Economic experts explain financial crisis
Jack Willems
Issue date: 10/31/08 Section: News
A panel of economics professors attempted to explain different aspects of the world financial crisis Tuesday night at the Donald W. Reynolds Center. UA student Stuart Shirrell moderated the panel.
John Dominick, one panel member, explained how the financial crisis began. In 1938, the U.S. government created Fannie Mae for the purpose of buying home loans from lenders, Dominick said. After Fannie Mae was sold to private stockholders 30 years later, Freddie Mac was created in 1970 for the same purpose.
Because they could keep selling loans to these government-sponsored enterprises, lenders could make many loans based on a small sum of money, he said.
Home loans traditionally had been safe investments because banks applied high underwriting standards to such loans, but this incentive was less when the loan was sold and the original lender had no direct interest in whether the loan defaulted, Dominick said.
The government-sponsored enterprises started pooling home loans and selling them as bonds to other banks, and investors that normally would not buy home loans would buy these bonds, including foreign investors, Dominick said.
"We exported the crisis in this fashion," he said.
Fannie Mae and Freddie Mac grew rapidly, but they would not invest in subprime mortgages, Dominick said. Later, under pressure from members of Congress, Fannie Mae and Freddie Mac began buying subprime mortgages. Finally, neither enterprise had enough capital compared to its loans, Dominick said.
To investigate the intertwining of politics and lending, a special panel needs to be appointed to investigate both enterprises and Congress, he said.
"When it comes to running banks into the ground, the federal government is batting 1.000," Dominick said.
Raja Kali, another panel member, explained the impacts of the crisis on the financial market. Lending between banks has gone up, banks have merged or collapsed and the yield of treasury bills has fallen, he said.
John Dominick, one panel member, explained how the financial crisis began. In 1938, the U.S. government created Fannie Mae for the purpose of buying home loans from lenders, Dominick said. After Fannie Mae was sold to private stockholders 30 years later, Freddie Mac was created in 1970 for the same purpose.
Because they could keep selling loans to these government-sponsored enterprises, lenders could make many loans based on a small sum of money, he said.
Home loans traditionally had been safe investments because banks applied high underwriting standards to such loans, but this incentive was less when the loan was sold and the original lender had no direct interest in whether the loan defaulted, Dominick said.
The government-sponsored enterprises started pooling home loans and selling them as bonds to other banks, and investors that normally would not buy home loans would buy these bonds, including foreign investors, Dominick said.
"We exported the crisis in this fashion," he said.
Fannie Mae and Freddie Mac grew rapidly, but they would not invest in subprime mortgages, Dominick said. Later, under pressure from members of Congress, Fannie Mae and Freddie Mac began buying subprime mortgages. Finally, neither enterprise had enough capital compared to its loans, Dominick said.
To investigate the intertwining of politics and lending, a special panel needs to be appointed to investigate both enterprises and Congress, he said.
"When it comes to running banks into the ground, the federal government is batting 1.000," Dominick said.
Raja Kali, another panel member, explained the impacts of the crisis on the financial market. Lending between banks has gone up, banks have merged or collapsed and the yield of treasury bills has fallen, he said.
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