Eugene F. Fama on the government’s role in the subprime mortgage meltdown

(pensive music) – The financial crisis was caused by the subprime mortgage market, but that came about because beginning in the '90s, the government was trying to foster home ownership Because they thought that was a way to get the people who weren't getting good jobs to have enough wealth so that they could consume more

The government was pushing to relax mortgage lending standards So, things that wouldn't have qualified for government insurance started to qualify It pushed Fannie Mae and Freddie Mac to qualify lower-grade mortgages for government insurance Of course, if you give me insurance on a mortgage, I'm gonna issue it You tell me that's fine, these are the incentives you put out there, people respond to them

After the fact, you can't say you shouldn't have responded to them once you create the incentives to do so (laughs) So, they were pushing this all along the way to loosen mortgages standards, basically for 20 years And the end result of that was the subprime meltdown, so that was basically a government-created problem It's kind of ironic that the person who was pushing this hardest was Frank, Barney Frank, from the early '90s And then he got to write the laws and blame other people for it, so (laughs) it's kind of the usual thing

Government creates the problem, and then it 'fixes' it (music fades out)

Source: Youtube

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