ROLE OF UNDERLYING POLITICAL ECONOMY:

Pre crisis:

The political economy of the United States, which had shifted its emphasis to emphasise
homeownership as a major policy objective, was one significant cause in the crisis. As a result of the
government’s promotion of this policy,the number of homeowners increased dramatically. The
easing of lending criteria, notably for subprime mortgages given to people with bad credit records,
made this possible. Because they could swiftly bundle these dangerous loans into securities and sell
them to investors, lenders were encouraged to create risky loans, which allowed many borrowers to
get mortgages that they could not afford. As a result, there was a housing bubble, with inflated
home values brought on by easy financing and speculating. It encouraged the growth of the
subprime mortgage market Politicians on both sides of the political spectrum have long supported
measures that promote homeownership, such as tax advantages for homeowners, financial support
for the mortgage industry, and demands that lenders grant credit to applicants with low incomes.

The political economy in the United States was pro-business in the years prior to the crisis, favouring
deregulation of the financial market and lessening governmental control. It facilitated excessive risk-
taking and unsustainable lending practises, which had enabled the development of sophisticated
financial products like mortgage-backed securities(MBS) and collateralized debt obligations (CDOs)
that were advertised as low-risk, high-return investments began to proliferate and were offered for
sale to investors all over the world. These instruments frequently drew their inspiration from
subprime mortgages, or loans given to individuals with bad credit or insufficient resources.

These laws and practises caused the housing market to become increasingly inflated, with
skyrocketing home values and lenders giving credit to borrowers who couldn't afford the payments.
As the bubble burst in 2008, it set off a global financial crisis that resulted in a severe recession and
wide-spread economic turmoil.

The housing bubble collapse was greatly influenced by the political economy of the United States, as
short-term benefits over long-term stability were valued by policymakers and business leaders.

During the crisis:

When the bubble eventually burst in 2007, the underlying political economy played a crucial
role in the severity of the crisis. The lack of regulation and oversight allowed lenders to
engage in predatory lending practices, while the government's focus on promoting
homeownership incentivized excessive risk-taking. The result was a financial crisis that had
far-reaching consequences for the United States and the global economy. The government-
sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, also played a significant role in
the crisis, as they purchased large volumes of subprime mortgage-backed securities, thereby
helping to fuel the housing bubble.

Immediate post crisis

After the housing bubble burst in 2008, the number of foreclosed

homes available for investors surged. That actually helped
homeowners who held properties that lost value, especially those
that were underwater.
In the aftermath of the crisis, the government took a number of steps to address the
underlying political economy factors that had contributed to the crisis. The Dodd-Frank Act,
which was passed in 2010, introduced a range of new regulations designed to strengthen
financial oversight and reduce the risk of future financial crises. The government also took
steps to reform the GSEs, with the aim of reducing their exposure to risk and ensuring that
they operated in a more transparent and accountable manner.