Cause and Effect: Government Policies and the Financial Crisis

Critical Review: A Journal of Politics and Society 21 (2-3):365-376 (2009)
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Abstract

ABSTRACT The underlying cause of the financial meltdown was much more mundane than a “crisis of capitalism”: The real origins lay in mostly obscure housing, tax, and regulatory policies of the U.S. government. The Community Reinvestment Act, the affordable‐housing “mission” of Fannie Mae and Freddie Mac, penalty‐free refinancing of home loans, penalty‐free defaults on home loans, tax preferences for home‐equity borrowing, and reduced capital requirements for banks that held mortgages and mortgage‐backed securities combined with each other to create the incentives for both subprime lending and the housing bubble that eventually led to the financial collapse.

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