Pepsionice . . .
The crux of the financial crisis was the lowering of the credit standards to take out a mortgage. It started with a laudable goal of removing the practice of redlining, where banks would not make ANY mortgage loans even to those creditworthy within the area they cordoned off. That led to the Community Reinvestment Act, where it was assumed that over time there would be some higher default rates but at least there would also be success stories.
The Clinton Administration changed the CRA compliance from comparing default rates among the various classes to being more of a front-end quota system. As long as housing prices rose that masked a lot of issues but eventually the housing market cooled.
When you lower lending rates at the bottom that also means lowering them throughout the credit curve. Many lower income earners were encouraged to take out mortgages, with little or no money down, poor documentation (remember the term Liar Loans?), etc. On top of that, a lot of speculation came into the market in the middle class and upper middle class as lenders were willing to lend based on the underlying value of homes the borrower already owned, a form of leverage that is akin to margin trading on Wall Street.
Banks were willing to go along with this due to what you referred to, the pooling of mortgages for seuritization, which took the credit risk from the bank and put it on the investor (in many instances foreign investors and borrowers who were not historically knowledgeable about US housing cycles). But this was tangential, not causative of the eventual crash. Mortgage pools were invented back in the late 70’s if memory serves as MBS Pools and was a legitimate investment if you understood the product.
Eventually, the political will to do anything to ‘prick the housing bubble’ subsided as the Bush Administration raised the alarm but frankly didn’t really do anything about it until it was too late. Fannie Mae was run by old Clinton Admin allies and members like Jim Johnson (the ultimate Washington DC insider on the Dem side, Franklin Raines and Jamie Gorelick of the Chinese Wall Memo fame) and they manipulated earnings to maximize bonuses (for example, Raines was forced to disgorge income in a plea bargain to avoid prosecution) while lobbying to reduce capital expenditures and requirements on their portfolio of loans.
Then eventually the whole thing implodes and housing price declines accelerated as forced sales and foreclosures shoved supply down the market’s throats and eventually you ended up with TARP. And an Obama presidency on top of that.
Hope that helps.
U forget the bundling of all the lousy loans, so they could be Securitised and then turned into derivatives, that were supported by Credit Default swaps, that were never accountedfor/margined properly.
So when it blew, it blew everything, especially AIG and if they went so did Goldman etc.....That was why TARP was needed, to bail out the crooks on Fall st....and the middle class is still paying.
Biggest hiest in history and no-one jailed.....