All of the homes in this new neighborhood of Brentwood, California are for sale, evidence of the collapse of the mortgage market in
2008–2009.
870 Chapter 32 Shocks and Responses: 1992–Present
and Poor’s, pronounced the bundles to be sound
investments. And many investors bought insurance
from the American Insurance Group (AIG) to protect
them if the bundles somehow went bad. AIG, perceiv-
ing little risk, failed to set aside much money to cover
potential losses.
By late 2008, however, millions of homeowners
were swamped with bills they could not pay. Total
household debt in the United States exceededBear Stearns more than filled the void. They bought
tens of thousands of mortgages from the original
banks and lending institutions. Lending banks used
this revenue to loan out more mortgages—thereby
generating more profits (and bonuses). International
investment firms chopped up the mortgages like
sausages, clumped them into complicated investment
bundles, and sold the bundles to investors worldwide.
Credit-rating companies, such as Moody’s and Standard
Table 32.1Causes of the 2008–2009 Financial Crisis
Consumers exhaust savings to buy houses
The president and Congress call on federally owned mortgage companies to relax lending requirements
Global investment bankers devise complicated bundles of mortgages and market them globally
Credit-rating agencies grade these mortgage investments as solid and AIG insures them
Lending banks issue mortgages greatly in excess of available reserves
Millions of homeowners fall into debt and cannot make mortgage payments
Collapse of mortgage investments brings down investment banks
Capital evaporates, leading to layoffs and threatening a second Great Depression