The financial crisis of 2008, which we are still experiencing today, has been the worst “melt down” since the Great Depression of the 1930’s. Many have tried to point at a single element of the economy as the culprit, while others assert it is the very nature of capitalism itself that caused the near collapse. Neither is correct for the economy of the United States, which produces approximately 25% of the worlds GDP. The collapse started in the US and because of the immense interdependence of world economies on the US dollar, the world followed. The story of the market crash of ’08 is the culmination of 4 separate but connected events. To understand what happened, one must understand each event, who the main players were and how they connect to the other events. This post is a short forensic explanation of those events. 1. In 1977, the Community Reinvestment Act (1) (CRA) was passed by a Democrat Senate and House under President Jimmy Carter. The purpose of the act was to address alleged discrimination by banks against making loans to minority and poor peoples. (2) The act states that banks, which are private corporations, have “…shall not take into account an applicant's age (provided that the applicant has the capacity to enter into a binding contract) or whether an applicant's income derives from any public assistance program.” 2. In 1992, under a Democrat Senate and House, The Housing and Community Development Act of 1992 (3) codifies within its language the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 that creates the Office of Federal Housing Enterprise Oversight, and mandates HUD to set goals for lower income and under served housing areas for the GSEs Fannie Mae and Freddie Mac. What this did was force these GSE’s to buy up 45% of privately held high risk loans to spread risk, while, in opposition to that goal, they made even more funds available for high risk loans. The pending disaster was already in the making. When as early as 2001 the Bush Administration attempted to rein in the pending catastrophe, they were fought by and lost to the Democrats. (4) 3. As a result of this regulatory interference in the natural and sound loan practice of the housing markets, the “Derivative” came into being. This is a contract where one party sells the risk associated with a loan or mortgage to another party in exchange for payments to that party based on the value of the loan. A wall Street frenzy of betting on the default rates of loans began as investors looked for means to protect themselves in less regulated areas of the market. AIG invested heavily in derivatives. (5) 4. All the while, as the amount of very high risk loans was totaling trillions and trillion of dollars, the Federal Reserve Board slashed interest rates from 6.5% in 2001 to 1% in 2003. This influx of cheap money even further exasperated the high risk situation. Between 2003 and 2006, the FRB again raised rates to 5.25% in an effort to slow the housing markets. They knew the very precarious situation the economy was in but the damage was done. In 2008, the situation hit critical mass and the housing bubble burst, triggering the meltdown. It would be nice to point at one person and say that was the cause. But this isn’t accurate or realistic. It was caused by a combination of events, parties, political philosophies and the combined poor judgment of all involved. The answer is not in a government take over the housing markets or of Wall Street. Too much influence in too few hands is what led to the catastrophe. The answer is in the return to the sound and proved practice of making loans available based on the ability to repay them, not on government policy that everyone should own a home. _________________________ Apparently one can only post an URL after having made 15 or more posts here. I do not yet qualify, therefore my footnote links will not show.