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The Economic Crisis of 2008: Cause and Aftermath
The Economic Crisis of 2008: Cause and Aftermath
U.S. housing policies are the root cause of the current financial crisis. Other players-- greedy investment bankers; foolish investors;
imprudent bankers; incompetent rating agencies; irresponsible housing speculators; short sighted homeowners; and predatory mortgage brokers, lenders, and borrowers--all played a part, but they were only following the economic incentives that government policy laid out for them.
- Peter J. Wallison
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Default Rate
6% 5% 4% 3% 2% 1% 0%
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Source: mbaa.org, National Delinquency Survey.
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Source: www.standardpoors.com
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Why did the mortgage default and housing foreclosure rates begin to
increase more than a year before the recession of 2008 started? Why are the recent default and foreclosure rates so much higher than at
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1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Subprime (FRB)
Subprime (JCHS)
Source: Data from 1994-2003 is from the Federal Reserve Board while 2001-2007 is from the Joint Center for Housing Studies at Harvard University
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Like subprime, Alt-A and home equity loans have increased substantially as a share of the total since 2000. In 2006, subprime, Alt-A, and home equity loans accounted for almost half of the mortgages originated during the year.
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Subprime (FRB)
Subprime (JCHS)
Subprime + Alt-A
Source: Data from 1994-2003 is from the Federal Reserve Board while 2001-2007 is from the Joint Center for Housing Studies at Harvard University
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Federal Funds
Source: www.federalreserve.gov and www.economagic.com
1 year T-bill
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Following the Fed's low interest rate policy of 2002-2004, Adjustable Rate Mortgages (ARMs) increased sharply. Measured as a share of total mortgages outstanding, ARMs increased from 10% in 2000 to 21% in 2005.
20%
15%
10%
5%
0%
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Source: The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Meltdown, Milken Institute
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Source: www.economagic.com
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Source: www.economagic.com
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19 80 19 81 19 82 19 83 19 85 19 86 19 87 19 88 19 90 19 91 19 92 19 93 19 95 19 96 19 97 19 98 20 00 20 01 20 02 20 03 20 05 20 06 20 07
Total Debt Mortgage
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Fixed
Adjustable
Source: Liebowitz, Stan J., Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Ch. 13 in Randall G. Holcombe and Be njamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.
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Fixed
Adjustable
Source: Liebowitz, Stan J., Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Ch. 13 in Randall G. Holcombe and Be njamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.
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borrowers.
The combination of lower lending standards, adjustable rate loans, and the Fed's interest rate policies of 2002-2006 was disastrous. Incentives matter and perverse incentives created the crisis of 2008.
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1980-82
1990-91
2007-?
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24%
9%
Source: Bureau of the Census, The Statistical History of the United States from Colonial Times to the Present (New York: Basic Books, 1976)
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Both the Great Depression and the current crisis are the result of
perverse policies. During the Great Depression era, disastrous policies led to a huge
expansion in the size and role of government. Will the same thing
happen this time? The answer to this question will determine the future economic status of Americans.
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END
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