Who Caused the 2008 Great Recession?

5-Minute Videos – Feb 23, 2026· Prager U

My cmnt: I have more than an academic interest in this question. I worked for a major manufacturing company as a systems analyst and had my 30th anniversary in January of 2009. One month later I was (permanently) laid off. Obama and the democrats, especially Rep. Barney Frank, were directly responsible for the subprime mortgage fiasco by forcing banks to make house loans to people without jobs, people with no visible means of support, people (almost all of them minorities) who could not possibly afford their loan payments, etc. This government induced mess cost me hundreds of thousands of dollars in lost wages, pension advancement and retirement income.

My cmnt: This democrat congressman Barney Frank was a real piece of work. He was an old, fat, unattractive homosexual douchebag who desperately wanted a young, attractive male companion. To obtain this desire he needed to fleece people with money for kickbacks – much like the Bidens and the Clintons did. Frank’s homosexual lover was running a prostitution ring out of their shared apartment in D.C. Frank lied and said he knew nothing about it (yeah, right). Democrats in their white guilt assuaged their consciences by forcing banks and other lending institutions to make these ridiculous loans and ultimately dumping the costs onto the taxpayer, as always.

From 2007 to 2009, America suffered a severe economic downturn known as the Great Recession, also known as the subprime mortgage crisis.

The economy, as measured by GDP, or gross domestic product, shrank by over 4%. Unemployment doubled, peaking at 10%. The Dow Jones Industrial Average fell 50%.

Millions lost their homes.

How did this happen?

Here’s the short version: in the spring of 2006, housing prices, which had been rising for years, began to decline and then freefall—30% nationwide, 60% in some markets like Las Vegas and Phoenix.

Why did this lead to a recession? 

The usual explanation goes something like this: free-market ideologues in Republican administrations deregulated the banks. Free from constraints, these institutions enticed millions of Americans to take out home loans that were beyond their means.

It was, according to Forbes Advisor, “a classic tale of greed and deregulation…”

There’s one more crucial component here. These “subprime loans” were variable, that is, they rose or fell based on interest rates. When interest rates were low, monthly payments were affordable. If interest rates increased, so would monthly payments. But few thought that would actually happen. 

This raises an obvious question: How did banks, which are inherently risk-averse, become so reckless with their money? 

To answer that, we need to look at federal policy, specifically a piece of legislation called the Community Reinvestment Act, or CRA.

Signed in 1977 by President Jimmy Carter and expanded in 1995 by President Bill Clinton, both Democrats, the CRA had an idealistic goal: make homeownership easier for low-income Americans.

But the government wasn’t making an encouraging suggestion. It was making a demand—one with quotas attached.

As Phil Gramm and Donald Boudreaux explain in their book, The Triumph of Economic Freedom, there was a carrot and a stick. If the banks didn’t make the loans—actually meet a quota—the government wouldn’t approve the banks’ expansion plans: mergers with other banks, new branches or even how many ATMs they could open.

Nice bank you have got there. It would be a shame if something happened to it. 

That was the stick, now here’s the carrot. 

The loans weren’t risky because the government promised to take away the downside. This is a concept known as moral hazard: privatizing profits and socializing losses—taking risks because someone else (the taxpayer) bears the cost of failure.

Here’s how it worked: the conventional practice was for banks to sell their mortgage portfolios—large bundles of home loans—to two financial institutions, the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac. 

These institutions were ostensibly independent, but in reality, they were controlled by the federal government—which pressured banks to make subprime loans they wouldn’t traditionally make—and forced Fannie and Freddie to buy those loans from the banks, which they wouldn’t traditionally buy. 

So to recap: the banks issued risky loans, collected fees for writing them, and sold them—and the risk—to Fannie and Freddie. 

And yes, some unscrupulous banks took advantage of this opportunity and did indeed entice people to “buy more house” than they could afford, and some other financial institutions exploited the game of selling and reselling mortgage portfolios.

That is the poison fruit of moral hazard.

By the mid-90s, Fannie and Freddie were buying mortgages with down payments of 3% instead of the standard 20%. By 2004, they were buying mortgages with little or no income documentation. 

Between 1977 and 1991, banks issued $9 billion in CRA loans. But over the next fifteen years, they issued more than $4 trillion in such loans.

The result: by 2008, roughly half of all mortgage loans in America—28 million in all—were high-risk.

Everyone was living in a fantasy: the banks thinking they couldn’t lose, the government and politicians thinking they were spreading the American dream, and the homeowners thinking the value of their homes would always increase.

In 2005, the clock struck midnight when the Federal Reserve began to raise interest rates to tame inflation. Home values started to fall while monthly mortgage payments rose. Suddenly, many people couldn’t make their payments and soon owed more than their homes were worth. This made refinancing impossible. Housing prices crashed, millions defaulted, and the economy went into a tailspin. 

As Edward Pinto, former chief credit officer at Fannie Mae, testified to the Financial Crisis Inquiry Commission, “The financial crisis had a single major cause: the accumulation of an unprecedented number of weak mortgages in the US financial system. When these mortgages began to default, they caused the collapse of the [worldwide banking system]…” 

The problem was not that the banks were under-regulated; the problem was that banks were pressured by the government to lower standards to engineer a social good—increase home ownership. 

The lesson is the same one we seem to have to learn over and over again. Government intrusion into the free market—even for noble-sounding ends—rarely, if ever, works out well.

No government mandate, no bubble, no Great Recession. 

I’m Franklin Camargo for Prager University.