause of this crisis, and long lasting effects of the recession. After reading the two articles it has become clear that selfishness and greed play a huge role in the financial crisis. The rich just wanted to get richer and were targeting groups who were vulnerable, and things were working out for awhile, but there were cracks in the foundation, then everything came crashing down. In our country’s current political state, it is important that we stay educated on the subject, and make sure we don’t let his happen again.

Reading Response One / Munazza Aijaz

The Senate Wall Street report separated the cause of the financial crisis of 2007-08 into four interrelated parts: lenders, credit rating agencies, federal regulators, and investment banks. It thoroughly explained the incentives with which each party acted, and what the ramifications were for the entire crisis. The report’s main arguments include the following: 1. Lenders on Wall Street issued credit to people with a history of late loan payments or no payment at all. These specific loans (high-risk) often had inflated interest rates to make up in the case of a late payment. 2. The regulators (the Office of Thrift Supervision) didn’t stop any of this from happening. They identified hundreds of instances of faulty lending but did nothing to stop the banks; in fact, they continued to give them good ratings. When the whole economy finally went into recession in 2008, they took two inconsequential, nonpublic, distinctly informal actions telling the banks to change their ways. Nothing happened. The OTS even resisted efforts from their backup regulator, the FDIC, for stricter penalties. 3. Credit ratings agencies were not doing their job, either. Paid by Wall Street and dependent on the banks’ high opinion of them, agencies like Moody’s and Standard & Poor’s issued false and absurdly high ratings. 4. The investment banks (such as Goldman Sachs and Deutsche Bank) created, sold, and traded high-risk products. One example is a CDO: essentially a combination of high-risk loans wrapped in false, slightly better packaging. Ending this practice would mean less revenue for the banks, and so not in their interest.

The Center for American Progress’ report, aptly named “Don’t Blame Federal Housing Programs for Wall Street’s Recklessness” argued that government programs did not drive the financial crisis of 2007-08. The report’s main arguments are the following: It wasn’t because of government programs that the housing crisis happens, it was actually the lack of government oversight that contributed greatly. Government programs that were created after the Great Depression (such as the FHA, the VA, and Fannie Mae) helped create stability in the housing market by providing government insurance on mortgages and offering mortgages to returning veterans. This increased homeownership in America, specifically for white families. (The FHA and VA enabled practices like redlining and discriminatory lending that increased segregation and stopped people of color from living in better areas.) In the early 2000s, government share of the mortgage market declined as private securitization increased (most of the private securities were involved in high risk, subprime loaning) which in turn was a significant driver for the crisis. The report argues that the two real causes of the crisis were 1. Predatory private mortgage lending and 2. Unregulated markets. The report also touched on how the government programs made mistakes, like buying a small amount of risky securities to keep their shareholders from panicking. But, it stresses, it didn’t actually drive the crisis, Wall Street did.

After reading both, the Senate report took more time in taking apart the cause of the crisis, whereas the CAP report took apart the cause of the crisis as well as defended government programs. In my opinion, the CAP report put more emphasis on the American people and actual families. It didn’t shy away from calling out conservatives or talking about matters of race, because the effects of discriminatory practices can still be seen today. The CAP report is a recent attempt to maintain government programs that help lower-income families and families of color with housing. The senate report is a clinical document of events with recommendations for the future.

For my outside source, I watched a film called “The Big Short.” It did a really excellent job of explaining all the intimidating financial terms, and of putting faces to names and banks. For example, when I read the reports, I already knew what “shorting” and “CDO” meant. I distinctly remember in the film when they said “when you hear ‘subprime,’ think ‘shit,’” and the way they compared CDOs to old fish in a new fish stew at a restaurant. Small explanations like these helped to make this subject less overwhelming and more tangible.

http://www.imdb.com/title/tt1596363/

 

 

Reading Response 1 / Em Meurer

In “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” the Senate Subcommittee on Investigations found that there were several compounding factors that lead to the financial crisis. These factors are high-risk lending, regulatory failure, inflated credit, and abuses by investment banking by several banks, six of which were focused in on as case studies by the committee. Basically, there was a lot of scamming and shaky business practices being put into play that were not properly regulated, all happening simultaneously. While one bank doing this at a time may have been a non-issue, the fact that the FDIC and other federal agencies were allowing them all to happen seemed to be the root cause of the financial crisis. The risks imposed by each bank separately compounded on one another, which is what the committee believes caused the market to fail.

The 2008 Housing Crisis: Don’t Blame Federal Housing Programs for Wall Street’s Recklessness” is an updated look at the root causes of the housing crisis and shifts the blame away from the roles of banks to predatory lending and poor government regulations. They looked at the crisis from a historical perspective as a means of explaining that it wasn’t federal programming for mortgage loans, as some people believe, but the loans that came out of the private sector and took advantage of people.

On Saturday, I had the opportunity to see Rafael Sergio Smith speak at the Design + Diversity Conference about the unconscious bias that is happening everyday that we need to make a personal effort to overcome. He began by illustrating his point with a case study, the Twitter hashtag, #AirbnbWhileBlack, people telling their stories of times that they were denied from being able to rent over the app because the host saw that they were black, while their white friends were rarely denied by the same hosts. Smith used this example to talk about how designers need to recognize that there is always bias in these conversations, whether it is intended or not, and we need to create interactions and tools that alleviate that bias. Towards the end of his presentation, Smith connected the case study of #AirbnbWhileBlack to Redlining, the practice of predatory loaning that resegregated many cities across America by denying private loans or by offering loans that were not stable by any means to minority groups: preventing them from living in the nicer (read: whiter) neighborhoods in cities. These historical maps can still be reflected today in looking at educational and economical gaps within American cities. And this hasn’t ended: these loaning practices were happening in 2008, right before the financial crisis.

The articles show that no matter the exact market cause of the housing crisis, it is rooted in greed. Private investors took advantage of people while the government regulations set to prevent this economic injustice turned a blind eye to what was happening. The second article points out that it wasn’t at the hands of a specific few key players, but a greater number were at fault for the same reason, but all within the private banking sector.

 

Reading these articles, I started to remember the wonderfully hilarious and extremely correct “Thanks, Obama” joke of late 2008 and 2009, and I feel shocked that, even 10 years later, we aren’t exactly sure what the root cause of the market failure was, yet, as Americans, we were eager to place the blame on something or someone.

Reading Response 1 / Amanda Denhart

The United States Senate Permanent Subcommittee on Investigations, backed by the Committee on Homeland Security and Governmental Affairs issued a staff report: Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. This report explores the preventable in’s and out’s leading to the 2008 financial crisis that disrupted the American Economy. This report exemplifies, through the use of case studies, four sectors to blame: 1) Lenders for introducing high levels of risk into the economy, 2) credit rating agencies for labeling the resulting securities as safe, 3) federal banking regulators for failing to ensure safe lending practices and 4) investment banks for enabling investors to bet on the failure rather than the success of the US financial instruments (Anatomy of a Financial Collapse, 12).

The 2008 Housing Crisis Don’t Blame Federal Housing Programs for Wall Street’s Recklessness, a later publication by the Center for American Progress, explores the inability of government funded housing programs to be at fault for the 2008 crisis. This article lays defensive grounds for maintaining all government-funded housing programs in tact, as opposed to the desires of the Community Reinvestment Act and the Federal Housing Agency. The article seeks to outline that a restriction or disintegration of housing programs would set back the work that has been done to expand the housing market and allow more equal housing through social classes.

The commonality between the two articles lies in their blame on private financial institutions in the race for high yielding, risky lending, and to organizations. One such organization is the Office of Thrift Supervision (OTS) for their lack of regulation and appropriate action to prevent financial institutions from engaging in such high-risk activities. The 2008 Housing Crisis report is a persuasive attempt to displace blame away from the government housing programs; Anatomy of a Financial Collapse fails to take a stance on such programs, therefore raising higher concern of other major areas, mostly actions on Wall Street, through the use of unbiased case studies and factual reporting.

When in search for a third source of information, I searched for a summary analysis of the economic reactions to the 2008 crisis. My searching led me to information on the 2011 Occupy Wall Street Movement, which opened my eyes to all of the various historical events across the globe that followed the 2008 crisis. It reminded me that though the economy is ever changing and gaining as we move further from the events of 2008, that there are still ripples in economies, lives, and investments across the globe. See the links below to learn more about the Occupy Wall Street protests in New York, and across the globe and their effects remaining in today’s world.

http://time.com/money/4495707/occupy-wall-street-anniversary-effects/

http://occupywallst.org/

Reading Response/ Katie Morrin

 

The Financial Crisis was one of the worst economic crisis in U.S history. It is often compared to the Great Depression because it globally affected many countries on a large scale. Many people lost their jobs, houses were foreclosed, and businesses went bankrupt. While the county is still trying to deal with the fallout, people wonder exactly what caused the crisis to begin in the first place. From what has been written, there are multiple reasons for the recession, while the private sector seemed to have a larger part, the failure of close regulations allowed for big banks to do what they please and fuel their greed.

The first article “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse” is a two-year study crafted by the U.S. Senate Permanent Subcommittee on Investigations. From their study of several case studies, it was concluded that the Great Recession was due to multiple facilities and their need for profit or failure to comply with regulations. While it can be argued that large banks such as Washington Mutual were the largest contender, other facilitators also had a hand. Washington Mutual sold their high-risk mortgages to investors knowing they would make a ton of money on Wall Street. The loans often were qualified to borrowers even though they were unable to afford the rising interest. And because there was no down payment or needed documentation, under qualified homeowners still purchased the mortgages making Washington Mutual and other banks like it a bunch of money. The Office of Thrift Supervision was supposed to regulate practices made by banks like Washington Mutual. However, as far as OTS was concerned, wrongdoing amongst the company was supposed to be solved internally. This backward logic allowed big banks to continue their offerings of high-risk loans without negative fallout. Even with the promise to correct issues identified, Washington Mutual continued to abuse the system and OTS refused to take any executive action. On top of this credit rating, agencies were pretty much bought out by big banks and continued to give AAA ratings. This made investors believe that the mortgages offered to them were sound and safe. It was all created in a way to make money for all of the agencies which backfired once homeowners began defaulting on their loans. This stopped the flow of money and caused businesses like Washington Mutual to be bought up by other banks.

The second article “The 2008 Housing Crisis: Don’t Blame Federal Housing Programs for Wall Street’s Recklessness” expands further saying that the blame for the crisis was due by the greedy hands of the private sector. The federal agencies such as FHA, Freddy Mac, and Fannie Mae were not to blame for the fallout. The article issues that the two agencies actually provided the least amount of damage and helped allow lower income families to become homeowners. They also provide proof that loans offered by federal agencies were least likely to default. If anything it was the fault of other large banks and the change of the economic environment that forced these agencies to purchase high-risk loans for their investors. It would be unwise to put the blame on these agencies as this could result in negative housing regulations in the future. If anything this article just provides more proof that it was the big banks and not the government that caused the Great Recession.

Both articles have an interesting perspective on what really caused the Financial Crisis. From what I have gathered I believe it is mostly from the private sector. However, the government failed to take executive action even though it was known the big banks were abusing the system. If the government had taken swifter action then perhaps the crisis wouldn’t have happened in the first place. That being said the big banks definitely attributed in large part. It was all fueled by greed.

Outside Source: The Causes and Effects of the 2008 Financial Crisis

Reading Response 1 / Emma Siewny

The housing crisis of 2008 was, by all accounts, a major devastation to all sectors of American society, and catapulted the U.S. economy into a deep recession whose effects are still being felt after nine years. Millions of people lost their jobs, their homes, and their life savings. In addition, countless businesses were forced to close – from small, local companies to large financial institutions. While the cause of this crisis is clearly multi-factorial, the two assigned reading articles cast different lights on the series of events that caused this crisis, and the ultimate causes for the collapse.

The first article, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”, is the result of a two-year investigation conducted by a sub-committee of the United States Senate. The committee concluded that the collapse was due to a series of events that encompassed  many different agencies and industries, although they were all interconnected. Among these agencies were private lenders, whose quest for growth and increased profit led to them issuing high-risk, low quality loans to borrowers who could not ultimately afford them. The study suggests that by doing this, banks provided the fuel that ignited the crisis. In addition, the author maintains that part of the “blame” belongs to the government, in that the agency which is supposed to provide oversight of banks failed to do its job properly. This agency, the Office of Thrift Supervision (OTS), felt that their job was to identify the problems but not to address them; that it was up to the banks themselves to correct their faulty ways. In addition, a third factor was the fact that the nation’s largest credit rating agencies chose to dramatically increase the ratings for securities that backed the low-quality mortgages, which allowed investors to think that they were safe investments when they were not. Finally, the study concluded that large investment banks were also complicit in the financial collapse by knowingly selling, trading, and profiting from these high-risk loans.

The 2008 Housing Crisis, the second article, is written from a different perspective. While the first article states that it is a report based on a “two-year bipartisan investigation”, this article is authored by the Center for American Progress, which is considered a progressive public policy research and advocacy organization. That being said, this article also benefits from being written six years after the first report, and that additional time allows for a more retrospective, informed lens with which to view history. The premise of these authors is that “There is consensus among experts that the housing crisis was caused primarily by the rise of predatory lending and products with exotic features marketed to consumers….”.  They disagree that the government, through agencies such as FHA, Fannie Mae, and Freddie Mac, are due a part of the blame, stating that the evidence does not support the argument that federal housing policies were at all to blame. Through the use of facts, charts, and graphs, this article maintains that loans which were initiated by government-backed agencies were far more unlikely to default, proving that those agencies were not at fault; further, blaming them would lead to bad solutions for housing policy issues.  They maintain that the crisis was caused by “predatory lending and poor regulation of the financial sector”.

These two articles, while disagreeing about some aspects of the cause of the crisis, did agree that a substantial portion of the blame belongs to the private sector.  Private banks, due to the quest for more business and higher profits, chose to originate high-risk loans to candidates that should not have been eligible for them. In addition, they agree that investment banks consciously decided to participate by providing funding for these lenders. The area in which they disagree involves the idea that the government was to blame, as well, but the second article maintains that this is untrue, because facts show that the loans backed by the federal agencies were far more likely to be high-quality, and shouldn’t be lumped into the total number of loans that were issued during this time frame. After reading them both, I sought another source to help me further understand the subject,  in order to form a more objective opinion. I read an article on Forbes.com, a leading financial publication, entitled “Lest We Forget: Why We Had A Financial Crisis”, by Jonathon Swift. His take on the cause of the crisis was yet another perspective; suggests that when the Glass-Steagall bill was  repealed in 1998 (which separated regular and investment banks), it allowed banks to engage in risky businesses.  In addition, he says that low interest rates fueled a housing boom, the credit-rating agencies gave AAA rating to junk securities,  the government  (via the SEC) changed the rules for just five Wall Street banks (not nearly all of them), and also overrode anti-predatory state laws. As a result, banks jumped on the bandwagon and took advantage of these changes for reasons of profit. As opposed to the opinion stated in the second required article, these authors suggest that “Fannie and Freddie” were losing market share, so they began to also chase profits, instead of meeting low-income lending goals. They do say, however, that these agencies were not the ones at fault, but that they were being lobbied strenuously to do what they did, and were trying to meet the demands that the marketplace required. Their summation, like the first reading suggest, is that the cause of the crisis was indeed multifactorial, but they blame the private sector in general more than the government influence.  After reading all three of these articles, I tend to think that the bottom line – above all else – is that greed on ALL levels and in ALL arenas were the cause of the crisis, and there is certainly plenty of “blame” to share – but that giving the government an equal portion of the culpability seems to be overstated. Hopefully, the lessons learned from the entire situation will prevent another similar crisis from occurring in the future!

Outside Source:

https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#161f051f92f1

Reading Response 1 / Erin Kennedy

In the majority and minority staff report released by the Permanent Subcommittee on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the committee explains that the financial crisis was caused by a culmination of corrupt practices and the failures of several parties, including commercial banks, investment banks, credit rating agencies, and the respective government agencies responsible for regulating these sectors.

One idea supported by the report is that the situation could have benefited from better government regulation, which could have helped stop the corrupt practices from developing in the first place. Specifically, the report discusses the regulatory failure that allowed practices such as pursuing high-risk loans and mortgages within banks, such as the Washington Mutual Bank (WaMu), to continue. The OTS, or Office of Thrift Supervision, for example, noted many red flags during the five years prior to WaMu’s collapse, yet they never responded with “enforcement action”, trusting that the bank would take their feedback and police itself. The Federal Deposit Insurance Corporation (FDIC) even attempted to step in upon the OTS’s lack of action, but was criticized by the OTS for their attempt.

The second article, The 2008 Housing Crisis, takes a much more focused angle and argues that the cause of the financial crisis was not federal housing programs, such as the Federal Housing Administration (FHA), the Community Reinvestment Act, and government-sponsored enterprises, such as Fannie Mae and Freddie Mac, but was due rather to predatory lending, as well as a lack of regulation and oversight in the financial sector. The article explains that these housing programs had been providing low and middle class families the opportunity of homeownership for years prior, and that “In fact, far from contributing to the housing bubble, the FHA saw a significant reduction in its market share of originations in the lead-up to the housing crisis. This was because standard FHA loans could not compete with the lower upfront costs, looser underwriting, and reduced processing requirements of private label subprime loans.” Because these programs had a much smaller role in the financial crisis, compared to the evident conflicts of interest and lack of enforcement in the private sector, the article explains that they should not be punished, but that the private sector should be more highly regulated to prevent corrupt practices from emerging in the future. The article is supported with data (see figure 2 below), visually showing that the FHA securitization was lower than private-label mortgage-backed securities securitization during the housing bubble, but after it burst and private options collapsed, the FHA stepped in to fill the created hole (see 2008 data).

In order to get a fuller understanding of the situation, I felt I needed to find a source from the other side of the spectrum, one that argued that the FHA and other various housing programs did play a large role in the financial crisis. An article from the Business Insider, entitled How the Government Caused the Mortgage Crisis, argues that the FHA and programs such as Fannie Mae and Freddie Mac were in fact catalysts for economic collapse because they had been mandated by the government to take on high-risk mortgages from the start, back in the early 1990s. I find this perspective interesting, however I feel I would need to explore other sources and data to draw a conclusion, considering this article does not support its claims with data as strongly as The 2008 Housing Crisis article.

I agree that the corruption spurred in the early 2000s in the private sector shows a lack of important checks and balances within a clearly broken system. Whether or not higher government regulation would have provided the appropriate policing to prevent the situation from occurring is still unclear to me, especially if the regulations already in place through the government at the time failed. I am also unclear as to whether government housing programs took a detrimental toll on the economy, and feel I would need to review more sources to draw my own conclusions. What I do know is that much is at stake in our future actions and choices as a country. Neither side wants to see history repeated; and it is clear that we have a great responsibility to learn from the past, as our decisions have the potential to affect the global economy in drastic ways.

http://www.businessinsider.com/how-the-government-caused-the-mortgage-crisis-2009-10

Taylor Frank — Reading Response 1

In the reading of The 2008 Housing Crisis the findings stated, “Placing blame for the housing crisis on the government is misguided and will lead to bad solutions for housing policy issues… most experts have deter- mined were causes of the crisis—predatory lending and poor regulation of the financial sector.” I found that in this article, that they do not find the government at fault, but rather the lack of regulations and the risky handing off mortgages to lenders. Even reading that during this time, the investors wanted more mortgages, but the demand wasn’t as high. The reason being that you had to have certain requirements fulfilled to receive the opportunity of a loan. Thus leading to poor regulations to create more homeowners that would get a mortgage.

The second article Wall Street and the Financial Crisis: Anatomy of a Financial Collapse read “Lenders introduced new levels of risk into the U.S. financial system by selling and securitizing complex home loans with high risk features and poor underwriting. The credit rating agencies labeled the resulting securities as safe investments, facilitating their purchase by institutional investors around the world.” This connects to the first article that talked about the poor regulations for receiving a mortgage. In this article as well, the blame was not towards the government. Within this article it talks more closely to case studies that they did to find the factors that brought the financial crisis upon our nation. As the data found that, “Despite identifying over 500 serious deficiencies in five years, Office of Thrift Supervision did not once, from 2004 to 2008, take a public enforcement action against Washington Mutual to correct its lending practices, nor did it lower the bank’s rating for safety and soundness.” This goes to show that the “checks and balances” that were in place, were not being enforced by many foundations and organizations.

Reading these articles at first was rather confusing to me and I tend to always find other ways to have things explained to me. I found a TED talk and a few YouTube videos that broke the financial crisis down for. What I have gathered from all these sources was that it seemed that people in the business threw out all what they had learned in business experience and thought taking a high risk would be beneficial to them. That does not make sense to me why they would do that, except that they became rather greedy and thought they would make a ton of money. In these articles they did state that the government was not to blame, but I don’t understand why they waited so long to step in to make sure that the mortgages were following regulations? The regulations for a mortgage are there for a reason, and it seemed that reasoning went over everyone’s head in the business.

 

The other resources I sought out are below:

“The real truth about the 2008 financial crisis | Brian S. Wesbury | TEDxCounty Line Road”

The 2008 Financial Crisis: Crash Course Economics #12

The Causes and Effects of the 2008 Financial Crisis

Reading Response 1/Jessica Roach

In the article, The 2008 Housing Crisis: Don’t Blame Federal Housing Programs for Wall Street’s Recklessness, written by members of the Center for American Progress, we are provided with explanations and examples of how federal government’s policies and programs could not have been major contributors to the 2008 market crash—and thus, should not be eliminated or restricted from our government. The article highlights the Federal Housing Administration, the Community Reinvestment Act, and GSEs such as Fannie Mae and Freddie Mac, as being at major odds with conservatives who seek to get rid of them. The stance is, however, that this would be largely detrimental to how far our country has come in allowing homeownership to become available. The true risk and cause of the crisis, they state, is from private mortgage lending and unregulated markets.

While The 2008 Housing Crisis article took a more pointed and defensive approach, the report Wall Street and the Financial Crisis: Anatomy of a Financial Collapse went more into specific case studies and laid out some steps to avoid another similar financial disaster. The report was more educational than persuasive in its approach.

The 2008 Housing Crisis was quick to note that there were many factors that led up and contributed to the Collapse. The change in our country from having many small, local banks and broker-dealers, to then having a very small amount of gigantic financial institutions created a dependency on those institutions to perform well. There was a rise in new financial products with hidden risks that were hard to track and understand even from experts, including residential mortgage backed securities (RMBS) and hybrid adjustable rate mortgages (Hybrid ARMs). Lenders were focused more on issuing more loans at a fast speed for quick money, but were not focusing on creditworthiness, allowing for things like stated income loans, which only required borrowers to state their income.

Government oversight and regulation at this same period of time was “increasingly incoherent and misguided.” Credit Rating Agencies, primarily Moody’s, S&P, and Fitch, would issue AAA credit ratings that were completely inaccurate, but because they would profit from maintaining relationships with Wall Street firms if they falsely ensured that a loan was secure even if it was actually high risk. On top of all of that, the Office of Thrift Supervision (OTS) detected hundreds of deficiencies in the thrifts that they supervised, including Washington Mutual Bank, which they failed to take action on.

Both the 2008 Housing Crisis article and the Wall Street and the Financial Crisis report lay out some causations of the 2008 Collapse, and in my opinion take on similar claims. They each call to private mortgage lenders and the increase in unregulated and complicated financial products as the primary leaders of the downfall, albeit in different ways. Although the report doesn’t specifically note the lack of influence that the federal government’s policies and programs had on the Collapse, they are also not listed outright in the examples of the leading causes. The article, obviously is in defense of those policies and programs—so we can also synthesize the two readings’ agreement in the viewpoint of the federal government not being responsible.

An additional reading I found to understand Fannie Mae and Freddie Mac’s roles, was the article “Did Fannie and Freddie Cause the Mortgage Crisis?” Similar to the 2008 Housing Crisis article, it lays out the reasons of how these government-sponsored entities were set up in order to prevent some of the high risk-high reward competition that the private companies fell into. The link to the article is below:

https://www.thebalance.com/did-fannie-and-freddie-cause-the-mortgage-crisis-3305659