The 2008 Housing Bubble Burst

Many people know that a lot of people lost their houses and a lot of equity in 2008 but they have no idea how it all really happened. Many people blame Wall Street and some blame the poor that defaulted. I think it was a combination of a lot of things that made the perfect storm. As I see it, there were 4 key things that happened.

1. Clinton signed the repeal of the Glass Steagall Act of 1933. 

This act separated investment banking and commercial banking. This kept banks from taking undue risks with people's money and acted as a firewall and was instituted after the Great Depression. In 1999, Clinton repealed this act. This repeal consolidated many investment and retail banks. This opened the door to take larger and greater risks with people's money.

2. Wall Street Derivatives

Once Glass Steagall was repealed, this opened the door for Wall Street to create derivatives. The banks would loan money to people who wanted a mortgage. The banks would sell the mortgages to Fannie Mae. Fannie Mae would bundle these mortgages and sell them.

https://www.thebalance.com/role-of-derivatives-in-creating-mortgage-crisis-3970477

3. Government Forced Banks to Loan Money to People who were Underqualified

An act called the Community Reinforcement Act forced banks to loan money to people who were underqualified, wanting every American to own their own home. The Affordable Housing Act also required Freddie and Fannie to meet government quotas to where at first 30% and then eventually 55% of the loans they bought had to be had to be made to people at or below the median income in their communities. Banks who would normally reject loans to certain people were not allowed to "discriminate" to would be house buyers over what they deemed arbitrary and outdated criteria-namely, income level, verification, credit history etc. Combine this with guaranteed loans by Fannie Mae and Freddie Mac, and banks were forced to have irrational lending standards. The nice goal of "wanting every American to be able to own their own home" became disastrous.

https://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html#749afe08364b

https://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/

4. Poor People Defaulted on Loans

People defaulted on the loans they were given when their interest rates reset. People were given low interest loans to start and when their loans reset with a higher interest rate later on and they couldn't afford them any longer, they simply stopped paying the loans. This caused a domino effect as more and more people stopped paying their loans and defaulted. This is when the housing bubble burst and more and more houses became available on the market. As supply became abundant, housing prices fell and many people lost equity in their homes (at least in the short term). People who sold at that time lost money and many who bought at that time did very well.

So, what caused the bubble? Can we blame just greedy Wall Street? I don't think so. When banks are forced to loan to under qualified people, banks can hardly be blamed for doing so. I think we need to make sure that the right regulations are in place. We need reasonable firewalls to keep investments and commercial banking reasonably separate and we need to allow banks to make reasonable loans to qualified people.