Housing Crisis? Was it government abuse (crony capitalism) or an unencumbered free market that caused it?

B. Crony capitalism. Thank you for the great explanation.

The core problem was that investment risks were not being assessed properly. They were underestimated. This problem occurred at all levels, from the very expensive financial investments all the way down to the people who bought mortgages they couldn't afford that formed the backbone of the expensive investments.

Having a central bank as a lender of last resort encourages this idea that money won't run out, which is false. That is also a major contributing factor.

Regulators will complicit in this lack of regulation by not properly assessing the risks being taken either. Regulation failed to prevent this, basically.

The situation would resolve itself by ending central banking. Change the rules, make it so that money can run out, and when it does, you are done. No promises or even a chance of being deemed "too big to fail" and being given another pile of money to waste. You can do this with or without intrusive regulations.

You can't choose one or the other, portions of A and B contributed to this.

The CRA did not require banks to make bad loans. It required baanks to stop the practice of red lining. It forced banks to hand out loans to qualified buyers no matter where the property was located. The majority of CRA loans have not defaulted. The ones who defaulted were written by companies like CountryWide who were not regulated like banks and were not subject to the CRA. Once loan originators found that they could write loans and package them as securities and force the rating agencies to provide high ratings, it was off to the races. the fact that the originators didn't have to hold on to any of the loans meant that there was no risk involved. At least not to them. The losers were the pension funds and investors who bought these toxic products after relying on the rating agencies and financial advisors to provide sound advice. We now know that while they were selling these products, they were also betting that they would fail. Thus they picked up money on both ends of the transaction. Win/win for them, lose/lose for us. And nobody has or will go to jail for fraud. It is now back to business as usual now that we socialized their private debt and kept profits private.

Fannie Mae and Freddy Mac caused it. What a surprise giant government run entities caused a crisis, so now the politicians want to give them MORE MONEY and MORE POWER.

A housing "bubble" does not happen in a true capitalist system because prices will always be at an equilibrium set by the market forces and will then SLOWLY adjust as the forces dictate. If the government tries to intervene and keep prices artificially low or high it creates a bubble since they are so far cut off from the equilibrium price.

Free market capitalism It gives us all a chance tu prosper where crony capitalism means you will need to be friends with those in power to get ahead.

Government decided that everyone needed to achieve the "American dream" of home ownership, so there you have it. The free market responds to government policies, and it cares not about stories about "disenfranchised" people who bit off more than they could chew and now find themselves trying to stay in "their" home that they are not paying for.

With the mortgage interest deduction and countless other schemes to goose the housing market, government has had a decades long war on renters.

It was a combination of irresponsible people at banks giving out loans that they knew would not likely be paid back and irresponsible home buyers who lived well beyond their means. It was also a failure at the government level to catch this problem in time.

It was actually a combination of both greed and crony capitalism, not to mention the stupidity of many purchasers.

The housing collapse, was caused by many factors. Here are the key ones in my opinion.

Loss of buying power. Since the late 90s foreclosures have been increasing sharply. Before Bush even took office we were already equaling foreclosure rates from the recession and that was during an economic boom. While IT and engineering and related fields boomed people in blue collar jobs saw stagnant wages and increasing predation of jobs and collapsing wage scales from illegals. Taxation being one of the biggest factors in the decline of standard of living. Outsourcing by 99 was already impacting IT as was H1/L1 visa abuse. By 2003 it'd devestated high tech jobs and just about wiped out middle management in the US as well as exporting millions of mid level jobs If people found a new job it was for considerably less than what they used to make.

Predatory lending practices. Variable rate mortgages, teaser rates, full time foreclosure mills all created millions of foreclosures out of people who otherwise would have not been foreclosed on. Tax increases at local and state levels to make up for the declining revenue from lost jobs and lower pay rates fro those who still had jobs further aggravated this problem. Many companies such as America's service company didn't care if you paid them every penny and on time. They foreclosed on every mortgage they got their hands on.

House flippers had saturated the market. As jobs went away more and more former White collar workers turned to flipping houses to make ends meet as they could no longer find work in their chosen fields and flipping houses became a reasonable way to make a living. The high rate of foreclosures meant a steady source of houses to flip and a hungry housing market meant a quick profit for minimal investment. Then the market dried up leaving many of these house flippers unable to pay the notes and holding mortgages on houses that suddenly were worth less than they paid for them.

Monopolies in the apt business made buying a house the only viable option for housing. Strict rules including in far too many apts banning children and collusion to blackball even people who proved in court they were in the right not the apt complex in disputes left many who could not afford buying a home no other option.

With the housing market done in and so many people having lost their jobs many found themselves having to move to take whatever work they could find but stuck in an upside down mortgage in a market where houses just were not selling. So many chose to just walk away rather than try to eat a loss they couldn't afford.

The other factors are minor ones. The reduced requirements to buy a home allowed for some bad loans. It was a minor factor however compared to the others.

Proof of this is easy to find. Foreclosures mirrored job losses.

When you look at the income of those who have been foreclosed A third of them are people making more than 100k. Most sub prime loans are too people with less than 50k of income but that's barely a third of foreclosures. If sub prime loans were at fault then %70 of foreclosures should be in the lower income brackets but it's not. Foreclosures until recently were quite rare in upper income brackets. Today they are as common as in the poorest income brackets. Another telling stat was foreclosures among non-residence homes during the 07-08 period. They were unusually high. They are still high.

The last piece of evidence was the high rate of foreclosures among people who were 10+ years into their note. If your a bad loan risk you don't make it 10 years. Bad loan risks default in the first year or two normally yet the overwhelming majority of foreclosures today are people more than 3 years into their notes.

So in my opinion neither. Irresponsible economic policies by a succession of presidents including the current one and a decidedly anti-American attitude in Congress both Republican and Democrat is the cause of the housing collapse.

The Community Reinvestment Act required financial institutions lend money to people who would not be able to pay it back. The result was inevitable.