The Note On The Banking Crisis

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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…show more content…
The act encouraged banks to lend to low- and moderate-income neighborhoods. While this was an admirable goal, some believe that to meet quotas established by this act, banks were forced to engage in imprudent lending. In the 1980s, coming off a recession, Congress enacted several laws designed to promote free enterprise by reducing regulations. One of these laws was the Alternative Mortgage Transaction Parity Act of 1982, an act that permitted the creation of adjustable rate mortgages, balloon mortgages, and negative amortization mortgages. These would be the types of mortgages that would create what became the subprime crisis, as buyers who did not qualify for standard mortgages, at prime interest rates, would be attracted to these higher-interest-rate mortgages and eventually default on them. The Tax Reform Act of 1986 eliminated the tax deduction for interest paid on credit cards, but retained the deduction for interest on mortgages. This act made home equity loans highly attractive to many consumers. Believing that their homes would continue to rise in value, homeowners took out home equity loans to finance such purchases as cars and home improvement, increasing the amount of debt owed on their homes and leading to an unhealthy amount of personal debt in the financial system. In 1970, debt was 60 percent of domestic personal income. Debt increased to 134 percent of domestic personal income by mid-2008. In 1999,
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