Who Was to Blame for the Banking Crisis?

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the system led to an eventual meltdown. The banking crisis began in USA and more precisely in its subprime mortgage market. The introduction of the Collateral debt obligations, the rising prices of property and the overall seemingly attractive, but actually toxic assets, all led to the eventual collapse of the economy. Government-sponsored enterprises, like Fannie Mae and Freddie Mac, facilitated the boom of this market, by supplying households with modest income with low rates of interest and small down payments. This led to an increase in prices and attracted many new investors. Mortgage-backed securities and CDOs, issued by big investment banks took over the GSEs business. MBSs are basically securities, backed by mortgages, which represent the claim of the cash flows on that mortgage. CDOs are also asset-backed securities, in which the payments to the investor are organized in different tranches, which usually have different credit ratings. CDOs value is based on a pool of securitized debt, like car loans, student loans, bonds, etc. These instruments are often criticized in hindsight, as it is now clear that they were not priced accordingly to their actual risk, and their complexity was not that easily comprehended by many of the