Housing Bubble Review #1: What is a mortgage? It is a loan to buy a house.
Housing Bubble Review #2: How was a “sub-prime” mortgage different from a “prime” mortgage? To get a prime mortgage, a person had to have good credit and had to make a down payment of 20%. People were getting sub-prime mortgages even if they had bad credit without putting any money down.
Housing Bubble Review #3: Why did banks make these risky sub-prime mortgage loans? Banks got a check for every loan they made, so they had an incentive to crank out as many loans as they could. Then they sold the loans to other banks, so they transferred the risk to others.
Housing Bubble Review #4: How did the actions of the Federal Reserve contribute to the housing bubble? By lowering the Fed Funds Rate to 1% after the dot. com crash, they made it really cheap to borrow money which led many more people to take out loans.
Housing Bubble Review #5: What incorrect assumption was at the heart of the housing bubble? That housing prices would always continue to go up.
The “Great Recession”: The Government’s Response
U. S. Government took them over FNMA (Fannie Mae) & FHLMC (Freddie Mac) Owners of many home mortgage loans Bailout of General Motors and Chrysler Wall Street Firms Bankrupt or Bought Bear Stearns Merrill Lynch Lehman Brothers AIG Insurance Company BAILOUTS OF COMPANIES Crash of the Ti Paulsen/Lehma Mergers
TARP = Troubled Asset Relief Program • passed by Congress, okayed by Pres. Bush in October 2008 • $700 BILLION Government program of forced lending to banks to make sure the nation’s banks didn’t collapse J. Stewart clip— 700 b. bailout G. S. Propped up J. Stewart interview re: use of
The Federal Reserve • The Federal Reserve responded to the financial crisis by lowering interest rates from 5. 25% to 0. 0%! • They hoped this would lead more people to borrow money to buy homes, cars, etc. Ben Bernanke Former Chairmen of the Fed Internet Bubble Collapse Housing Bubble Collapse
President Obama’s Plan President Obama and the Congress passed a $787 BILLION fiscal stimulus package in January 2009. This included a combination of: • Tax cuts to put money in peoples’ pockets • Government spending to hire people and provide a safety net Stimulus package discussion starts 1: 34 in
Housing Bubble Review #1: The collapse of what company triggered the popping of the housing bubble? Lehman Brothers
Housing Bubble Review #2: What is the general term for removing government restrictions on what businesses can do? Deregulation
Housing Bubble Review #3: What did the Glass-Steagall Act do? It put up a wall between investment banks and personal savings banks.
Housing Bubble Review #4: The selling of what type of derivative at first earned AIG a lot of money, but ultimately led to its collapse? Credit default swaps
Housing Bubble Review #5: What is another name for a Collateralized Debt Obligation (CDO) that is based on home mortgages? A mortgage-backed security
House of Cards Caused by Credit Bubble Led to
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