In construction, but summary below is elucidating, I think.
CONTENTS
The cause (bubble, excessive borrowing and leverage as is typical of bubbles)
The Fannie Mae, Freddie Mac problem
Other contributors or "allowers"
Did the "bailouts" and stimulus make sense?
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THE COLLAPSE WAS CAUSED BY:
Quick summary
Speculative bubble in real estate (and loss of value) - A disaster ready to happen
Wall Street was not the cause
Massive worldwide liquidity seeking a place to invest → Excessively easy credit
→ Opportunity to borrow alot (which was overdone)
Americans were overleveraged (too much debt) - A disaster waiting to happen
Banks and investment firms were overleveraged
Contributors
Bad mortgages
Companies with too many mortgages, not enough reserves (excessive leverage)
Derivatives that obfuscated values and buyers who were blind to risk
At the base of the whole collapse: (Scan)
Speculative buying by the public, and buying beyond their means
rebuked by Dems
The assumption that real estate would not go down much (how dumb is that?)
Therefore, investors (included sophisticated ones) were blind to risk
The Added Volatility
Some companies had too much invested in sub-primes, without adequate
reserves
Companies were insured with AIG mostly, so companies would go down if AIG
couldn't pay
Ratings agency dramatically misrated
The bad idea: Loosened lending practices
The initiator: Government, Fannie Mae and Freddie Mac
Government policies
Lack of regulation: Allowed lenders to lend without set minimum limits
Attempts to solidify Fannie Mae and Freddie Mac to prevent disaster: (if they were regulated it would have prevented or dramatically lessened it)
Bush administration concerned about systemic risk 2001
McCain and Bush 2003, rebuffed by Dems
Greenspan warning 2005, rebuffed by Dems
McCain and Bush 2006, rebuffed by Dems
Contributors:
The set up Late '90's repeal of the Glass-Steagall act and the blocking of the
regulation of derivatives
Rating agencies rated sub-prime mortgage bundles as AAA
No one thought real estate could go down
Speculators in real estate creating a bubble
Consumers overleveraging plus some lying and some "cluelessness"
Some financial institutions had too much of their own money in them
Some had too little reserves.
AIG had insured against losses of many companies, so its demise would
cause other companies' demise.
Many lenders took low initial payment in adjusted rate mortgages
Global cash abundance looking for higher interest rates
Overspending by consumers
DID THE "BAILOUTS" MAKE SENSE?
They were absolutely necessary and without them we would have had a much higher unemployment rate and a much higher destruction of assets.
The Republicans argue, I think falsely, that there was no real benefit and then they hold the TARP was unnecessary and that the Stimulus package was ineffective because unemployment did not go down to the promised 8%. But it would have taken a miracle to drop that far, though the stimulus caused us to put the brakes on the fall of employement and to restore a little confidence instead of a larger panic. The two, together, were of enormous benefit and prevented a much larger collapse.
The huge stimulus that is included in the Great Tax Compromise of 2010, at the end of the year, was extremely smart and should be very beneficial. Obama got more than enough out of the deal, including hugely stimulating additional tax reductions beyond keeping the "Bush tax cut" rates.
TARP is much maligned. Invented by the Bush administration and approved by Obama the candidate, TARP was absolutely necessary to "bailout" the financial system from collapse of the institutions that provided the financial foundation that permits our economy to run. It was a bailout for Americans, not for the financial institutions - we just had to deal with them as the intermediary. And it essentially not only saved the system but also provided an initial boost to save the automakers - and it has just about all been paid back.
The Stimulus, however necessary it was, has not had as clear a payback - but I think the payback was the avoidance of a much larger decline.
