2008 Financial Crisis Case Study

The 2008 financial crisis has been described as the worst financial crisis since the Great Depression. Most economists agree that the crisis began in 2006, when housing prices began to decline, leading to the collapse of the subprime mortgage market in 2008. The subprime mortgage market had been in place since the 1990s, and lacked regulation. The lack of regulation due to corruption among mortgage securitization companies in the 1990s ultimately led the collapse of the economy 2 decades later. The financial crisis resulted in the US government engaging in a series of policies with the purpose of getting the economy back on track. In addition to adopting such policies, the government engaged in large-scale bailouts. The biggest bailouts included the government-sponsored enterprises Fannie Mae and Freddie Mac, as well as the insurance giant AIG. Many economists questioned why the government bailed out certain firms while letting others (like Lehman Brothers Holdings) crumble. This paper uses Bourdieu’s theory of fields and Fligstein’s theory of market stabilization to examine the history of mortgage securitization market leading up to the 2008 crisis as well as the government’s policy responses. About 30 years prior to the financial crisis, the creation of mortgage-backed securities had revolutionized the mortgage business. To add a bit of clarity, a mortgage-backed security is an asset-back security that is secured by a mortgage or a bundle of mortgages. The creation of these securities allowed Wall Street to buy loans made to people who were buying homes, bundle them together, and resell the bundle to investors. Although the act of making a loan for someone that wants to buy a home had always been the job of the banks, the introduction of the highly profitable business led to an influx of new lenders. These non-bank mortgage companies began taking control of the market share for home loans due in large part to government-sponsored enterprises, like Fannie Mae, and Wall Street banks who bought their mortgage-backed securities. Fannie Mae and Freddie Mac were amongst the biggest mortgage companies in the US before the 2008 crisis. …show more content…
They were both labeled as government-sponsored enterprises, meaning that Congress created them in order to provide financial services. Being that they were sponsored by the government, they were able to engage in riskier practices than most mortgage companies because they would be bailed-out if they ever failed. For example, whereas large banks had to put aside enough capital to cover 8% of their portfolio’s, Fannie Mae and Freddie Mac only put aside a fraction of that. As a result, they were able to hold more debt than their competitors and became the dominant actor in the mortgage securitization market throughout the 1990s. Surprisingly, the government played a large role in the rise of non-bank mortgage companies. In the 1990s, due to a decrease in American home ownership, the government pushed heavily for policies that encouraged home ownership. For example, during his second term as president, Bill Clinton revealed his National Ownership Strategy. The goal of the proposal was to increase homeownership by 8 million using strategies to help potential homebuyers who were unable to put down payments on homes. Although this proposal had good intentions, it facilitated an increase in subprime mortgage lending. Subprime mortgage loans are loans made to borrowers with low credit scores. Since their credit