A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
It’s common to see stories in the media about how unrestrained capitalism caused the most recent economic crisis. These pundits say that government should become more involved in the economy to fix the broken system.
But is it possible that government, the institution tasked with repairing the economy, actually caused its collapse in the first place?
Let’s take a closer look. The crisis began with the government giving mortgages to people who wouldn’t otherwise have been able to afford them. It started in 1999, when government-sponsored enterprises, better known as Fannie Mae and Freddie Mac, put into action a Clinton administration plan to assist low-income and minority families in purchasing homes.
As part of the plan, the government forged new mortgage requirements that allowed brokers to offer loans with zero money down, enabling people with no savings to buy houses. Not just that, but these new, risky mortgages were classified as creditworthy by government-backed rating agencies.
These agencies then, not wanting to call politically popular programs “risky,” kept reassuring the public that the mortgages were secure.
But Fannie Mae, Freddie Mac and the rating agencies aren’t the only ones to blame for the crisis. In fact, the Federal Reserve played a major role as well. Here’s how:
In the early 2000s, the Fed slashed interest rates by printing tons of money. This input of cheap money, paired with relaxed mortgage rules, prompted a major housing boom, causing home prices to shoot up at an insane rate. With hopes of getting rich overnight, careless investors piled into the market.
As a result, in 2006 some 25 percent of all home purchases were made by speculators.
But the good times didn’t last long. By the end of 2006, housing prices were sinking, and foreclosures had risen by 43 percent. Since no down payments were at risk, speculators just walked out on their underwater investments. The mortgage market fell apart, and the financial system that had stuffed billions of dollars into mortgage-backed securities soon followed.
This disastrous outcome came about because reckless government policies enabled people to spend money they just didn’t have.
Meltdown (2009) gives you a guide to understanding the government regulations which in effect caused the 2008 global financial crisis. These blinks will explain how government spending has and always will worsen economic recessions, and importantly, what needs to be done to save the world economy.
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Blink 3 von 12 - Eine kurze Geschichte der Menschheit
von Yuval Noah Harari
