Mark J. Perry, a professor of finance and economics at the University of Michigan in Flint, and Robert Dell, a commercial real estate banker, explain how government policy caused the great recession. I'll cherry pick some highlights.
1. Bank misregulation, in particular the international Basel capital rules, including a U.S. adaptation to them—the 2001 Recourse Rule—and the outsourcing of risk assessment by regulators to government-sanctioned rating agencies incentivized (not merely “allowed”) the creation and highly-leveraged systemic accumulation of the highest yielding AAA- and AA-rated securities among banks globally...
2. Continually increasing leverage—driven largely by Fannie Mae and Freddie Mac credit policies and the political obsession with taking credit for increased homeownership—into the U.S. mortgage system. Reduced down payments and loosened underwriting standards were a matter of government policy throughout the housing boom. The two nearby charts illustrate the leverage trends from 2001 to 2007—residential mortgage debt as a share of GDP rose from less than 50 percent in 2001 to almost 75 percent by 2007 (top chart); and the percent of residential real estate sales volume with loan-to-value ratios of 97 percent or higher (down payments of 3 percent or less) increased from about 10 percent in 2001 to almost 40 percent by 2007...
3. The enlargement of the riskier subprime and Alt-A mortgage markets by Fannie and Freddie through the abandonment of proven credit standards (e.g., dropping proof of income requirements) during the 2004-2007 period, and their combined accumulation of a $1.6 trillion portfolio of these loans to meet the affordable housing goals Congress mandated...
Perry and Dell conclude that repealing and replacing Dodd-Frank is just as important as repealing and replacing ObamaCare.
Personally, I think the reason there was so much money flooding the housing market and causing a bubble was the extent of the leverage allowed to the home buyers themselves. Requiring larger downpayments would likely have discouraged or delayed a lot of home sales and would have slowed the rise in home prices.
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