Jacob Economics - Week 7

In episode 12 we learned about the 2008 Financial Crisis. In the 2000s, investors in the U.S. and abroad started throwing their money in the U.S. housing market. Big, global investors brought investments called mortgage-backed securities, which are created when large financial institutions buy up thousands of individual mortgages, bundle them together, and sell shares of that pool to investors. There are also things called subprime mortgages. Subprime mortgages are loans given to individuals with poor credit history. The new tax lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. The 2008 Financial Crisis was when the housing market collapsed. The reason it collapsed is a perfect example of a bubble. People defaulted on their mortgages, so more houses were for sale. This means more houses were put up and mortgages were given to people who couldn't pay them, so they now defaulted. Eventually there were many houses on the market for sale, but nobody wanted to buy them, and prices collapsed. The government helped to help remedy the crises in several ways. Firstly, the FED made emergency loans to banks. They also made TARP (Troubled Assets Relief Program) which spent $250 billion to bail the banks out. In 2010, Congress passed financial reform called the Dodd-Frank law. It took steps to increase transparency and prevent banks from taking on so much risk.