What Caused the Economic Crisis of 2008?

I think we can sum up the cause of our current economic crisis in one word — GREED.  Over the years, mortgage lenders were happy to lend money to people who couldn’t afford their mortgages.  But they did it anyway because there was nothing to lose.  These lenders were able to charge higher interest rates and make more money on sub-prime loans.  If the borrowers default, they simply seized the house and put it back on the market. On top of that, they were able to pass the risk off to mortgage insurer or package these mortgages as mortgage-backed securities. Easy money!

What Went Wrong With Our Financial System?

The whole thing was one big scheme.  Everything was great when houses were selling like hot cakes and their values go up every month.  Lenders made it easier to borrow money, and the higher demand drove up house values.  Higher house values means that lenders could lend out even bigger mortgages, and it also gave lenders some protection against foreclosures.  All of this translates into more money for the lenders, insurers, and investors.

Unfortunately, many borrowers got slammed when their adjustable mortgage finally adjusted.  When too many of them couldn’t afford to make their payments, it causes these lenders to suffer from liquidity issue and to sit on more foreclosures than they could sell.  Mortgage-backed securities became more risky and worth less causing investment firms like Lehman Brothers to suffer.  Moreover, insurers like AIG who insured these bad mortgages also got in trouble.

The scheme worked well, but it reverses course and is now coming back to hurt everyone with a vengeance.

The Case Of My Greedy Real Estate Agent

My own experience with these greedy lenders and real estate agents happened about two years ago.  My wife and I were thinking about upgrading our home to something slightly bigger, and in a better neighborhood.  As we go through the process, we resolved not to do it because it would double our monthly mortgage payment and add another 20 years to our mortgage term.

creative-home-loan

Illustration from The Skinny On The Housing Crisis, published with permission. The Skinny On.

When I told the real estate agent I couldn’t afford the monthly payment, he said I could go for a 40 years mortgage with 5% down payment, and apply for more than what I needed so that I’ll have an emergency fund.  Basically, he advised me to decimate my cash flow and savings so that I can pay mortgage into my 70s.  And while I am at it, I should pay private mortgage insurance (PMI) for a couple of years.  Now, that’s irresponsible and greedy.

The sad thing about the scenario above is that I am certain there are borrowers who didn’t know any better and went along with a similar plan.

The Bailout And Who Should Pay

I don’t like the idea of government bailout, because the government is using my money to help out greedy bankers.  Unfortunately, it may be the only option we have right now, but I hope these greedy lenders won’t get away scot-free.  Somebody made a lot of money leading up to this crisis and they should pay for it — at least the government should make them.

In my opinion, the government should force conversion of bad mortgages into 30 years fixed rate mortgages.  The interest rate on these converted mortgages could be higher than normal.  This way it’s more affordable to more borrowers resulting in a lower default rate.  Yes the lenders will make less money, but in my opinion, they already made too much.  By the way, the borrowers aren’t completely innocent either, that’s why they should pay a little more as well.

Since it was fine from them to play with our economy and our lives, I think this is the least that they could do to take part in the recovery effort.  Why should my tax dollars go toward helping these greedy bankers who already made billions out of the scheme?  I am sure no one will come to my rescue if I my greed got me in trouble.

Other articles about the crisis and the bailout:

About the Author

By , on Sep 22, 2008
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

Leave Your Comment (135 Comments)

  1. ohiodale says:

    What about the greed of the individual who took out the loans they could not afford just so they could have a huge house. The greed was wide spread not just the bankers. The realtors, individuals, builders, and the banks were greedy. Also the government created Fannie and Freddie so they also played a role in this crisis.

  2. ?? says:

    For or against the government providing money for the relief in the depression 1920-…but consider the economic crisis of 2008-2009

  3. Deadbeat says:

    Come on tell the Truth! Their was a perfect storm and what started it was a bunch of speculators who drove the price of oil up!

    YOU CANT MAKE HOUSE PAYMENTS WHEN ALL YOU CASH GOS TO GAS AND GROCERIES!

  4. jack says:

    I can’t believe so many of you want to blame a political party. They are both crooks, involved in the same hypocracy. Did they all make a ton of money of this at no risk, yes they did. Is it wrong, you bet. Wake up and look at all of them, don’t be a puppet on a string! While we are passing blame, how about the people who knew they couldn’t afford these houses and got them anyway. It’s the same way with credit cards, take some responsibility for your actions if our citizens were not so greedy and had a little more self pride and self control we wouldn’t be in this mess. Everybody from the top to the bottom wants a free hand-out, where does it end

  5. reshad hakim says:

    i am keen reader of economics.The financial crisis really affected the market much.The financila crisis have been repeating since many years but the 2008 crisis was the worst,however there is no guarantee that it wont happen again.
    I think the economic system followed and imposed is the biggest reason.

  6. Nate McLaughlin says:

    I am a retired commercial,industrial Real Estate Appraiser who also did appraisals and feasabilyt studies on proposed Residential Subdivisions.For me, it was a no brainer to see that the houses that were being constructed, at least in the area I live, were over improvements for the existing market. The product did not match the demographics. From my understanding, lenders were flush and wanted to get the money out in loans. They apparently were not concerned with HOW but QUICK. Freddie and Fani would purchase these loans and then everything would get spread out in derivatives based on Securitized Mortgages.Never seen anything like this in my lifetime! Nate

  7. Julian says:

    For every “greedy” real estate agent, there tens upon tens of financially irresponsible, math illiterate home buyers.

  8. Chris says:

    Wow ignorance is bliss they say…
    Actually Will was the closest to the facts. The Republicans tried twice to increase regulation on Fannie and Freddie and both time were voted down by the Democratic controlled Congress.

    Actually Jerry, if the Democrat’s, such as “Fat Boy” Frank had increased requlation in 05 when the Rep’s were pushing for it much of this mess would have been avoided.

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