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Discuss the role of each of the following in creating the Bubble in home prices leading...

Discuss the role of each of the following in creating the Bubble in home prices leading up tothe Financial Crisis of 2008:a) Wall Streetb) Freddie Mac and Fannie Maec) Fed Policyd) Extrapolative Expectations

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Answer #1

A) Wall Street through its constant speculatory activities led to an ever increasing jump in prices of real estate as well as people making short money and investing in real estate which pushed its prices up

B) Freddie Mac and Fannie Mae gave out loans to people without checking for their background history and credit score, which led to people demanding more and more loans and buying more and more houses and eventually leading to higher defaults

C) Fed policy through quantitative easing and acting as lender of last resort made banks rely blindly on it to protect them in times of emergency. This led to banks giving out more and more loans and thus defaulting eventually.

D) Extrapolative expectations made people invest more into real estate so as to make money in future from this investment, however with no repayments and high defaults, it all took a U turn.

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