Given the events of the past couple of months, interest, money, and the future of asset allocation is beginning to change. To better understand the conditions we see today, we must go back to the extension of the Housing and Community Act of 1992 which incentivized banks to come up with innovative ways to make houses more affordable to vulnerable populations. The banks responded by popularizing mortgage-backed securities (MBS), which created a massive housing bubble that ended pretty badly as we all remember. During the financial crisis, the Federal Reserve sought to lower interest rates, increase the money supply, extended its discount window program to central banks, and bailed out other banks in a desperate effort to flood the economy with the currency that was needed to quickly re-start the economy. But why? You see, neo-classical economics and monetary theory agreed that lowering the Federal discount rate should promote more borrowing from central banks, which then should have made it easier for private banks to borrow money from central banks, which they could then use to lend to companies at lower interest rates.
From the chart above, we can clearly see how lowering interest rates increased the money supply, and thus should increase the demand for money in the short-run. As the demand for money increases, an increase in investments should follow. Unfortunately, this also implies that inflation levels should have risen as we trade off growth for inflation. Given the amount of money put into the system, we can clearly see that this theory started to work flawlessly during the beginning of 2008 and thus, the economy should have recovered quickly after that. As this happened, the banks began to borrow enormous amounts of money, and the market speculated that higher levels of inflation were soon to follow.
After 2008, many people feared that such a massive increase in the money supply would create rapid amounts of inflation as more businesses borrowed cheap money at the same time that interest rates were reaching zero. The idea at the time was that this enormous sum of money would create growth in the US economy, which would translate into more jobs, but also more inflation. As time went by, nobody could explain why the U6 and U3 unemployment rate decreased as inflation remained flat, despite all of that money that was added to the economy. In 2008, some investor’s even feared hyperinflation as they thought the economy was going to be overstimulated. When inflation didn’t reach the target of 2% year after year, the market knew something had gone terribly wrong.
What Happened?
Although many argue that inflation didn’t surge in the US economy because of anemic growth and over-regulation, that’s only part of the story. Let’s remember that the money demand theory promised an increase in money supply (that did happen), along with an increase in money supply and demand for money as interest rates decreased. It never promised that this effect would occur in the real economy. You see, the assumption was that the money put into the banking system would quickly enter the real economy and spur inflation. Instead, a lot of that money was never loaned while some went into wall street. However, this doesn’t mean that theory was incorrect, after all, there were a lot of rules and constant changing regulations that prevented this money from being lent out, the biggest being the Dodd-Frank Act of 2010.
If you look at the money demand theory from an investor’s perspective, it signals that bonds were going to get pricier as rates went down since there’s an inverse relationship between price and interest rates. For example, as interest rates go down, the price of bonds go up. As a result, lower interest rates increased the price of bonds. Since Bonds and Stocks are often held in portfolios and measured against risk, if the value of bonds diminishes due to an increase in price, then it’s only natural for investors to switch to stocks as they seek to maximize their utility. This should have created a surge in the stock market as we moved from point A to point B, and it did.
In order to better understand why this happens, we can look at the Security Market Line (SML) that explains that for every unit of expected return, investors incur an extra unit of risk according to Efficient Market Hypothesis (EMH). Why would investors take on more risk? Because they have to invest in assets that are correctly valued, taking into account opportunity cost, risk, and total returns.
In summary, not only can old theories be used to explain Ben Bernanke’s plan to restore the economy after 2008, but there’s also significant proof that it did work to some degree. There was admittedly inflation in the stock market if we define inflation as a rise in prices only accompanied by lower value of those assets. The evidence can be seen by higher than expected P/E ratios which signals overvaluation of stocks as investors pay more for earnings. As we all know, money has to travel somewhere once it reaches a market, and it seems that a lot of that money went into the stock market and never reached the real economy, which is known as Financialization. This also implies that the real reason why the economy recovered very slowly (if at all) was because it never got any real help.
Now what?
Since we are now entering a world of higher interest rates and inflation, it is only obvious to think that Bonds will start to become more attractive again. However, that doesn’t mean that the stock market will go down or crash, it only means that returns on an annual basis will be lower compared to periods of lower interest rates. As we shift from B to A, it will be important to remember that major stock indexes such as the S&P 500 will not perform as well when compared to lower interest rate periods. As always, some industries will outperform the market.
References:
- Flynn McConnell Brue Microeconomics [Book]. – New York : McGraw Hill, 2015. – Vol. 20.
- Mankiw N. Gregory Principles of Macroeconomics [Book]. – Stamford : Cengage Learning, 2015.
- Nicholson Walter Microeconomic Theory [Book]. – Willard : Thomson South-Western, 2005. – Vol. 9.
In my opinion, if we take a look at bonds, when interest rates go down, bonds go up, so interest rate is important for the entire economy. People don’t have many choices when they see that interest rates go up, they will lose money in their bonds. To prevent the 2008 crisis, they should be looking at bounds differently, to insure the overall portfolios of the market. They should not look at bound as a potential income, but only at the total return portfolios.
If they wanted a perfect growth on the total return in 2008, they should have made sure first, they have some safety in the overall portfolios. A good average of bounds would be reasonable, they should make sure the other money went into global diversified markets instead of stock markets only, where the money didn’t flow but instead slow the economy. If the equity interest went off, their bonds would stay straight and if it went down, their bound would save the economy at that time. They should take bound in consideration even in low interest environment. It’s hard for company to know where to put the money, so the more important would be to look at the total return instead of looking at each individualistic class.
Due to the fact that the banks was handing out loans to pretty much anyone who wanted to buy a house at the time the housing market sadly crashed and this incident accord about 10 years ago. In this time period now most if not all banks required very strict rules and qualification to loan you money for a house. But back when the housing market was crashing they wasn’t informing those people about the qualifications they needed for the loan. Who knows if they were doing right on wrong in their eyes but with the market crashing it hurts the economy. In my eyes if the market is down then let it be it’s more than likely that it will fix itself sooner or later.
This article gave much insight on the economy and how many people were affected by the mortgage loans from the banks. In 1992 the Housing and Community Act was extended so banks could make houses more affordable to certain populations. This created a major housing bubble which eventually ended horribly and had a negative effect on many people.
Due to the implementation of the extension housing and community act there was financial crises so as to revert the situation it saw the government try to curb this situation and the approach that they did use is the increase of the money supply and allow the lower rate of the borrowing which they argued would lead to a lot of borrowing by the bank. This move was mainly used to flood the economy with the money. By the use of the neoclassic and also the monetary theory it brought out the fact that with the federal government taking the initiative to flood the economy with the currency it would lead to the borrowing of the bank due to the low-interest rates. The view of the people that due to the increased supply of the money in the system would lead to an increase in the job which did not reflect and also the inflation which was anticipated to rise did not rise. Due to this it would lead to the scaring away of the investors of the bound and make them shift to the stock exchange investment. When taking an initiative then the confederation and also the repercussion should be check at properly to avoid scaring the investors in some business.
At the time of the housing market crash in 2008, I was only 12-13 years old. That is also the time my parents panic sold our house and moved to a smaller home, which they now say they regret. At the time I didn’t really understand it at all, I never tried to either. I have over the years now got more information on the subject and understand why a lot of people had the same idea. Even today there is remnants of the 2008 financial crisis that people have to deal with. The entire situation seemed like a good idea but I feel like it was just executed terribly which caused the entire problem in the first place. Maybe the next time something similar happens people don’t let greed get in the way and cause this to happen. Overall the 2008 financial crisis shouldn’t have happened but things happen.
As the article says, the idea strictly speaking was not bad. The formula that Ben Bernanke President of the Federal Reserve and Paulson Secretary of the Treasury was not mistaken. By the time the crisis of 2007-2009 began, there was not much more to do than try to lessen the blow and start a scheme to get out of depression. The idea that the federal government would inject cash into the banks in the form of purchase of assets so that the cash would be immediately available to lend to Main Street and the flow of money will not stop. Along with this also the Federal Reserve lower its interest rates to make the loans more attractive. The problem was that although Bernanke and Paulson did this with the idea of helping the economy, the banks occupied the money at will, which was not the best for Main Street. One of the issues that stands out is that much of the money that the government injected into the financial system ended up in the Stock Market, inflating it to levels never before seen, exceeding the P / E ratio and the Schilling P / E ratio that measure the real value of the stocks in relation to their actual profits. All this led to the current situation in which we have a stock market that seems to have reached its peak and is now stranded, leaving investors with very few investment options. Since the old investment instruments do not show signs of being stable and new instruments such as cryptocurrencies are very volatile instruments, which leaves investors without many options to create money.
The housing industry contributed to the collapse in 2008. The idea in general is not bad. The problem was in the execution. Essentially this became a free for all and was not regulated. Thousands of people were receiving loans that they essentially couldn’t pay back and no one was concerned with it because people were making money. Once it started to crash and the curtain was pulled back (so to speak) it became apparent very quickly just how bad things had gotten. Easing restrictions on home loans should have never been an option to stimulate the economy. While owning a home is the American Dream not everyone can actually afford it. Stricter regulations are needed to ensure that situations like this don’t happen in the future.
This article illustrates the negative impact of the unintended consequences that government regulation has on the economy. It was the implementation of poor policy that led up to the market crash in 2008. While the Housing and Community Act allowed lower income families to afford housing that was previously out of their reach, it was not sustainable. Many people were being approved for loans that they had no ability to repay. This, of course, led to a bubble in the real estate market resulting in the economic recession that we experienced in 2008. It was government regulation, yet again, that prolonged the recovery from the recession. The money that was being pumped into the economy to help jump start it was being halted by the creation of Dodd-Frank, which put tight restrictions on whom banks could lend money too. It seems to me that if the government would take a laissez faire approach and allow the economy to work the way it’s supposed to, we would be less likely to experience such extreme recessions.
In 2008, many people rapidly began selling their houses, because of the big influx of money, people became scared of inflation. It was not a well-thought-out choice, and many people probably regret it. This article really goes into depth and explains why the economy crashed, and why it might have recovered, if it did.
Tulsi Patel
This article is very informative on how the economy is working and the effects of what happened and what all failed. In 2008 the market crashed, and that was the biggest turnover for everyone. It was not only that but it was also the largest point drop in history! When the market crashed the housing industry also went down hill it started in 2006 and just kept dropping and could never pick back up, but in 2008 it dropped to its lowest because many families income was very low. Many people had to get loans on houses but during the recession the banks were failing too and it made it hard for buyers to not only get a house but also to live. The housing bubble had a very bad effect to so many people. Even as of today, there is some remaining of the recession from 2008.
It is understandable that the banks had fault in the 2008 crisis, but it was a riskily choice that they needed to take to better the economy. This article helps by giving more insight information on how it did not work. Now that the 2008 crisis happened, economists should really understand the outcome of the choices that they think is the right one to make.
Munira Rasool
The Housing and Community Act of 1992 created a huge housing bubble which was unsuccessful. During that financial crisis, the Federal Reserve lowered interest rates, increased the money supply, and bailed out banks to flood the economy with currency. Monetary theory agreed that lowering federal discount would promote private banks to borrow money from central banks, making interest rates lower. The graph shows that lowering the interest rate increased the money supply and increased the demand for money in the short run leading to increase in investments. Due to banks borrowing big amounts of money, there was higher level of inflation. In the real world economics, that’s not how things worked out how it was planned previously. Instead a lot of money did not even enter the real economy after borrowing. However, this theory wasn’t incorrect because there were constant regulations to prevent money from being lent and restoring the economy did work to some degree. There was just higher inflation in the stock market. This article really helped understand how inflation and stock market works as well as their relationship.
Andrea Cortez
In the year of 2009, lot of individuals lost their job and blame it on bad economy. However, trying to own a home in the present time due to the down fall everything has change and made it more difficult to achieve so. This article gives reader inside on how individuals were affected by the loans banks had givens to families for their mortgages. Now it is not as easy it was to own a house, before all you need was someone with good credit to help you get your dream home. I have a friend is in the process of trying to build a home and does have good credit but since he became a full-time student, it is not enough for my family get a loan, even though the rest of his family brings the income. If I were to apply back in 2009 I would receive a loan and build my home. I would have to agree with the laws they have now because not having a job and paying for a home can be difficult.
Although, the government says they are here for the public, it is hard to grasp that idea when the bail out banks, flood the market and create a housing bubble. In 1992 The Housing and Community Act created a large housing bubble that ended up being a horror story. Over the years, interest rates have been rising and inflation has gone through the roof. There is an inverse relationship between interest rates and inflation however after banks began borrowing large amounts of currency this flipped and inflation and interest rates had a direct correlation. The whole problem in 2008 with the housing market crash was the lack of regulation from the government. If the government showed leadership and was prepared for large amounts of currency being traded and invested, this collapse of the market should never have happened.
In 2008 I was in 9th grade and wasn’t fully aware of the housing and economic crisis happening around me. I knew times were getting hard and that we were in a recession, but that was about it. This article showed me what was really going on at that time and why our economy was declining at the rate that it was. I think the plan as a whole was a novel idea, bust sadly it did not work out how everyone had projected it to. If everything had worked as planned and actually been distributed to the people, this issue might not have occurred, or at least not to the level of severity that it did. However the money basically halted once it hit the stock market, or was not even loaned out at all, and in turn never made it to the real economy. Part of the plan did succeed though, with inflation occurring within the stock market, it was just not as economist had planned or hoped.
Coby Cox
In 1992 the extension housing and community was passed and as a result the economy tanked and there was a financial crisis. As a result to try and fix the economy, the government implanted various methods such as flooding the economy with an increase supply in money and offering zero to low interest rates. The theory was that an increase in supply will cause an increase in demand and it did at first and banks began to borrow money and inflation began to manifest higher and the idea at the time was a surplus in money would result is growth in the economy creating more jobs but it was short-lived. On paper and in theory, the economy should recover, however, that was not the case. Instead, not only was money loaned out to just about anyone with no qualifications, but a lot of the money never made it out as loans and instead was put into Wall Street. Low interest rates equals an increase in the price of bonds therefore the value diminished scaring investors to stock investments.
Sieera Antoine
This article talks about the affects of the 1992 housing and community act that initially was working well in the short run but in the long run it caused a lot of damage. The Act created a large bubble that ended very badly for the economy. It allowed large amounts of money to be loaned out to purchase homes and over time the results were higher interest rates and inflation.
Andres Ballesteros
While the Housing and Community Act of 1992 was a rather unique experiment in trickle-down economics, the mass issuance of mortgage-backed securities that resulted in a huge bubble burst that would create one of the greatest recessions in United States history. The large influx of cash into the central banks was intended to encourage borrowing, and therefore stimulate growth through the resulting loans. However, rather than create a healthy rate of inflation (and therefore significant economic growth), a large portion of the money never even reached the streets through trickle down, as many banks and entrepreneurs chose instead to put the money into stocks or other investments instead of loaning it in order to produce the intended growth. The inefficient rate of inflation that followed frightened investors and caused many of them to withdraw even their existing commitments in Wall Street, causing growth to slow and, eventually, the economy to contract.
The article starts by explaining that In 1992, the Housing and Community Act was created to help banks come up with innovative ways to make houses more affordable. The banks ended up creating a plan to make mortgage-backed securities. Although it sounded like a promising idea, it caused a massive housing bubble that did not end well. Furthermore, during the financial crisis, the federal reserve attempted to fix the economy. They decided to lower interest rates and increase the money supply. This was all an attempt to flood the economy with money that would hopefully end up restarting the economy. Also, they assumed that people would invest more money into loans that would go into the struggling economy. Instead, some of the money ended up being brought into Wall Street and did not help the economy build itself back up. It resulted in even lower interest rates and inflation in the stock market.
In 2008, I was very young and truly did not understand the impact of the economic crisis had on the united states. now looking back, I can see it was a very big deal to everyone in the country. The 1992 Housing and community act was one of the main reasons the economy went into this crisis. This crisis was due to the government doing poorly in their execution of looking in the long term compared to what they did in finding a short term solution to the issues at hand. and that Ben Bernake’s plan seem to somewhat work in 2008
The 1992 Housing and Community Act may have seen like a different approach and experiment, it led to a financial crisis and left America in a state of panic. The initial outcome of this may have worked well, but in the long run it was sufficient enough to keep its place. This act made it possible for people to purchase homes by laying out large sums of money. Over time, interest rates continuously increased and led to inflation. A lot of the money just ended up on Wall Street, not even as loans. The government wasn’t prepared for these large sums of money to be borrowed and traded. This just resulted in super high rates of inflation in the stock market. This was presumably the largest point drop in history. In 2008, it reached its lowest point especially because of low income families. Overall, this article thoroughly discusses the 1992 Housing and Community Act and its negative effects on the economy in the long run.
All in all, this article expresses how mortgage loans may be necessary to execute, however, at some point in time the loans granted will eventually have a negative impact. To illustrate, between 2007 and 2009, the federal government concluded that bestowing cash into banks, would attract low income families to request for bank loans. Correspondingly, in hopes of alleviating the economy’s crisis, banks began to award loans to individuals with low interest rates, even though they were unable to completely repay them. Thus, the result of these actions led to a devastating blow in the real estate market. In conclusion, this was the official start of the tragic recession in the United States. After some time, government regulation aided in stopping the recession. Specifically, the restrictions that were imposed on banks and citizens, played an important role. These restrictions ultimately determined who could and could not be granted money. Conclusively, the government had pursued to further the economy but, the outcome was just the opposite.
From what i understand, money or income must travel some place when it achieves the market and it appears that a great deal of that cash has gone to the share trading system and has never achieved the genuine economy. Along these lines, the economy returned gradually in light of the fact that it never got the correct help. Since we are entering the world with higher loan costs and expansion, clearly bonds will turn out to be more appealing. We need to be careful with our money and if we want to invest it, to do it in the right thing that will go upwards. In todays world where the government keeps stating how economy has never been better, we people can actually prove the opposite.
During our financial crisis back in 2007-2009, I was only a little kid and I had no idea what was going on with our country. The Housing Act of 1992 made people believe that it would a lot of families that had trouble with housing. Letting anyone borrowing money is just a huge mistake, no one should just let anyone borrow money like that. Due to The Housing Act of 1992 it made the people who created it to Lose money, everyone lost money when they thought they were going to make more. Ben Bernake’s plan seemed to have worked in some situations that happened back in 2008
As a small business owner, my dad was greatly impacted with the 2008 crisis. Not only did the demand for new construction go down which meant he didn’t have a job, but the contractors for which he performed jobs for, went bankrupt. He lost over 100k from completed jobs that were never paid by these contractors. When he started his business things were going so well for us, having migrated three years prior to this from Mexico, our economic situation was great. After this loss, it took my dad over five years to get back up. With that, we were pretty close to even losing our home. I was only in my teens when all of this was happening so I didn’t exactly know what the cause was but I just remember my parents being greatly concerned with the deteriorating economy. After reading this article I now comprehend what was behind, and how it got to where it got. I can see how they tried to fix the situation but the market is unpredictable and in the end, it just came out to be a pretty bad experiment which affected the entire nation.
Susie Wasson
I was not quite old enough to remember the housing and economy crisis so reading this article was very insightful to me. I did not realize how bad handing out loans on things like that can really effect the economy. It is also crazy to think that just 10 years ago was one of the biggest drops in the housing economy. This article really helped me to understand how and why this happened.
After Reading this article I gained insight on how the people were greatly affected by the mortgage loans from the banks. After the housing and community act was passed to banks in 1992 it created a negative effect on the people in the future.
The interest rates for money is one of the most fundamental connections in economics. The status of the stock market is directly related to what the interest rates are that given time. Fir example if rates are lower then many more people will be borrowing money. Money is considered “cheap” this has a profound affect on the market as a whole. If a company wants to open a new shop they will most likely have to borrow money for it. Considering the rates of interest at the time will be the direct after if they will go through with it or not. Interest rate drive the stock market. If people e can borrower for less then they can borrow And invest. Will this my not be a smart idea many people do this.
The housing industry of 2000 was initially a good idea. many low-income people benefited form loans that banks were so willingly handing out. The problem came when those people who borrowed could not repay the loans. In turn, the banks borrowed more money from larger banks to repay what they loaned out. Seems to me like vicious cycle that eventually crashed.
For me, it is hard to form a solid opinion on this issue because I can see it from many different angles. On one hand, any economy is going to have ebb and flow and should be allowed to run its course. However, leaders of economy want to make sure that the lows never get too low which is why they try and take control of interest rates and money circulation. This can be beneficial because corporations are able to borrow more money to stay afloat and stimulate our economy with said money. However, in the housing crash, the corporations used people who were not financially stable to make more money. This was unethical and instead of attempted to be proactive and stop these criminals while the issue was going on, the executives and government turned a blind eye until it was too late and these corporations needed saving which again, I’m not sure was the best decision. I understand that if the government wouldn’t have bailed these companies out, many would have lost their jobs but again, in true capitalism, better companies would form and employee those who went through this turmoil and our economy would have more careful and ethical companies succeeding rather than the ones who were willing to use us only a decade ago.
The financial crisis of 2008 was terrible, I think people made bad decisions to buy houses they could not afford just because they were being approved for loans that were outside of their means. I believe if people were more educated on mortgage loans that a lot of the problems would not have happened. The economy is so fluid and changes so often the best way to prevent foreclosures is to budget and live within your means. Just because you are offered a large amount of money you should always be mindful of the interest rates and the fact that it will have to be paid back.
The idea of the Housing and Community Act of 1992 seems like it was doomed from the beginning. These banks were encouraging people to live outside of their means. The people that were taken advantage of were told that they could afford a house that was out of their price range. These people ended up not being able to pay back these large loans which caused the housing market to crash. The idea that the Federal Reserve had when they decided to restart the economy was the right mindset. Getting people to spend more money was the only way that the economy was going to recover. Although when this happened money did not go back into the economy as expected and things did not recover as projected. I believe that this might have something to do with the fact that people were investing their money rather than spending it. The money was not getting recirculated back into the economy. In the long run, however, this ended up causing the economy to suffer longer than it should have.
Unfortunately, several years ago, the economy was in really bad shape. To make matters worse, the issue went on for quite some time. Several laws and policies were set in place to try and reverse the sad state that the economy was in. The way I see it, the economy is doing much better. The real estate market is very important to the economy of this country. With the real estate market being in bad shape, it can cause debt and take away financial security. Even though the policies mentioned in this article did not go exactly as planned, they did work. The economy is now in a much better state. Now that the economy is more stable, there can be more policies set in place to continue the trend of growth. Some things happen overnight, but issues such as the economy need to be executed correctly. At this point, the best thing we can do is learn from our mistakes as a country.
-LISA W-
I find it interesting how this article describes the various relationships that exist in terms of economic policy and the practical effects on main street economics. Certainly, the relationship between government action and the market reactions is fully on display – particularly how financial investments and allocations swiftly respond to artificial rates and valuations.
As well, I believe the article rightly identifies a primary source of the 2008 recession in government intervention in housing markets, creating financial incentives for banks to issue high-risk loans and essentially promising to back the risk on such loans through eventual bailouts. This demonstrates the interconnectedness of government economic policy and markets, as does the role of the Fed in responding to the recession.
Bernanke’s plan seems based in appropriate theoretical application but was disrupted by legislative intervention into the economy via Dodd-Frank. It makes me wonder if perceptions of corporate greed and the need to regulate the economy expressed in Dodd-Frank legislation had the actual effect of stagnating recovery by disrupting actual economic policy maneuvers by Bernanke’s Fed. This would seem to be the difference between positive, empirical economics and application of normative theory versus purely ideological opinions on the what economic policy should be.
When the Housing and Community Act of 1992 was ruled out, it seemed to have good intentions. It provided more funds from bigger banks to smaller banks, so the small banks could loan it out with lower interest rates to help many individuals purchase a home when normally they would have not qualified. Unfortunately, the act was unsuccessful. One reason being that the funds never enter the real economy. Instead, the funds went into wall street and the some of those funds had constant regulations that prevented the money from being lent out. Years later, the housing act contributed to the collapse. Although the funds were being lent out, some homeowners were not able to repay their loan back. The more money there is, the bigger the debt is. In reality, the economy did not receive the real help it needed, which caused the economy to recover very slowly. If the funds would have been distributed as intended, then maybe the Housing and Community Act of 1992 would have saved the economy in much bigger way.
Cayla Cook
This article was very insightful on the ways that the economy went on a downward spiral starting in 2008. It is interesting to see how this event was based off of good intentions and went bad from the money that “went into the stock market and never reached the real economy.” The housing industry was working to do good and help lower-income people, but the idea was just not pragmatic in the end. To me, the housing and community act just was not practical. In terms of money, this was telling people they could afford something that very well could have been way out of their budget. This only set the people up for failure when they couldn’t repay their loans and, in the end, crashed the market all together. In regards to asset allocation, this seems as if it was not even thought about in the housing and community act.
Christina Cook
In 2008 I myself was a young adult and future mother looking to purchase my first home. I specifically remember thinking how easy it was to get approved for our first home. I was unaware of all the events leading up to the housing bubble crashing. Reading this article and discovering how the funneling of money into the markets in order to spur the economy only hurt it. I was one of the house buyers that ended up getting approved for a home that I would be able to afford. When interest rates jumped so did my house note, which continued to climb with no end in sight. In hindsight, I feel that flooding the market with money with the intentions to increase the economy only hurt it. Many homeowners such as myself could not afford to pay back the loans we should have never received. Unfortunately, markets for these homes were not as valuable as the home loans themselves resulting in entire neighborhoods with homes in foreclosure. Crippling the economy instead of stirring it.
This article explains the cause of the housing bubble created when banks were trying to make homes more affordable by offering mortgage-backed securities that ultimately caused the economy great distress in 2008. Many people bought homes that they could not afford, thinking that they could because they were being approved for the loans. The plan to help the economy looked good in theory, but when put into practice it didn’t pan out as expected, and many were wondering why inflation was running flat when the money supply was increasing. The article highlights that the money went into the stock market and did not circulate in the real economy as expected. The article also highlights the relationship between the flat trending inflation and the increase in the money supply. Bonds were going to increase in price since the interest rates were decreasing, and more people put money into the stock markets. By looking at the events of 2008 we can use the information gathered to make educated predictions for the future of the economy as interest rates and inflation are increasing.
The 2008 financial crisis brought many tensions to the economy. There were many at fault, but it is hard to pinpoint what exact reason it could have been for the crisis to take place. During the time banks were lending money to companies and individuals easily thinking it would boost the economy. People were being approved for mortgages with low interest rates that they could not really afford. Banks were not paying attention to the facts and details at the time and just approving people without any base. This caused problems for the people, banks, and economy overall. There was also inflation taking place, especially in the stock market. People were investing tons of money in the stock market at the time but it was not a good idea. Prices of stocks were much higher than they should be and when the stock market crashed in September 2008 it created a catastrophe in Wall Street. The stock market crash and housing market crash made the financial crisis of 2008.
The article explains that the 1992 Housing and Community Act, created a way for banks to pretty much approve anyone. Which is what lead to the 2008 housing market economy to crash and it also didn’t help that the people getting the houses knew they couldn’t afford them. It all adds up to me now, as to why a lot of people during that time especially contractors, going bankrupt. At the same time most of that money was never loaned out due to new regulations from the Dodd-Frank act of 2010. The economy till this day is still recovering from that bad housing bubble because lenders look your credit history and see you defaulted on a mortgage loan. Fast forward to 2018 the housing market is booming and lenders are much stricter, really looking at your debt to income ratio and many other things. Inflation also impacted the stock market and jobs negatively. Looking at the intention of Benarke’s plan as a whole, it wasn’t horrible but it did have the best of intention to put money back out into the economy.
The article effectively displays the negative effects in our economy when the government allows so many people to borrow money. The Housing and Community Act established in 1992 created a market crash because the government was lending out too much money to people trying to buy homes. This led to people buying homes they could not afford. Lowering the interest rates on the borrowing increased the money supply in the short-run and made privately owned banks borrow more from central banks. In the long- run however, prices inflated and caused the money supply to decrease while the demand was still increasing. This is where the problem lies in our economy of borrowing. I believe that the act of borrowing is efficient in the short-run but should be revoked. Overall, Benarke’s plan may not have worked entirely the way it was planned but it still did have positive outcomes. The article states that the plan could have had a more positive outcome if the recovery of the economy actually got some direct help.
The article emphasizes how the government allow the citizens to borrow money in 2008 to purchase houses and they know the economy is about to crash. Also, the banks offer lower interest rate and less strict policies towards the applications. The banks give out loans and borrow more money from the Federal Reserve. But when it comes to the financial crisis, the government wasn’t the problem. It was lack of government, precisely the failure to impose the necessary regulatory structure on the shadow banking system. A lot of the narrative of the financial crisis has been that this [loan] origination process was broken, and therefore a lot of marginal and unsustainable borrowers got access to funding. In our opinion, the facts don’t line up with this narrative. Calling this crisis a subprime crisis is a misnomer. In fact, it was a prime crisis. Behind all this is the reality that the massive expansion of the financial sector is not contributing to growing the real economic pie. As Gerald Epstein, an economist at the University of Massachusetts has said: “These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.” In the expansion of the GDP, the development of the financial sector counts as an increase in output.
The article itself is very resourceful, the graphs depict how supply and demand along with inflation work. In the article it mentions how the housing act of 1992 was a way to make properties affordable while also making the economy stable with minimal inflation, this was a way for the economy to come up but instead it affected it in the total opposite way by causing inflation rates to not only rise but the market was also affected because the government was allowing too many people to borrow money. Which eventually led to the financial crisis of 2008, and caused the government to make it harder to borrow money but this they finally got what they were looking for, a system was created.
The article rightly investigates and attempts to explain the economic crisis of 2008. Personally, the extent of knowledge I had previous to reading this article was simply that the housing bubble negatively impacted the economy, but this article has made it evident that there were many factors at play during the span of 2008. The graphs provided by the article display the money demand theory and the projected flow of money into the economy through loans; the article however, faults the lack of these actions to the Dodd-Frank Act of 2010. The economic crash can additionally be attributed to the over-evaluation of stocks and lending money to homeowners unable to afford their payments in the long run. The lack of government regulation into the economy only further prolonged the stagflation that plagued the economy. The author’s agenda to explain the economy’s future performance in regards to bonds is made prevalent through its comparison to its prevalence in the economy during the previous decade.
This article is a very good illustration of the financial crisis that occurred around 2007 to 2009. It began all the way back in 1992 with the implementation of the Housing and Community Act which encouraged banks to make buying houses more attainable to those who could not otherwise afford it. The creation of mortgage-backed securities and subprime mortgage loans ultimately led to the market crash in 2008. High-interest rate loans were being given to home buyers with a very high credit risk. In an attempt to remedy the situation, the Federal Reserve decided to increase the money supply and lower interest rates with intentions to increase the short-run demand for money as well as stimulate inflation and an increase in investment purchases. This was the plan in order to re-start the economy; however, instead of the excess money going into loans, they were invested in stocks. This is obviously not what was intended, although it seems as if things in the economy usually do not go as planned anyway.
It’s very interesting how we believe what we put into the economy is exactly what we’d get out of it. Economists have always seemed to use the trickle down method when it comes to pouring into the economy. When the market was attractive for homeowners, surely there were many who could’ve affected change for others to realize home ownership wasn’t the best idea at the time. The government should not have put people in jeopardy by allowing them to enter into loans that they would not be able to afford and come up with some real options to assist rather than tear down the economy.
In 2008, when the economy and the housing market took a turn for the worst, I was really young and did not know what exactly was happening. My father’s bussiness took a hit because he does loans for people trying to buying houses, so I did not what was happening to the economy at the time. However I knew something was happening because it was affecting my family’s life and it was not good. By reading the article I learned about The Housing and Community Act of 1992. On paper this sounds like a great plan, every American should be able to own a house or own property. When something like that is preform poorly it could end up like how 2008 went and cause major set backs not only to the economy but to peoples livelihoods. Later on in the article it goes on to talk about stocks and bonds. My knowledge on this subject matter is little to none, however I did learn in my English class last semseter that stocks are more of a risk than bonds. So if bonds become more attractive, personally I would invest in more bonds than stocks.
This article broadened and helped my knowledge of the economy and how the US people were affected by mortgage loans from the banks. In 1992, the Housing and Community act was made in hopes to help banks make buying a house more affordable. The entire idea of it was only good for short term and not for the long term. When people would go to get a loan for a house their interest rates would increase so much all it lead to was inflation. I think during the housing crash, the people who got loans were not financially stable enough to even make more money. People were buying houses they couldn’t afford due to being approved on loans they should never have been approved for. There was policies implemented to try and reverse this crash but how much can you actually reverse if so many people are in debt. The economy didn’t receive the right amount of help that it needed during this time which was a long road to a very slow recovery.
When I was about 7, in 2006, my parents and I moved from California to Texas because the rent here is cheaper. I still remember that about a couple of years later, I’m assuming 2, a lot of my family members started to move to Texas in hopes to find a more affordable home. Since I was a child, I obviously did not understand the circumstances the economy was going through. This article helped me better understand how the market crash in 2008 affected the United States. The fear of inflation caused a sort of chaos among everyone and it made it hard for people to purchase and sell their homes. Before the economy crashed, banks were also borrowing enormous amounts of money in order to be able to loan to potential home owners. After the crash, banks were also faced with a big problem! With more people taking out loans than people paying off their debt, they were not able to function efficiently.
This article has well informed me of how the economy has tried to start a process to better the economy and how it had become broken. Reading this made me think that the interest rate will increase or decrease depending on how the economy’s performance is doing. At the beginning of the article gives information about the year 2008 where economic recession had started to occur. When the banks were borrowing money, it caused a rise in the inflation level. It was too good to be true, and many people had figured out that after borrowing so much money, a lot of money did not enter into the economy. The theory was soon showed to be incorrect because of the continuous regulations to prevent money from being lent. The article helped me to understand the relationship between the stock market and inflation. I think if the government had paid better close attention from the beginning the situation in 2008 would not have occurred. From the given event in 2008 has brought more information that can give better aid towards the future and hope not to repeat the same situation.