Blame For The 2000-2006 Housing Bubble Essay

Blame For The 2000-2006 Housing Bubble Essay

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The issue of whom to blame for the 2000-2006 housing bubble has shifted from an economic to a political discussion. As with many political issues, each party believes they know who’s to blame for issues within the U.S. economy. One theory states that, through things like the Community Readjustment Act and the Affordable Housing mission, the Federal government as a whole should receive the blame. Some economists, however, believe that the U.S. government did its best to make the American Dream of owning a home more accessible to everyone, but banks took advantage of reduced loaning standards and lent out money they knew individuals could never repay.
When it comes to the conservative opinion, individuals believe the federal government caused the housing bubble. The argument stems from the original switch from “laissez faire” economics to a more regulated economy. This shift began earlier, but was first implemented in policy via the Community Reinvestment Act of 1977. Although the act did not receive proper regulation until the early 1990’s, in 1995 the regulators of this act created new rules in order to determine which banks were meeting CRA standards. This lead to the encouragement of banks to have ‘creative’ lending practices in order to allow individuals to qualify for the loans they desired. This encouragement resulted in “the share of all mortgage originations that were made up of conventional mortgages (that is, the 30-year fixed-rate mortgage that had always been the mainstay of the U.S. mortgage market) fell from 57.1 percent in 2001 to 33.1 percent in the fourth quarter of 2006.” Along with this, the percentage of Sub-Prime and Alt-A loans more than doubled.
To further government control of the economy, especially ...


... middle of paper ...


...not afford. The 1977 CRA began the real damage to the housing market shortly after the relaxed standards of mortgages of the Affordable Housing Initiative. While home ownership rose to new heights, so did the defaulting on loans and the drastic decrease of the Federal Reserve Rate. This decrease allowed banks to take out money at a lower cost, thus encouraging them to loan it out at the reduced standards. With that came the increased use of leveraging and ARMs that ultimately caused the spike in housing prices that the majority of families’ incomes could not sustain. While the former CEO of Citigroup, Chuck Prince may have said that, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he neglected to acknowledge that the government was ‘playing the music’.

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