Political Science 2211E Lecture Notes - Lecture 13: Fiduciary, Free Market, Community Reinvestment Act

• School: Western University
• Department: Political Science
• Course: Political Science 2211E
• Professor: Adam Harmes

Document Summary

In 2001, fed lowered interest rates due to dot. com bust and 9/11. Tried to lessen shock and maintain trust in the institutions. Rising prices encourages people to borrow to invest. Money pours in and leads to bubble. Low interest rates gave banks too much money to lend. Community reinvestment act forced banks to lower lending standards. Fannie mae and freddie mae subsidized subprime mortgages. Caused banks to issue more of them. Moral hazard when a safety net leads to risk taking. Caused banks to loan too much as thought they would get bailed out. Government intervention, not free markets, caused the bubble: too low interest rates, housing subsidies, previous bailouts. Us housing bubble was cause by all the deregulation that happened during the 80s, not government intervention. Free financial markets gave banks too much money to lend out. Deregulation encouraged excessive risk taking and predatory lending. Banks had too much money to lend because of the deregulation of the derivatives.