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9. Eventually the worst borrowers (sub-prime) started to default on the mortgages, the market started to find out about the problem of sub-prime, lending stopped to them.

Yes, and who got bailed out with taxpayer money and gave themselves bonuses while those who suffered from foreclosures were hung out to dry?

10. Lending to the housing market slowed, therefore buying of houses slowed. This caused house prices to go down because there had been overbuilding and excess inventory. This caused losses on mortgage backed bonds. The credit crisis then occurred.

Yep. All because bankers were so desperate for profit that they sold subprime mortgages and refused to listen to anyone who said that the subprime mortgages could crash . . .

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[-] 1 points by justwantanaccount (68) from Ann Arbor Charter Township, MI 13 years ago

1. Very low interest rates - set by the federal reserve bank (Greenspan)

I learned that the Fed lowered interest rates AFTER the financial collapse, to encourage trade, since otherwise the banks would have been too scared to make any loans.

2. Very lax bank lending rules which allowed for 100 pct financing of home purchases with zero down payment (allowed by the federal reserve bank, federal laws, and state laws). France and Canada on the other hand, which did not experience a housing bubble had federally set limits on mortgage lending capped at 70 pct of the purchase price. Given that the housing bubble created a lot of jobs (in construction for example) and allowed many more people to buy homes than would normally be feasible, it was political suicide to object to these policies - given the short term orientation of US democracy

I learned that banks persuaded the government that those laws should be relaxed - since the housing prices were supposed to rise up forever and all - and banks created an ecology where sprouting off that kind of nonsense was more advantageous, since that (shitty) economist was more likely to receive funding.

Bankers' attitudes (from Niall Ferguson, who's actually a conservative who still believes in imperialism):

"According to one school of thought, the latest financial innovations had brought about a fundamental improvement in the efficiency of the global capital market, allowing risk to be allocated to those best able to bear it. Enthusiasts spoke of the death of volatility. Self-satisfied bankers held conferences with titles like 'The Evolution of Excellence'. In November 2006 I found myself at one such conference in the characteristically luxurious venue of Lyford Cay in the Bahamas. The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was then cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely. My audience was distinctly unimpressed. I was dismissed as an alarmist. One of the most experienced investors there went so far as to suggest to the organizers that they 'dispense altogether with an outside speaker next year, and instead offer a screening of Mary Poppins'." (From his book, Ascent of Money)

As you can see, they are insane. They truly believe that you can keep making more and more profit no matter what. We don't need those people running the banks and create another bubble.

Also the definition of a bubble is that you experience fake economic prosperity before a crash.

3. Mortgage origination companies falsifying financial details of applicants for mortgages because they get paid on volume, take no risk on lending and package the mortgages to send off to banks and other lenders.

Thanks for explaining the systemic problem for us. The system shouldn't encourage this sort of thing to happen, you see. It's like encouraging your body to grow cancer or something.

4. Individuals lying on their mortgage applications. People who had no jobs and no income.

But the recession is because a massive, massive amount of people defaulted - usually this doesn't happen. If the system was working only a few people would default. But it wasn't - and still isn't.

5. Credit rating agencies rated bonds backed by pools of these mortgages as AAA.

Yes, that's part of the problem. Since the banks were making so much money, there was pressure for those bonds to be rated as AAA or else the banks get pissed.

6. Because interest rates were low, cost of the mortgages to borrowers was low.

[citation needed] Seriously this is the first time I hear that the interest rate lowered before the financial crisis. Even if it was, it must have been to compensate for the Dot-com bubble burst of 2000 (no I don't blame Bush on the economy, he was unlucky to have become president when an effin' bubble burst) - again, help increase trading in times of a recession.

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