Why Did We Have All Those Bailouts?

By Author: Lawrence Roberts
Total Articles: 4762
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It all starts in the housing market. Realtors peddle fantasies of unlimited wealth that leads to people wanting to overpay for houses. The desire for real estate at any cost provides an opportunity for lenders and mortgage brokers to make huge origination fees if they can lower standards and qualify more people. Appraisers use the comparative-sales approach which justifies current pricing based on the irrational behavior of buyers. Investors in mortgage backed securities enable the originations by purchasing any loan they can get. Default insurance companies like Freddie Mac, Fannie Mae and AIG provide false assurances to investors that they can insure their losses. Ratings companies provide dubious ratings that puts even more confidence into investor's decisions. All of this together leads to a massive inflation of house prices.

People who overextended and overpaid for real estate cannot afford their payments. They are insolvent. This leads to defaults which leads to forced sales which leads to lower prices. The lower prices distresses more homeowners leading to even more forced sales and even lower prices. The defaults ...
... and resulting losses cause lenders to become cautious and tighten lending standards. This leads to fewer qualified buyers and a reduction in demand leading to even more price drops. The losses by lenders causes default insurance providers to pay claims. They have written more policies than they can cover, so they go bankrupt. The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. It also leads to a dramatic slowdown in our economy as the circulation of money slows and commerce dries up. All of this leads to massive bailouts of anyone who provided or insured loans.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Why Did We Have All Those Bailouts?.