Why Did The Government Cause The Great Depression?

A market failure happens when a market does not reach an equilibrium that allows it to achieve social economic efficiency and thus does not maximize social surplus. When the housing market crashed in 2006, many people claimed that it had been caused by the failure of the free market to police itself. However, when the facts are examined, it quickly becomes clear that it was not the market that was at fault, but the actions of the government that caused the meltdown. During the housing crash over $15 trillion in wealth and 6 million jobs were lost. Why did the government make the decisions that it did? Furthermore, how did those actions cause the worst economic collapse since the Great Depression? When the transaction between buyers and sellers in a particular market secondarily creates positive benefits to other parts of society it is called a positive externality. These positive externalities are often encouraged by government
The country wanted to encourage homeownership so they “meddled” in the mortgage business. They lowered the barriers to entry that screened people who might not be able to afford home ownership. The US government allowed derivative securities to be created that depended upon a steady stream of new mortgages being written. This vicious circle pushed the price of houses to an unsupportable level. When people were not able to pay their mortgages, the banks started to call in their loans, which devalued the derivatives, which then lost money for the pension funds. The US housing bubble burst, investment banks and funds lost astronomical amounts of money, and people that invested in the pension funds realized that their money that they had invested in “safe” investments was gone. It is over 10 years later and we are just now recovering from the economic recession that was fueled by the housing