[352] Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. She writes about the U.S. Economy for The Balance. With marketshare came bonuses and with bonuses came risk-taking, understood or not. After briefly discussing how mortgages were structured and traded in the pre-1990 period, it describes subprime mortgage lending, as well as other innovative mortgages issued in the 1990s. Hence non-prime securities could not be sold without ratings by (usually two of) the three agencies.[211]. This law included $700 billion in funding for the "Troubled Assets Relief Program" (TARP). The balance of payments identity requires that a country (such as the U.S.) running a current account deficit also have a capital account (investment) surplus of the same amount. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.[18]. [194], Derivatives such as CDS were unregulated or barely regulated. The subprime mortgage market is in free fall. [381] Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. [435][436] The FBI began a probe of Countrywide Financial in March 2008 for possible fraudulent lending practices and securities fraud. Their timing was perfect. [129] Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. [45], During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying the U.S. financial and economic system that contributed to the crisis. [421], On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. "[357], The crisis had a significant and long-lasting impact on U.S. employment. These entities were not subject to the same regulations as depository banking. Because the market for these assets is distressed, it is difficult to sell many MBS at other than prices which may (or may not) be reflective of market stresses, which may be below the value that the mortgage cash flow related to the MBS would merit. In the U.S., a foreign financial surplus (or capital surplus) exists because capital is imported (net) to fund the trade deficit. Krugman does agree that it is "arguable is that financial innovation ... spread the bust to financial institutions around the world" and its inherent fragmentation of loans has made post-bubble "cleanup" through debt renegotiation extremely difficult. The government sector includes federal, state and local. This incentivized agency rating analysts to seek employment at those Wall Street banks who were issuing mortgage securities, and who were particularly interested in the analysts' knowledge of what criteria their former employers used to rate securities. [324] On Dec. 16, 2008, the Federal Reserve cut the Federal funds rate to 0–0.25%, where it remained until December 2015; this period of zero interest-rate policy was unprecedented in U.S. It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. [279] In 2008, David Goldstein and Kevin G. Hall reported that more than 84 percent of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48 percent to insuring 24 percent of all subprime loans in 2006). They are less concerned with avoiding asset price bubbles, such as the housing bubble and dot-com bubble. [6][146] This "originate-to-distribute" model had advantages over the old "originate-to-hold" model,[147] where a bank originated a loan to the borrower/homeowner and retained the credit (default) risk. On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit. "[367], Economist Wynne Godley explained in 2004–2005 how U.S. sector imbalances posed a significant risk to the U.S. and global economy. DOI 10.1007/s10645-009-9110-0. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. Dozens of lawsuits have been filed by investors against the "Big Three" rating agencies – Moody's Investors Service, Standard & Poor's, and Fitch Ratings. Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. The authors of a study entitled "Did the Community Reinvestment Act Lead to Risky Lending?" [285] According to one analyst, "The SEC's facts paint a picture in which it wasn't high-minded government mandates that did the GSEs wrong, but rather the monomaniacal focus of top management on marketshare. [268] This idea manifested itself in "silent second" loans that became extremely popular in several states such as California, and in scores of cities such as San Francisco. The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. [309][310], The debate arises because this accounting rule requires companies to adjust the value of marketable securities (such as the mortgage-backed securities (MBS) at the center of the crisis) to their market value. By June 2006, the fed funds rate was 5.25 percent, pushing up short-term rates. On July 17, 2006, the yield curve seriously inverted. "[193], Author Michael Lewis wrote that CDS enabled speculators to stack bets on the same mortgage bonds and CDO's. Initially, the 1992 legislation required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing.

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