Crisis: How it happened, and could it happen again?

FeaturedImage_FinancialCrisis_4.jpg

The 2008 financial crisis is the worst economic disaster since the Great Depression of 1929. It occurred despite Federal Reserve and Treasury Department efforts to prevent it.

It led to the Great Recession. That's when housing prices fell 31.8 percent, more than the price plunge during the Depression. Two years after the recession ended, unemployment was still above 9 percent. That's not counting discouraged workers who had given up looking for work.

The first sign that the economy was in trouble occurred in 2006. That's when housing prices started to fall. At first, realtors applauded. They thought the overheated housing market would return to a more sustainable level.

Realtors didn't realize there were too many homeowners with questionable credit. Banks had allowed people to take out loans for 100 percent or more of the value of their new homes. Many blamed the Community Reinvestment Act. It pushed banks to make investments in subprime areas, but that wasn't the underlying cause.

Many legislators blame Fannie and Freddie for the entire crisis. To them, the solution is to close or privatize the two agencies. But if they were shut down, the housing market would collapse. They guarantee 90 percent of all mortgages. Furthermore, securitization, or the bundling and reselling of loans, has spread to more than just housing.

Comments (2)

You must be logged in to post a comment