Reflection Paper: Mortgage Crisis
The mortgage crisis came about because starting in the 1990s under the Clinton Administration, a push for greater home ownership was facilitated by a lowering of lending standards for home buyer borrowers. This created artificial demand in the housing market, and prices of homes soared. Over the course of the next decade, lending standards rapidly deteriorated, and home mortgages were being bundled and sold to investors as collateralized debt obligations, and derivatives were added to the mix so that an enormous financial industry focused on mortgage-backed securities had grown into a behemoth (Lewis, 2010). The Federal Reserve had kept interest rates low in response to the Dot Com bubble bursting at the turn of the 21st century, and this in turn had caused yield-starved investors to seek out financial instruments like collateralized debt obligations. Starting in 2004, the Fed Funds Rate rose from 1% to more than 5%--a 500% increase over the course of four years from 2004 to 2008. As interest rates rose, borrowers suddenly were at risk of not being able to pay their mortgages, as they were given variable interest rates in the terms of their loans rather than fixed rates. Savvy investors had seen all of this coming in the years leading up to the housing bubble bursting, and they purchased credit default swaps (described by Michael Lewis in his book The Big Short). These swaps were like insurance on or bets against the housing bubbleand banks were all to happy to sell them to investorsuntil, all of a sudden, they realized they should be buying them rather than selling them (as Goldman did).
When the bubble burstbecause home prices had risen too high too fast, rates were rising and borrowers were defaultingthe values of mortgage backed securities plummeted as banks like Lehman Brothers realized they had far too much risk on their books and had to...
…default swaps to Goldman and other buyers who realized the market was about to burst, as the Federal Reserve was raising rates. Just like the Federal Reserve never should have dropped rates in the first place in response to the Dot Com bubble of 2000; its artificial suppression of rates has been a problem from the word goand its current (unconventional) monetary policy of quantitative easing has only helped to make sure the biggest bubble of all economic history is blownand when it bursts, the great reset foretold to all by Klaus Schwab will finally arrive. The same stakeholders responsible for the 2008 economic crisis will be responsible for the crash to come. Lending standards may have tightened a bit since the housing bubble burstbut the introduction of QE means that the central banks can never stop serving as the buyer of last resortbecause when they do all the effects of the bad policies of the past will suddenly be felt…
References
Lewis, M. (2010). The Big Short. NY: W. W. Norton.
Young, M. R., (2008). Both sides make good points. Journal of Accountancy, 205(5), 34.
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