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Housing Bubble Review

Explore the key factors that led to the housing bubble, from risky sub-prime mortgage loans to the government's response. Learn about the collapse of Lehman Brothers and the impact of deregulation on the market. Discover how the housing bubble ultimately resulted in a financial crisis.

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Housing Bubble Review

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  1. Housing Bubble Review #1: What is a mortgage? It is a loan to buy a house.

  2. Housing Bubble Review #2: How was a “sub-prime” mortgage different from a “prime” mortgage? To get a prime mortgage, a person had to have good credit and had to make a down payment of 20%. People were getting sub-prime mortgages even if they had bad credit without putting any money down.

  3. Housing Bubble Review #3: Why did banks make these risky sub-prime mortgage loans? Banks got a check for every loan they made, so they had an incentive to crank out as many loans as they could. Then they sold the loans to other banks, so they transferred the risk to others.

  4. Housing Bubble Review #4: How did the actions of the Federal Reserve contribute to the housing bubble? By lowering the Fed Funds Rate to 1% after the dot.com crash, they made it really cheap to borrow money which led many more people to take out loans.

  5. Housing Bubble Review #5: What incorrect assumption was at the heart of the housing bubble? That housing prices would always continue to go up.

  6. The “Great Recession”: The Government’s Response

  7. Wall Street Firms Bankruptor Bought Bear Stearns Merrill Lynch Lehman Brothers FNMA (Fannie Mae) & FHLMC (Freddie Mac) Owners of many home mortgage loans Bailout of General Motors and Chrysler U.S. Government took them over AIG Insurance Company Crash of the Titans— Paulsen/Lehman BAILOUTS OF COMPANIES Mergers

  8. TARP = Troubled Asset Relief Program • passed by Congress, okayed by Pres.Bush in October 2008 • $700 BILLION Government program of forced lending to banks to make sure the nation’s banks didn’t collapse J.Stewart clip— 700 b.bailout G.S. Propped up J.Stewart interview re: use of TARP money

  9. The Federal Reserve • The Federal Reserve responded to the financial crisis by lowering interest rates from 5.25% to 0.0%! • They hoped this would lead more people to borrow money to buy homes, cars, etc. Ben Bernanke Former Chairmen of the Fed Internet Bubble Collapse Housing Bubble Collapse

  10. President Obama’s Plan President Obama and the Congress passed a $787 BILLION fiscal stimulus package in January 2009. This included a combination of: • Tax cuts to put money in peoples’ pockets • Government spending to hire people and provide a safety net Stimulus package discussion starts 1:34 in

  11. Housing Bubble Review #1: The collapse of what company triggered the popping of the housing bubble? Lehman Brothers

  12. Housing Bubble Review #2: What is the general term for removing government restrictions on what businesses can do? Deregulation

  13. Housing Bubble Review #3: What did the Glass-Steagall Act do? It put up a wall between investment banks and personal savings banks.

  14. Housing Bubble Review #4: The selling of what type of derivative at first earned AIG a lot of money, but ultimately led to its collapse? Credit default swaps

  15. Housing Bubble Review #5: What is another name for a Collateralized Debt Obligation (CDO) that is based on home mortgages? A mortgage-backed security

  16. Caused by Credit Bubble Led to House of Cards

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