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The housing bubble burst because of many known and unknown factors. We know that one primary cause of the crisis was due to the offering of mortgages to sub-prime borrowers (those without the steady, significant income). This is just a bad idea where it's only a matter of time until the borrower stops paying.
The banks made these loans because they knew they could sell them to Fannie and Freddie, the two government-backed agencies whose job it is to make home ownership possible for more Americans. Because Fannie and Freddie would take these hot potatoes loans off the banks' hands, Fannie and Freddie should be given substantial blame for the meltdown.
This is not to excuse the banks. As history would have it, banks have not always been the most honest institutions that America has created. For example, Lehman Brothers, a huge investment bank that went bankrupt in 2008, deceived the public by changing its financial statements to its favor at the end of each quarter. Lehman Brothers wanted people to paint a picture of the corporation that was rosier than it truly was. Even today, J.P. Morgan Chase and other large banks are in the news paying fines and agreeing to settle accusations of wrongdoing.
Perhaps the credit rating agencies should be just as accountable for the bursting as the banks are. The three major credit rating agencies go by the name Standard & Poor's, Fitch, and Moody's. Their job, as credit rating agencies, is to warn consumers about potentially dangerous investments so that they can avoid investing in them.
It turns out that the banks not only sold sub-prime mortgages to Fannie and Freddie, but they also bundled them together into "securities" and sold them to all types of investors. It is these investments the credit rating agencies should have warned about by giving them low ratings. Instead, it game them A ratings!
Why did they give time-bomb investmetns such high ratings? Consider that the rating agencies are actually paid by the banks which are creating the mortgage investment bundles. They rated the same companies that paid them! Imagine it this way: a boss gives his secretary an evaluation form and tells the secreatry to rate him. The secretary wants to make as much money as possible, so he's going to give his boss the highest rating possible, regardless of how well the boss runs the business. In this metaphor, the secretary is the rating agencies, and the boss is the major banks. It's a corrupted and confusing system, and it really needs to be changed before other people's lives are ruined by these companies.
In the end, it was the bank's fault for making loans it knew would eventually fail. At the same time, the credit rating agencies did not warn investors about the riskiness of these loans.. So, they're definitely responsible as well.
Standard & Poors finally showed some courage by slightly downgrading the debt of the United States government from AAA to AA+, which supposedly can never default because as a last resort it can print money to pay off its debts. Let's see if this downgrade sets a trend for the future.
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