President Obama's economic speech at Georgetown
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No one really knew what the actual value of these securities were, but since the housing market was booming and prices were rising, banks and investors kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the responsibility. Banks took on more debt than they could handle. The government-chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities. AIG, the biggest insurer in the world, decided to make profits by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits – except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington.Skip to next paragraph
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Then the housing bubble burst. Home prices fell. People began defaulting on their subprime mortgages. The value of all those loans and securities plummeted. Banks and investors couldn’t find anyone to buy them. Greed gave way to fear. Investors pulled their money out of the market. Large financial institutions that didn’t have enough money on hand to pay off all their obligations collapsed. Other banks held on tight to the money they did have and simply stopped lending.
This is when the crisis spread from Wall Street to Main Street. After all, the ability to get a loan is how you finance the purchase of everything from a home to a car to a college education. It’s how stores stock their shelves, farms buy equipment, and businesses make payroll. So when banks stopped lending money, businesses started laying off workers. When laid off workers had less money to spend, businesses were forced to lay off even more workers. When people couldn’t get car loans, a bad situation at the auto companies became even worse. When people couldn’t get home loans, the crisis in the housing market only deepened. Because the infected securities were being traded worldwide and other nations also had weak regulations, this recession soon became global. And when other nations can’t afford to buy our goods, it slows our economy even further.
This is the situation we confronted on the day we took office. And so our most urgent task has been to clear away the wreckage, repair the immediate damage to the economy, and do everything we can to prevent a larger collapse. And since the problems we face are all working off each other to feed a vicious economic downturn, we’ve had no choice but to attack all fronts of our economic crisis at once.
The first step was to fight a severe shortage of demand in the economy. The Federal Reserve did this by dramatically lowering interest rates last year in order to boost investment. And my administration and Congress boosted demand by passing the largest recovery plan in our nation’s history. It’s a plan that is already in the process of saving or creating 3.5 million jobs over the next two years. It is putting money directly in people’s pockets with a tax cut for 95% of working families that is now showing up in paychecks across America. And to cushion the blow of this recession, we also provided extended unemployment benefits and continued health care coverage to Americans who have lost their jobs through no fault of their own.
Now, some have argued that this recovery plan is a case of irresponsible government spending; that it is somehow to blame for our long-term deficit projections, and that the federal government should be cutting instead of increasing spending right now. So let me tackle this argument head on.