The Note On The Banking Crisis

1254 Words Jul 5th, 2016 6 Pages
The Banking Crisis The Banking Crisis, 2010
Although there are multiple opinions on the causes of the banking crisis, there is one thing on which there is general agreement. If banking were still practiced as it was by George Bailey in the movie It 's a Wonderful Life, the crisis would not have happened.

To understand why the crisis occurred, it is useful to understand the chain of events that contributed to it and the role each played. This chain transformed the slightly stodgy, conservative banks of George Bailey 's day to the high-stakes world of Wall Street, where large fortunes could be made with financial innovation.

The first step in the chain dates back to 1938, when the Federal National Mortgage Association (Fannie Mae) was established by the Franklin Delano Roosevelt administration to provide funds to banks so that they would be able to loan potential homeowners money to purchase their homes. The Federal Home Loan Mortgage Corporation (Freddie Mac) was created in 1970 to buy mortgages, repackage them, and sell them to investors. With the creation of these institutions, the concept of securitization was introduced, and the dynamics of banking changed dramatically. Prior to the 1970s, bankers knew their customers, and borrowing was a simple process. When people wanted to buy a house, they applied for a loan from their local bank. The loan stayed with the bank, and the buyer paid the bank back over a period of years. However, in the 1970s, there was a greater…
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