Do you think the unsecured loans was the primary cause of financial crisis in 20

  1. rahulshaah profile image61
    rahulshaahposted 5 years ago

    Do you think the unsecured loans was the primary cause of financial crisis in 2008?

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  2. LandmarkWealth profile image79
    LandmarkWealthposted 5 years ago

    The primary cause of the financial crisis was 3 pronged.  It was the government sponsered enterprises like Fannie and Freddie buying up large supplies of the CMO markets in order to create artificial demaned for these products.  The more they bought...the more were issued.  Banks stopped caring about the credit quality and the securing of loans when they could simply sell them off.  And as long as the gov't was there to buy up the loans the risk would be transferred off of their balance sheets.  Except certain congressmen were running defense for the GSE's and hiding the fact they they were bankrupt while their books were being cooked.  They stonewalled inquiry after inquiry.  When they collapsed, the banks were left holding all this lousy paper that the gov't was asking them to write for years. The gov't attempting to socially engineer the system to ensure everyone could own a home was the single biggest cause.

    The second prong was the upsurd requirments placed on banks via the CRA act which has become more and more aggressive over the years.  The forced diversity in loan portfolios is inherently irresponsible underwriting.  The only factor that should determine loan approval is ones financial profile.  Not socially engineering bank loans via zip code.  Another ridiculous gov't manadate.

    The third was the Fed holding rates too low for too long.  More than likely we are beginning to repeat the same mistake all over again.

    At the end of the day...banks don't like to loan money to people that can't pay them back.  If the gov't subsidizes the financial markets and transfers the risk to the tax payer as they have done, market dislocations will continue to occur.  If banks are allowed to loan money based on credit ratings and evaluting the borrowers ability to repay the loan, without the gov't attempting to socialize th system, we'd all be better off.    Unfortunately, little has been to stop this behavior.  The gov't still places all the wrong incentives in all the wrong places.

 
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