Chapter

The 2008 Meltdown

Matthew P. Fink

in The Rise of Mutual Funds

Second edition

Published in print January 2011 | ISBN: 9780199753505
Published online January 2012 | e-ISBN: 9780199918805 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199753505.003.0013
The 2008 Meltdown

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The turn of the 21st century witnessed a huge run up in home prices. Despite warnings, the Federal Reserve Board and other regulators did not act to curb speculation. When the bubble burst, there was a severe decline in home prices, failures of major financial institutions, and the worst economic downturn since the 1930s. Mutual funds were hit hard but fared considerably better than institutions that employed leverage far in excess of that permitted for mutual funds. The meltdown resulted in numerous calls for changes in financial regulation, including proposals that would impact mutual funds. This chapter argues that the basic problem was the failure of regulators to act as the bubble grew and grew. The Federal Reserve Board declined to crack-down on unscrupulous subprime lending practices. The SEC exempted asset-backed arrangements from regulation as investment companies, repealed its “uptick” rule designed to impede short-selling, and lowered, rather than raised, capital requirements for broker-dealers. Most importantly, the Fed, first headed by Chairman Greenspan and then Chairman Bernanke, refused to raise interest rates in order to curb excessive speculation.

Keywords: housing bubble; speculation; home prices; economic downturn; mutual funds; financial regulation; subprime lending; uptick rule; interest rates

Chapter.  6347 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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