why and how the 2008 economic crisis happen?
In: Economics
Here are the two most important facts to understand about the 2008 financial crisis:
1) It was fueled The Federal Reserve printing money that was feeding directly into the financial markets.
2) The government was pushing lower lending standards onto banks because, at the time, it was politically desirable in the name of making it easier for low-income people to get home loans.
Pretty much everything else followed from those two things, but the official narrative that was crafted afterward was designed to exonerate the people in power in favor of pushing the blame entirely on the financial sector. Banks were pressured into giving loans without any evidence that the people they were giving them to would pay them back, so they packaged the mortgages and sold them off. Both the money to give out in the loans and the money to buy the mortgages from them were abundant in supply because of cheap credit from the Federal Reserve. Artificially low interest rates further encouraged this behavior by pushing down the return on investment for less risky investments like AAA bonds.
The regulatory environment did everything it could to encourage the system of giving out and selling off loans because- again- politicians wanted to brag about making home ownership easier. Fannie Mae and Freddie Mac were created specifically for that purpose, and in the lead-up to the financial crisis they were directly encourage to loosen standards and misrepresent the risk of the mortgage packages they were selling to private investors.
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