The Housing Crisis: What Happened and Why?

The Housing Crisis

Franklin Allen and Glenn Yago

From the initial rumblings in the subprime market to the government’s unprecedented bailout programs, the turmoil in the U.S. financial sector sent shockwaves throughout the global economy beginning in 2007.

The genesis of the housing bubble emerged from the ashes of the dot-com bust. To alleviate the downturn, the Federal Reserve drastically reduced interest rates, and the era of easy credit was under way. Other nations with massive foreign reserves were drawn to invest in the United States, and, with Treasuries offering only meager returns, they began to eye mortgage-backed securities as a “safe” vehicle offering higher yields. The appetite for these securities proved to be insatiable, and the ...