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policies that market participants had developed aft er the Bear rescue. With no
certainty about who was strong or who was weak, there was a headlong rush to
U.S. government securities. Banks—afraid that their counterparties would want a
return of their investments or their corporate customers would draw on lines of
credit—began to hoard cash. Banks wouldn’t lend to other banks, even overnight.
As Chairman Bair suggested, that was the fi nancial crisis. Everything aft er that was
simply cleaning up the mess.
Th is analysis lays the principal cause of the fi nancial crisis squarely at the feet
of the unprecedented number of NTMs that were brought into the U.S. fi nancial
markets by government housing policy. Th ese weak and high risk loans helped to
build the bubble, and when the bubble defl ated they defaulted in unprecedented
numbers. Th is threatened losses in the PMBS that were held by fi nancial institutions
in the U.S. and around the world, impairing both their liquidity and their apparent
stability.
Th e accumulation of 27 million subprime and Alt-A mortgages was not a
random event, or even the result of major forces such as global fi nancial imbalances
or excessively low interest rates. Instead, these loans and the bubble to which they
contributed were the direct consequence of something far more mundane: U.S.
government housing policy, which—led by HUD over two administrations—
deliberately reduced mortgage underwriting standards so that more people could
buy homes. While this process was going on, everyone was pleased. Homeownership
in the U.S. actually grew to the highest level ever recorded. But the result was a
fi nancial catastrophe from which the U.S. has still not recovered.