The federal reserve, while not necessarily the cause of the crash of the Housing Market in 2008, definitely contributed to it. Today I’m going to talk about how the federal reserve effected the housing market in 2008.
The first event in the sequence that led up to the market crash was in 2000, when the FED wanted to artificially stimulate economic growth by lowering the interest rates on mortgages in order to make it easier to borrow money from banks and make purchases on houses and the like. The general public just saw this as “oh, good time to buy house, let’s buy house now and not laterâ€, so millions of homes were purchased with a mortgage with these low interest rates. As interest rates rose higher, and more people started buying houses, and investors started thinking they could get lots more returns easily if they lent money to more people, so they lowered their standards and started letting people with low credit scores get loans, and that can never turn out well. People started defaulting on their loans, and so the banks just kept the property. The prices of homes, which had been climbing for some time, now started to drop because of all these new properties being sold by the banks. With the lower prices, the people who still had their loans realized that their houses were no longer worth what they were paying monthly for, and so more and more people defaulted. The market had crashed.
In short, the stock market mainly crashed because the FED lowered interest rates, and then did nothing to follow up and fix the mess that they had caused.