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What caused the housing crash of 2008?

Congress began to drastically reduce banking regulations in the early 1990s. The first major step was the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This act eliminated previous restrictions on interstate banking and branching, allowing banks to operate across state lines for the first time.

The next major step was the passage of the Gramm-Leach-Bliley Act of 1999. This act repealed significant aspects of the Glass-Steagall Act, which had separated commercial banking, investment banking, and insurance services since the Great Depression. This allowed banks to offer all three types of services under one roof for the first time.

These two acts were the culmination of a decade of deregulation in the banking industry. They were supported by many in the industry, who argued that they would make banks more efficient and competitive. However, they were also criticized by some, who argued that they would lead to increased risk-taking and instability in the financial system.

The full impact of these deregulations is still being debated. However, there is no doubt that they played a role in the financial crisis of 2008. The crisis led to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposed new regulations on the banking industry. However, it remains to be seen whether these regulations will be enough to prevent another crisis from happening.

Here is a timeline of some of the major banking deregulations that occurred in the 1990s:

* 1994: Riegle-Neal Interstate Banking and Branching Efficiency Act is passed.
* 1995: Federal Reserve reinterprets Glass-Steagall Act to allow bank holding companies to earn up to 25% of their revenues in investment banking.
* 1998: Citicorp-Travelers merger creates the world’s largest financial services company.
* 1999: Gramm-Leach-Bliley Act is passed, repealing significant aspects of the Glass-Steagall Act.

The unexpected events that ruined the American economy

The demand for mortgages affected banks.   Banks hired more mortgage agents.  Mortgage agents got jobs with little training – because buyers didn’t want to wait.  The buying stampede was on and there was money to be made.

Allan Greenspan, then the Federal Reserve chairman, kept interest rates low. That was like throwing gasoline on a fire.  The feeding frenzy kept up, with home buyers bidding more than asking prices.  And if a buyer didn’t over bid high enough, they wouldn’t get the house.

With all that money in the economy, Wall Street found ways to leverage the equity built on the traditionally safe home mortgage.  Little did they know, it was a house of cards.

The housing bubble goes bust

During this time, American companies were outsourcing their product needs. The outsourcing opened trade doors and tremendously helped populations around the world find work.  It also helped American corporations to diversify their operations and provide lower cost goods to American consumers.

The down side was a loss of American jobs to overseas workers.  As American workers lost jobs, they began defaulting on their mortgages.  Banks began to suffer losses.   Soon, home prices were not being bid up anymore.

With banks now suffering losses and home sales stagnating more workers lost jobs.  Soon, hundreds, then hundreds of thousands of home mortgages were in default.

Wall Street firms held mortgage paper that they found worthless.  Mortgages were supposed to be bedrock stable.  Instead, the old reliable bank income from home mortgages dissolved.  Banks failed.

Brokerage companies failed.  Bear Sterns, Lehman Brothers and others followed by huge companies that insured against losses such as AIG failed or needed government intervention.

The house of cards had fallen.   Billions of dollars were lost.  Jobs gone.  Home prices slid back a decade or more.

The US Congress only meant to help the American worker afford a home more easily.  But Congress was blindsided by events.  Congress is always blind to events. . .its a world of “compromise” for Congress.

The US Congress is more like a committee than it is a board of directors.  The American public wants to elect movie stars, lawyers and college professors.  The result is a committee of politicians unable to analyze how their actions will affect the future.

The economy is a business.  To grow it, you have to think like a business.  This editorial asks the reader “How’s the US Congress working out for you now?”

More reading on this historic destruction of America

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