Eventually supply overtook demand while banks and financiers overtook market safeguards in favor of speculative profit. The US housing bubble that occurred in 1983 with the savings-and-loan debacle was amplified to multiple effects in 2008, producing the financial crisis that spread to the UK and the world. The 2011 US Congressional Financial Crisis Inquiry Commission Report identified "widespread failures in financial regulation and supervision" producing instability that undermined world markets (p. xviii). Deregulation McClendon (2010) explains how in 1980 the Depository Institutions Deregulation and Monetary Control act freed banks from usury ceilings held by US states, enabling them to charge conventional high interest rates to appropriate populations for home mortgage loans.
This act also raised the deposit insurance limits up to $100,000. The ceiling had previously been $40,000. The Alternative Mortgage Transaction Parity Act of 1982 soon followed and allowed banks to make adjustable rate and interest-only mortgages outside of state restrictions. Both of these measures were intended to help banks and savings and loans institutions spread more liquidity into appropriate markets. The US Garn-St. Germain Depository Institutions Act of 1982 enabled savings and loans banks to enter the lending market with low loan-to-value ratios (McClendon, 2010).
The result was that the savings and loans industry collapsed from speculation and little oversight. Thousands of Americans lost their life savings, and thousands of savings and loans executives went to jail. President Reagan appointed Alan Greenspan as chairman of the Federal Reserve Bank. Greenspan had been Charles Keating's lawyer and Keating had been prosecuted and had went to jail as one of the main savings and loans executive speculators. Greenspan had argued that his client had "a sound business plan" and that there had been "no foreseeable risk" (Dillon and Cannon, 2010). Risk-taking "The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public" (FICI, p.
xvii). But there had been plenty of risk. Niinimäki (2007) provides a discussion to demonstrate that banking crises "are connected with fluctuations in real estate markets". He analyzes how the fluctuation of collateral value may present moral hazards.
Only when collateral value is known and certain may bank return volatility be alleviated.
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