The Subprime Mortgage Crisis: Exercise in Politico-Economic Fundamentals
Initial situation (until 1980s):
Lenders have profit motive
| |
| |
| V
| Lenders establish credit ratings
| | \
| | \
| V V
| Good-credit people Poor-credit people
| can get loans can't get loans [Capitalism ends here. -K]
| |
| |
| Meanwhile (1990s): |
| |
| V
| Some politicians push Poorer people are
| for home ownership disproportionately
| and "affordable housing" racial minorities
| | |
| | |
| V |
| Gov't changes incentives V
| for Fannie Mae and Claims that lending
| Freddie Mac via standards are racist
| bailout insurance /
| / | \ /
| / | \ /
| / | V V
| V | Pressure on lenders to
| Lenders can make | lower standards for
| higher-interest loans \ poorer-credit people:
| to poor-credit people \ "Home Mortgage Disclosure Act"
| and then sell those \ & "Community Reinvestment Act"
\ loans to Fannie Mae \ |
\ and Freddie Mac \ |
\ | > Fannie Mae and |
\ V Freddie Mac officials |
\ Higher-interest loans lobby hard to |
\ to poor-credit people prevent oversight |
\ become profitable V
\ | Higher-interest loans
\ | to poor-credit people
\ | / become politically
\ | / necessary
\ | /
\ | /
V V /
Then (mid 2000s): Lenders make <----------------
many more loans
to poor-credit people
|
|
V
Poor-credit people
begin defaulting on
loans in large numbers
|
V
Ripple effect: Fannie Mae,
Freddie Mac, and private lenders
start losing big money
|
Now (late 2000s): |
V
Some politicians and pundits
blame "greedy lenders"
for making bad loans:
"The free market has failed."
/
/
The government takes over /
Fannie Mae and Freddie Mac < Version 1
Stephen Hicks, 2008
http://www.stephenhicks.org/

