Financial crash of 2007

Great Debates
1

Something that has always nagged at me about the crash was it was so painfully obvious that it was inevitable at least 2 years before it started happening. Everywhere I went a discussion would come up about how things were going to crash and banks would fail etc. Why did the banking industry or in this case the government not intercede? 90% of my personal contacts were blue collar workers such as myself, some of them were buying houses because it was so easy, bragging about how the realtor told them that with appreciation they could refinance long before the balloon payment was due. Most of the others were shaking their heads knowing the axe was about to drop, we saw in 1989.

Was this a huge cover-up involving politicians from both sides of the aisle?
2

Don’t attribute to malice what can be chalked up to stupidity or greed.

People were making lots of money. They didn’t care what happened at the end as long as they got theirs. Ditto for the politicians…no one’s going to argue against prosperity.

I’ll say that I held to CMOs when things went south.

3

The short answer is: because all of the people directly involved were making tons of money, and none of them wanted to stop the gravy train.

I recommend The Big Short, which explains the crash very well, and focuses on a few people who saw it coming and made tons of money betting on it.

4

The Crash of 1929 was also predicted. (And many crashes that did NOT occur were also predicted but never mind them.)

There were many pundits predicting permanently rising prices; a financial nirvana had arrived. Many of them may have believed it; most of the smarter ones did not. Most of the liars were well within their legal rights, indeed behaving “properly” according to Greed is God/Free Market ideology. The ones whose lies violated fiduciary obligations were criminal; in a very few cases they have been prosecuted.

But OP asks why government did not intercede? :confused: :smack: Can you imagine the circle-jerk of outrage, if the government had popped the bubble? Had forced down housing prices and financial profits??
OP, are you joking?

5

Bingo, it is a scary thought but absolutely true that our own goverment would do this out of fear of being the bad guy.

6

Exactly the job of the government is prop its favored firms back up for its cronies after the bust has set in.

Government intervention created the bubble, they love those things.

7

If by “do this” you mean “refrain from interceding” then we are, more or less, on the same page. (Less rather than more, since political reality is … well, real.)

I’d like to imagine a United States with a political climate such that government could act in the public interest, and the public would trust it. A political climate which was not dominated by vested interests and hypocrites infesting the airwaves with lies. But that United States is not this United States.

To paraphrase Donald Rumsfeld, we are stuck with the political climate we have, not the political climate we might wish we had.

ETA: As demonstration see Farnaby’s post.

8

Well, first the OP doesn’t make sense. He says ‘everyone around him’ was talking about the looming crash and bank failures. He also says ‘90% of his personal contacts’ were blue collar workers, some of them buying houses even as the crash was ‘painfully obvious’. One assumes that ‘everyone’ around him includes the ‘90% of blue collar worker personal contacts’; if ‘everyone’ was talking about the impending crash, why are some of the buying houses right up to the crash?.

To be more blunt: I don’t believe you when you say how ‘painfully obvious’ it was to ‘everyone around you’ at least ‘2 years’ before the crash. I’m sure that many many people are - after the fact - claiming to have ‘seen the painfully obvious crash coming’. But the truth is, you didn’t see it coming, your blue collar worker contacts didn’t see it coming, the ‘everyone’ around you didn’t see it coming. Almost nobody saw it coming, except for a handful of very very specific people, mainly looking at very very specific things (as noted, see The Big Short).

Explain this, please.

Finally: while I would never claim to have seen the crash coming…in early 2006 the local bank offered my (single, 58yr old, part-time employed) mother a refinancing appraisal that was over 50% higher than the price she paid to purchase the house just three years prior. After hearing that, I went back to New York and sold my apartment two months later. Just sayin’.

9

Everyone thinks they’re “better than average”. People could simultaneously think, “all these shlubs are going to get creamed when this bubble bursts” and “I’m not a schlub – I’m just a clever guy taking advantage of good financing to make a wise purchase in a good market, unlike those dopes who are buying a house they can’t afford during a bubble.”

10

I consider myself at least as financially savvy as the average, and I can’t say Ive *ever *seen clearly “what’s about to happen” in the economy. So, OP, what are your predictions for the next 2 yrs? The markets are at record highs, and it seems pretty clear the Fed is going to gradually reduce/eliminate Quantitative Easing. 2 years from today, what will be the Dow and the average interest rate, and the employment rate. Anyone else who would like to proffer an opinion on these matters is also welcome, of course.
I’m going to predict Dow higher by about 1200 points, unemployment about 6%, and interest rates about 4%.

11

That’s a tiny bit too convenient. Many people are stupid or greedy or both.

However, in many cases, at many places, there’s ample evidence of bankers having full awareness of what is it that they are selling which, at least in my books, is malice by definition.

I’m always impressed afresh at the ability of people to rationalize the whole 2007 financial crisis.

12

I bought my house in 2003. Even then, its appraised value had increased 50% since my friend bought it in 2001. Interest rates were incredibly low. I had the option of choosing a fixed-rate mortgage, or a variable-rate one. The latter was lower. I chose the former. My reasoning went this way: ‘Interest rates are historically low. If I get a variable-rate loan, there’s only one direction the rate can go. I’ll pay a slightly higher rate now, but I’ll be paying a lower rate when the rates increase.’ Interest rates actually did go lower; but I still believe I made the right decision. (And I refinanced from a 30-year loan to a 15-year loan at a lower fixed interest rate than I started with.) Interest rates have been kept very low. I predicted they would increase. I still think they will, and so I still think my 3% (or whatever) fixed-rate is better.

What about the housing bubble? Did I see it coming? I could see prices increase, obviously, since the house I bought went up 50% in two years. I could see its market value increasing leading up to the crash. I did grasp that a whole lot of people would get a nasty surprise when their rates re-adjusted. But I didn’t expect an actual crash. I thought that house prices would level off. Many people would be paying higher monthly payments than they thought, and some would find them unsustainable. This, I thought, would be the mechanism by which prices would stabilise. Higher interest rates would rein in rising home prices. But in 2007 I noticed something else…

Gas prices were rising dramatically. It seemed as if they rose from about $2.65/gallon to more than $4/gallon in no time. That’s when I said, ‘Uh-oh…’ I think most people can adjust their budgets to accommodate higher interest rates. I think most people can adjust their budgets and to accommodate higher fuel prices. But not both. I think it’s very difficult to adjust one’s driving habits to accommodate higher fuel prices, because for the most part people have to drive. In my case it was pretty bad. I was not yet telecommuting, and I did not yet have the Prius; and my office is 110 miles away. Fuel prices are lower now, and I telecommute three days a week; but I tend not to drive any more than I have to. (This was true before long commutes and high prices.)

If you can’t reduce your fuel consumption (much) and have to pay a lot more to fill your car – and if you’re now paying a higher interest rate on your mortgage – something has to give. You don’t buy that new TV or washing machine or any number of consumer items. You don’t go out to eat as often. You cut back on non-critical expenditures. Do that, and the economy slows down. With consumers not consuming, businesses don’t need as many employees. (I believe consumers , and not businesses, are the ‘job creators’.) So you have a whole lot of people, many of which have these now-more-expensive mortgages on houses that were the most expensive they could afford (assuming their values would continue to increase) who don’t have jobs. Pop goes the bubble.

I am not a financially savvy person. My life is much too busy to want to ‘deal with’ odious chores. That’s why I have an accountant do my (pretty complicated) taxes and why I take the path of least resistance when it comes to my 401k. It’s why low-priority (to me) things don’t get done for a while, or why I pay someone else to do them. I simply have no time. But even I saw ‘something bad’ coming before the bubble burst. In 2003 the bubble was just starting to inflate, and I could see that and adjustable APR was trouble. In late-2006/early-2007 I could see that high fuel prices were going to choke the economy. If I could see ‘something’ coming, then everybody and their big dopey dogs should have seen it. I didn’t see an actual crash and Great Recession (I’ve heard it called the ‘Bush Depression’) on the horizon, but people who are financially savvy should have.

And it seems they did. They raked in billions with no regard to the future. The house was afire, and they were there with their straightened clothes hangers saying, ‘I can roast these marshmallows and hot dogs for free! Woo-hoo! Free fire!’

13

I was out of the US at the time, and it was blatantly obvious to me even though my contact with the outside world was limited to outdated copies of Newsweek and the BBC World Service. My mom’s not-particularly-desireable home tripled in value in the course of a few years. How could anyone think that was sustainable? In the meantime, my friends out of college were having a hell of a difficult time getting real jobs. Something was, very clearly, not healthy.

On the housing level, I think it was a classic mix of stupidity, greed, and brinksmanship. As the housing bubble rose, suddenly every Joe Schmoe decided they were a self-styled real estate investor. The stupid and greedy simply didn’t understand the risk, and genuinely thought they were making smart sure thing investments. It was pretty self-feeding-- people saw their friends and coworkers moving in to large homes, and they figured they could as well. Because it’s easy to see how people spend money, but hard to see their debt, unsustainable spending became normalized.

The smart and greedy, on the other hand, figured they’d be able to get out in time before the bubble popped. Eventually, someone got stuck with the hot potato.

As for politicians, there just isn’t much value in preventing a crisis. Nobody votes based on what didn’t happen. It’s the same reason why it’s easy to raise millions for rebuilding after a major disaster, but next to impossible to raise money for disaster prevention.

14

First of all I don’t claim to be finanacially savy at any level, I know better. But when you see and feel a momentum of panic buying at inflated prices that continue to rise and the buyers have bad credit and incomes that should not qualify them for the homes they are buying it becomes painfully obvious that the bottom is going to fall out. And it did.

15

Panic buying?

But it wasn’t. By definition, we know it wasn’t obvious because the market crashed.

Perhaps it -should- have been obvious. And it is ‘obvious’ in hindsight. But it was most definitely not obvious at the time.

16

I’m not in a position to do so now, but it’d be interesting to do search up some threads from before the crash to see what people were saying.

17

Dragon, the panic buying in SoCal came in when prices started rapidly rising and people figured if they didn’t buy now they would never have another opportunity.

18

If people were assuming housing prices would continue to go up, up up…clearly it wasn’t at all obvious to anyone that a crash was ‘imminent’, was it.

Which is the point. All asset bubbles are ‘painfully obvious’…after the fact.

19

No you had a lot of people buying and a good number of people who felt a crash was emminent. The part I am getting at is we had considerable chatter all the way down to the working class about an emminent crash. How can I possibly believe that the so called experts were not aware of this long before the rest of us.

20

I think there were two issues. One was whether officials predicted a housing crash, and the second was whether or not they predicted it percipitating the wider financial panic. IPretty much everyone saw the housing crash coming a year or two ahead of time. There was no fundamental reason housing prices should increase so rapidly, and even someone that knew nothing about finance could look at the Case-Schiller index and spot the bubble. Fed minutes show the Federal Reserve Commitee was discussing the bubble by early 2005. In June of 2005, they devoted a special meeting to discuss the issue. It didn’t catch them by surprise.

But what they missed wasn’t the bubble, but how rapidly the bubble would pop, and to what extent the effects would effect the wider banking world. They thought there would be a “soft landing”, that inflated prices would slowly unwind, that the resulting damage to the economy could be stopped by lowering interest rates after the fact, and at worst there would be a mild recession. This, rather then missing the bubble, was the big mistake made by policy officials prior to the Great Recession. They believed in “The Great Moderation”, and that a combination of simple monetarism and rational markets would protect us from any severe economic downturn.