Introduction
Numerous studies have put forward the government housing policy as the main cause of the 2008/2009 financial meltdown. In essence, the entire crunch occurred due to several factors, which were not addressed in time. For instance, the moves by the Bush Administration to enable middle-income earners own homes to some extent furthered the crisis. However, the policy had come at a time when controllers and supervisors of the financial systems had made huge mistakes in the management. Therefore, the housing policy is just a coincidental plan that was implemented at a time when the entire financial system was in a mess. Some of the key causes of the financial crisis include regulation, leverage, and securitization.
Cause of the Crisis
Regulation
Lack of proper regulation within the key financial institutions had led to the financial crisis. For instance, the fall of institutions like Bear Stearns Bank, AIG Insurance Company, and the Lehman Brothers, according to Thomas, Hennessey, and Holtz-Eakin (par. 1), were due to lack of effective government regulations. The most common initiative was the Community Reinvestment Act (CRA); the initiative was to undertake clear-cut number of subprime mortgage initiations. Failure by financial bodies to regulate the operations of CRA loan made the government to control the lending procedures. This made things go out of hand for the financial institutions, which were tasked with regulating borrowing. In addition, failure by the government to regulate the operations of two giant mortgage firms, Freddie Mac and Fannie Mae, made it possible for the companies to violate the lending agreements. For instance, they misused the agreement to borrow at discounted rates by inflating their balance sheets in order to enrich themselves using the ill-gotten bonuses. It is at this point that underwriters and investors built confidence on loans from Fannie or Freddie, as they held that it was “sanctioned” by the Federal Government (Kuttner 1). Clearly, the failure by the government to regulate the operations of the lending firms is a root cause of the financial meltdown. The loose monetary policy, which was not regulated, made it possible for middle-income earners to borrow heavily even with no credit history. From this dimension, it is evident that poor regulation, and not the housing policy, is the main cause of the financial crisis.
Securitization
The move to enable retail investors to buy a large pool of mortgages made lenders to securitize mortgages. The process of pooling of mortgages made lenders to securitize mortgages, not only through government-sponsored entities, but also through unregulated private outlets. So lucrative were the deals with private-label mortgage-based securities from the mid-1990s such that by 2006, nonprime mortgages had hit 50% of originations. The private-label MBS had higher yield than the government-sponsored entities (GSE) MBSs. At the time, it became very difficult to monitor the lending processes and qualities of private-label securitizations; they became illiquid with time. The assumption by rating agencies that the housing prices would not go down made them rate private-label MBS as the best option in the market; this led to a boom in the production (“The Origins of the Financial Crisis: Crash Course” 2). Borrowers who could not meet the qualifications set by traditional mortgages went for private-label securities. Since PLSs were difficult to monitor and not backed by standardized assets, they lost market value to the GSEs. As a result, the misallocated investment, as well as the loose standards increased housing prices within a short period. With the entry of private-label securitizers into the market, the level of risky loans increased, and had touched the 46% mark. The stiff competition in the market made lenders to extend their risky loans to those with no ability to repay. Therefore, securitization made it easier to obtain finance.
Leverage
For the past 10-20 years prior to the 2008 financial crisis, it is clear that excessive leverage in major economies had resulted in high levels of debts (“The Origins of the Financial Crisis: Crash Course” 4). Currently, even the US property market has not stabilized from the crisis. Several financial institutions at the time leveraged by a ratio of 30 to 1; the government-backed firms, Fannie and Freddie, were leveraging by a ratio closer to 100 to 1. Such leveraging made potential and non-potential homeowners to go for mortgages with the hope that housing prices will maintain an upward trend. Notably, the levels of leveraging by the two giant firms, and key financial institutions went on to affect the GDP of all nations. Critics argue that moral hazard encourages systematic risk as it encourages other firms to engage in malpractices with the aim of receiving support from the Federal Reserve.
Conclusion
The causes of the financial crisis have a historical dimension; it was not a onetime affair. Complex chains of debts had set up due to weak oversight on financial institutions. The move made regulators to mishandle the crisis. Unmonitored financial operations in America, as well as weakness in the European banks augmented the debts from the property busts. The European Central Bank and the Bank of England did very little to supervise monetary operations and address the financial instability. From the analysis, it is clear that the government housing policy is not the main cause of the financial crisis.
Works Cited
Kuttner, Robert. “Don’t Blame the Dream of Home Ownership.” Huffington Post 2014: 1-2. Print.
“The Origins of the Financial Crisis: Crash Course.” The Economist 7 Sept. 2013: 1-5. Print.
Thomas, Bill, Keith Hennessey, and Douglas Holtz-Eakin. What Caused the Financial Crisis?. N.p., 2011. Web.