|$CRUNCH! - The financial collapse of 2007-2009
What caused the financial meltdown of 2007 - 2009? The details will be debated by
economists for generations. But all agree that at the center of the collapse were the
defaulting sub-prime U.S. home mortgages.
Since the days of the pioneers, Americans have dreamt of having homes to
call their own. Our homes were our castles, and still are.
Sooner or later the
had to get involved, to
By the late 20th century,
though, inside the vast
bureaucracy that is the
federal government, there
was a collection of agencies
with special missions to
promote home ownership:
FHA, HUD, Fannie Mae,
Freddie Mac, Ginnie Mae,
and so on.
Look at Fannie Mae, for example, a
GSE: Government Sponsored
Enterprise. Freddie was privately
owned, by stockholders. But it was
also supported and partly controlled
by the federal government. In turn,
Freddie supported a lot of influential
politicians...so it's not clear who was
running whom sometimes.
To support the government's desire for increased home ownership, Fannie, Freddie and Ginnie would
buy up loans (using cheap money, since these are Government Sponsored enterprises) from local
lenders, and often resell these loans around the world, repackaged as insured investment products.
Congressional Chairman Barney Frank, for example, was a big supporter of "affordable housing"
measures. He "encouraged" the GSEs to take on riskier loans.
Under pressure to increase loans to lower
income buyers, and also lured by the profit
potential (hey, Fannie will buy up the loans and
take them off our hands!), banks proceeded to
loan, loan and loan!
By the mid-2000s there was a whole lot of
lendin' going on, and building, and buying
and selling of houses...and prices of houses
But where did all of the money come
from, to finance this booming real
estate sector? Did the money drain
from some other side of the
Well, the Federal Reserve made sure
that there was plenty of money to
grease the economic engine. Interest
rates were kept low - probably too
low - for over three years!
Of course, as now in
retrospect we see
clearly, these housing
frenetics could not last
forever. The Fed moved
rates up, loan defaults
increased, and soon
collapse and even panic
So what's all this we hear
about CDOs and swaps and
Tarp and Tarf and all of that?
Well, all of these played a
role in the details of how the
collapse came about, and
how the government
responded to the collapse.
But that's another
story for another
time, boys and
At first the help was in
the form of income tax
breaks for home
mortgage interest and
capital gains on family