We all remember learning of the millions who lost everything during the Great Depression of the 1930’s. Savings, jobs and homes seemed to dissipate leaving the nation ravished in the process. Who would have thought we would all see something like that again? In comes the Great Recession; different name, but all the same symptoms. While The Great Recession officially only lasted two years, from December 2007 to June 2009, its effects still ripple straight into today. Eight million jobs were lost, and those were just the ones recorded. The real estate and stock market were utterly decimated, wiping out $18.9 trillion in household capital. Something that catastrophic leaves lessons in the minds of macroeconomic policy makers, as well as anyone concerned even slightly with the world of finance. Considering everyone is touched by such financial issues, these lessons resonate beyond the mere financial sector.
The biggest change in macroeconomic policy comes in relation to lending. Prior to The Great Recession, predatory lending, as the term has since been coined, ran rampant. Everyone was being given access to credit they not only could not afford, they should not afford. An enormous credit bubble was created, fueled by banks eager to grow their lending base regardless of risk or impact. Banks made money. Wall Street made money. With little regard to the viability of the borrower’s’ ability to repay the loans in the first place. The very foundation of the strategy was cracked, and the entire housing market collapsed as a result.
Subprime lending did not just stop there. The other great lesson learned also came from the real estate market. Home owners, in an effort to capitalize on deficient, greedy lending practices and keep up with the Joneses, started using their homes, not as mere shelter, and a place to hang one’s hat, but as an equity resource. As a result, many who were not caught in the subprime struggle to begin with, found themselves refinancing using the same subprime system as their home buying neighbors. And the flawed system perpetuated.
As a result of these subprime lending strategies, changes were made by macroeconomic policy makers to mitigate predatory lending practices by banks. It may be harder to get a loan now than it was before The Great Recession, but the loans taken will be much more secure for banks, and subsequently, more safe for households prohibited from reaching beyond their financial means.
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