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When The Bubble Burst Essay

1539 words - 6 pages

By the time I arrived state side from my second tour in the Middle East the housing bubble had already burst. I noticed a drastic change in the way that many of my friends and family were living. Several of my friends that worked in real estate had sold their boats and seconds houses. My own stock portfolio had lost a third of its value. My sister and her husband had defaulted on their home mortgage leaving them scrambling for a place to live. I saw that greed a huge factor feeding the housing crisis, yet I didn’t know which side was to blame. My sister and brother in-law wanted more house than they could afford, and the bank was willing to lend them more than they should. This crisis sent the government into action to avoid what many were calling the greatest financial crisis of our time. Although many experts suggest an economic depression was imminent without the Troubled Asset Relief Program (TARP) many of the funds were used poorly because the investment banks didn’t acknowledge their risky investments, the funds should have directly helped consumers hurt by the mortgage crisis, government financial relief efforts have had a minimal effect on the economy.

The Troubled Asset Relief Program was created during the financial crisis of 2008. The programs purpose was to buy bad assets from banks in the form of a low interest loan and transfer ownership to the federal government in an attempt to unfreeze credit and create liquidity. In return the government received non-voting ownership of the assets plus interest on the loan. The bad assets were a large number of mortgages and consumer loans that were converted into bonds that were backed by real estate or other property, another words if the borrower defaulted on their loan, the real estate that backed that loan would belong the bond owners. The holder of these securities called mortgaged backed securities (MBS) could then recover a portion of the loan depending on the value of the property; which usually turned out to be lower than the amount of the loan. The bonds were then sold to financial institutions for high fees, and the institutions collected the all of the remaining mortgage payments. This gave incentive to banks acting as a middleman to make as many loans as possible thus collecting more fees. Michael Boskin Professor of Economics at Stanford University suggests banks have become increasingly complex network for generating a profit and have become heavily leveraged in a wide variety of investments. The traditional model of people depositing money into a bank and then lending that money at a higher rate to generate a profit has changed. (Boskin 44)

Mortgage-backed securities were bought up by various investment firms and fund investors, and offered various rates of return based on the risk the investor wanted to take. The safest parts of the bonds were the senior level and offered the lowest interest rate, but the investors in these were surest to recover from their investment....

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