So that concludes my blog on the causes of the US subprime
crisis. I believe all of the factors which I have talked about have contributed
with most of them intertwined with each other. The passing of the CRA
encouraged subprime lending, which put Fannie and Freddie under pressure to
make these profitable loans from their own shareholders. Securitization
facilitated the extraordinary growth of the market, a market which was tricked
into a false sense of security by the AAA ratings given to these securities.
Everyone has their own ideas on the primary cause of the
crisis but I firmly believe that the buck stops with the credit rating
agencies. They had a duty of care when rating these securities but were unfortunately
blinded by greed. The infuriating aspect of this is that they received no
punishment for misleading people, causing many pension and retirement funds to
be wiped out. However these agencies continue as normal, recently downgrading
sovereign debt of the US and many Eurozone countries. The ironic thing is that
much of this sovereign debt is due to the cost of bailing out banks, which
needed to be bailed out due to the large amount of toxic debt on their books
which at one point in time was given an AAA rating by these same agencies.
Since writing this blog I have come across the paper by
Hickson and Thompson 2006 which believe that bubbles, such as the housing
bubble are “investor deceiving frauds”. I hope to revolve my next topic around
this idea and investigate if this is true when it comes to the current housing
bubbles in the US, and in Ireland. Thank you for reading my blog and I
encourage you to voice your opinions regarding any of my posts and get some conversation going.