You can’t only blame the banks
Many are familiar with the housing crisis of 2008, but very few understand who the culprit was behind the malinvestment. In a truly free market, market distortions of this kind are nearly impossible and are corrected rather quickly. In 2008, to say the government didn’t play a role in causing the crisis would be ignorant. Barney Frank, who was chair of the House Financial Services Committee, forced lower underwriting standards throughout the housing finance industry. This allowed for banks to make deals with individuals that under normal market circumstances would never have purchased a house. We also had government backed mortgages which meant that the losses on homes would be socialized in the case that people failed to keep up with their mortgage.
But why did the party stop? Tons of people were getting homes and the prices were soaring, of course this was part of the problem. To make matters worse, the Federal Reserve had been lowering interest rates to artificial lows, unseen in American history. This meant that banks were offering rates at historic lows, you were thought to be a fool if you weren’t buying a house! However, all great things must come to an and and when the Federal Reserve raised interest rates, people couldn’t afford to pay their adjustable rate mortgages and the banks got stuck with the homes with nobody to sell them to.
Many people like to blame the banks for their recklessness, but who was truly reckless in this situation? If we look at this from the perspective of game theory, we see that banks had to make a decision of either offering these adjustable rate mortgages or not. If they didn’t offer the mortgages, they were missing out on a major opportunity to gain on giving out mortgages under the impression that the Federal Reserve would hold interest rates low for the foreseeable future. If they took place in the mania, they could score big. This is obviously a simplified view of the crisis, but it’s a view that shows that a “government saved us all” mentality doesn’t hold its own when they had their hands in most of the decisions made.
http://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/