Question 10.0 (3/22/2011):
What caused the current U.S. economic crisis?
The answer was E: All of the above.
A variety of factors contributed to the current economic situation. The broad availability of cheap credit and the insatiable appetite of the American consumer fueled the purchase of first homes, second homes and even third homes. In addition, many Americans thought housing prices would rise forever, causing lenders, who felt secure with underlying collateral values (the houses) to loosen standards and consumers to purchase homes they couldn't afford.
Additionally, mortgage brokers were incentivized to sell mortgages. They were packaged by the banks into pools of mortgages sold to institutional investors so that the banks could earn a commission. Rating agencies were incentivized to "trust" the models developed by Wall Street since their fees came from them. Neither the mortgage brokers nor the banks were at risk if things went bad (or so the thinking went) because they didn't hold on to most of what they had sold.
Finally, low interest rates and the desire to earn extra pushed investors to channel funds into what were thought to be high quality investments. After all, they were endorsed by rating agencies. Such investments, however, turned out to be highly risky.
Question courtesy of Scott Fine, professor of banking and finance.
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