The Return Of Depression Economics And The Crisis

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Paul Krugman an American economist, Nobel Prize Winner and Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and is ranked among the most influential economic thinkers in the US.1 In his book The Return of Depression Economics and the Crisis of 2008 Krugman examines the economic crisis of 2008. He asserts that there were many tale tell signs and warnings throughout history that could have mitigated the crisis. Krugman contends that through history all financial crisis had common elements. The panic of 1907, the Great Depression, the Savings and Loan problems in the 1980’s, the Latin American Crisis and the Asian Crisis of the 1990’s all shared the…show more content…
Greenspan and a bi-partisan congress, the Glass-Steagall Act which was initiated in 1933 to separate and regulate commercial banks and investment banks differently was repealed, thus allowing commercial banks to act like investment banks with little oversight.3 Without regulation to worry them, banks found a favorable environment to take on more risk than otherwise allowed. This leads into the answer of why banks would loan to people of poor risk.
With loose regulations investment banks were buying MBS’s from banks and mortgage brokers, repackaging and reselling them to institutional investors, insurance companies, pension funds, university endowments and hedge funds.4 Without worrying about if or when a borrower would default on a loan, banks and mortgage brokers qualified people for loans who would under normal circumstances would never qualify. After September 11, 2001 Allen Greenspan lowered interest rates, resulting in a frenzy of new home loans between 2001 and 2004. Many mortgages financed with a variable interest rate to people who bought much more home than needed at a time when home values had already increased at an unsustainable rate. Borrowers not acting responsibly, overleveraged themselves with teaser rates and low down payments, achieving the American dream had never been so easy. Banks and mortgage brokers were incented to approve as many mortgages as possible as they were making money on both ends. A buyer paid origination
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