Kyle Phelps
Finance 442-001
Professor Bennett
October 26, 2014
United States Housing Bubble In December of 2007, the United States entered a recession that it did not begin to climb out of until June of 2009. The cause of the recession is most commonly attributed to the financial crisis that resulted from the housing bubble, which finally burst in late 2006. There were several causes of the Great Recession such as decreasing mortgage and short-term interest rates, lower standards for mortgage loans, and a false notion that the housing prices would continue to increase as they had nearly every year since the Great Depression. This idea caused various institutions to issue mortgage-backed securities, which seemed to be extremely safe at the …show more content…
housing bubble differs vastly from those previously mentioned. Its key difference is that it is not simply a number that can be calculated and it is not something that can reasonably be predicted. The core issue that contributed to every other factor in the housing market crash was irrational exuberance, a term made famous by the former chairman of the Federal Reserve, Alan Greenspan. Robert Shiller defined irrational exuberance as “a heightened state of speculative fervor.” While it can be said that U.S. Government and everyone involved in the housing bubble were extremely naïve in expecting housing prices to continue to rise, one must take into account the history of the housing market over the previous 70 years. Since the Great Depression, the U.S. had typically seen a rise in housing prices period after period. As mortgages became securitized, those securities became very trusted investments and cash inflow streams for companies such as Fannie Mae and Freddie Mac as well as insurance firms like AIG. The most crucial mistake was relying on the continuous rise in housing prices so much that nearly the entire financial sector of the country was somehow dependent on the success of the housing market (Hardaway …show more content…
Without strict regulations, government backing of private institutions is a recipe for disaster. Fannie Mae and Freddie Mac were able to operate under the notion that they would be taken care of by the government no matter the cost. Surely it is possible that these institutions were not doing business under that principle. However, the idea that the buyers of their mortgage-backed securities – the funding of their entire business – were not purchasing those securities based on the safety net of U.S. Government is impractical. These companies operated so carelessly that the country was put into a recession, but were bailed out by the U.S. Government. That mindset, when operating an institution of that magnitude, proved to be hazardous and should be avoided at all costs in the future (White
Finance 442-001
Professor Bennett
October 26, 2014
United States Housing Bubble In December of 2007, the United States entered a recession that it did not begin to climb out of until June of 2009. The cause of the recession is most commonly attributed to the financial crisis that resulted from the housing bubble, which finally burst in late 2006. There were several causes of the Great Recession such as decreasing mortgage and short-term interest rates, lower standards for mortgage loans, and a false notion that the housing prices would continue to increase as they had nearly every year since the Great Depression. This idea caused various institutions to issue mortgage-backed securities, which seemed to be extremely safe at the …show more content…
housing bubble differs vastly from those previously mentioned. Its key difference is that it is not simply a number that can be calculated and it is not something that can reasonably be predicted. The core issue that contributed to every other factor in the housing market crash was irrational exuberance, a term made famous by the former chairman of the Federal Reserve, Alan Greenspan. Robert Shiller defined irrational exuberance as “a heightened state of speculative fervor.” While it can be said that U.S. Government and everyone involved in the housing bubble were extremely naïve in expecting housing prices to continue to rise, one must take into account the history of the housing market over the previous 70 years. Since the Great Depression, the U.S. had typically seen a rise in housing prices period after period. As mortgages became securitized, those securities became very trusted investments and cash inflow streams for companies such as Fannie Mae and Freddie Mac as well as insurance firms like AIG. The most crucial mistake was relying on the continuous rise in housing prices so much that nearly the entire financial sector of the country was somehow dependent on the success of the housing market (Hardaway …show more content…
Without strict regulations, government backing of private institutions is a recipe for disaster. Fannie Mae and Freddie Mac were able to operate under the notion that they would be taken care of by the government no matter the cost. Surely it is possible that these institutions were not doing business under that principle. However, the idea that the buyers of their mortgage-backed securities – the funding of their entire business – were not purchasing those securities based on the safety net of U.S. Government is impractical. These companies operated so carelessly that the country was put into a recession, but were bailed out by the U.S. Government. That mindset, when operating an institution of that magnitude, proved to be hazardous and should be avoided at all costs in the future (White