I'd rather a coup by a capitalist than a socialist for whatever country I lived in.

[emacknight]

@Sam_Stone

The bankers basically just took advantage of the glut of liquidity and created instruments that allowed them to maximize their profit and minimize their risk. This triggered the financial crisis, but even if the banks had been responsible and well regulated, the real estate bubble would eventually have popped, and the existence of all those subprime and alt-A loans would still have triggered waves of foreclosures and a downturn in the economy. The difference would have been that the collapse of the housing bubble wouldn’t have necessarily triggered a liquidity crisis in the economy as a whole.

No, what you’re missing here is that about 4 years before the crash, American banks ran out of good customers. Everyone with a credit score over 700 that wanted a house had a house.

In Canada, when this happens, the banks stopped issuing more loans. They see no need to expose themselves to the risk of bad mortgages, why, because they hold onto those loans. They don’t actually want or need more mortgages. The flip side of this equations is that because banks hold onto mortgages, they recognize a finite pool, and go after the best borrowers.

But in the US, the banks were okay lowering their standards further and further. Why? Because US banks don’t hold on to mortgages the way Canadian banks do. They bundle them up and sell them to Federally regulated banks like Freddie and Fanny.

What we should all ask now is, “who would buy bad mortgage?” The answer is quite simple, no one.

Wait, no one, so why were they bought?

Because banks were able to bundle them with other mortgages, get a fake/fraudulent rating applied to them, and pass them off a good mortgages, then start again issuing more loans to worse customers.

It was a giant ponzy scheme that no one cared about until housing prices stopped going up, and that’s where the fun starts.

All those mortgages issued over the previous four years were done so on the assumption that house prices would keep going up, and that interest rates wouldn’t. So people were getting 4 and 5 adjustable rate mortgages* (with extremely low rates), with zero down, and above the listed value of the house. They were told the house value would go up, and they could refinance at a lower rate, using the new equity. And why not, it worked for the previous few years.

So now, two things happened. [1] When prices stopped going up, and interest rates did go up, people couldn’t refinance, and suddenly faced foreclosure. And this wasn’t just the sub-primes. But this led to [2] the high rated mortgage backed securities started to get hit by the foreclosures. People then realized that sub-prime loans were mixed in with prime loans. The result here was that ALL of the mortgage backed securities were called into doubt. No one had any confidence in any of them.

This was kicked off by a French financial company announcing that they didn’t trust these securities.

With all these in question, no one would dare buy new ones, so the flow of liquidity that you mentioned stopped dead. Now banks were stuck holding the hot potato (shitty loans they expected to get rid of) and began folding.

As more home owners weren’t able to refinance and went into foreclosure, the price of houses started to fall even faster. And so on and so on.

Why is all this relevant? Because capitalism couldn’t do anything at this point. Like a locust population that ate everything available, the only thing left to do is die.

It took socialist policies to try and stop the slide.

*again, there is a huge difference between mortgages in Canada and the US, you probably didn’t know that.

[Aji_de_Gallina]

@BrainGlutton

The Spanish Revolution (as distinct from the Spanish Civil War) was not about killing lots of people, mostly poor. Neither was the Paris Commune. (Granted, neither of those lasted long; but they did not self-destruct, they were crushed by hostile governments.)

Just give them time.

[emacknight]

@emacknight

*again, there is a huge difference between mortgages in Canada and the US, you probably didn’t know that.

Just so we’re clear, this wasn’t meant to be snarky, it was something that caused my wife and I a lot of confusion when we bought our house last year. The two processes are almost indistinguishable from each other.

[Sam_Stone]

@emacknight

No, what you’re missing here is that about 4 years before the crash, American banks ran out of good customers. Everyone with a credit score over 700 that wanted a house had a house.

I didn’t miss that at all. In fact, I just said:

@Sam Stone

The development of CDOs and other ways of securitizing mortgages was the result of market pressure. There was more money out there looking for good rates of return than there were people who qualified for traditional mortgages. So there was a lot of pressure on banks and government as well to help ‘streamline’ mortgage financing to take advantage of the available capital.

Again, this was a worldwide phenomenon. Even Canada wound up with some subprime mortgages, but not nearly as many as the U.S.

The fact is, when interest rates are very low, and there is excess liquidity, huge pressure develops to find investment vehicles that return higher rates of interest. In the U.S., the combination of a shadow banking system that was largely unregulated, plus government agents unwilling to stop a trend that was putting houses into the hands of the masses, plus numerous incentives for home ownership contributed to a bubble that was bigger than most. But the bubble was worldwide.

In Canada, when this happens, the banks stopped issuing more loans. They see no need to expose themselves to the risk of bad mortgages, why, because they hold onto those loans. They don’t actually want or need more mortgages. The flip side of this equations is that because banks hold onto mortgages, they recognize a finite pool, and go after the best borrowers.

This is only partially true. Banks bent plenty of rules to get mortgages into more and more hands, and to extend other forms of credit. For example, the income requirements were often stretched. When we applied for our last mortgage, I was absolutely shocked at how much money the bank was willing to lend us. I absolutely knew there was no way we could afford a mortgage as large as they were willing to hand over.

The existence of CMHC insurance allows you to get into a home with only 5% down, and I knew people who pulled shenanigans to get the 5%, like taking out a personal loan for the down payment, or taking the down payment off of a cash advance on credit cards. The banks typically don’t look to closely at some of that stuff so long as you meet the literal requirements for the insurance.

We also wound up with a lot of people underwater because as home prices increased, the banks started advertising second mortgages. We got letters from our bank extolling the virtues of borrowing against our house to finance luxuries and holidays.

But ultimately, the banks held the mortgages, so there were limits to how far they’d go. The ability to American banks to securitize and sell off their mortgages removed any incentive at all to minimize their risk, especially since it was so hard to price into the value of the mortgage securities. I think we agree on that point.

Why is all this relevant? Because capitalism couldn’t do anything at this point. Like a locust population that ate everything available, the only thing left to do is die.

Let’s not be extreme. Yes, there was a market failure here, due to lack of information. And there’s a role for government to regulate financial transactions to ensure that risk information is known and can be priced. No doubt about it.

It took socialist policies to try and stop the slide.

No it didn’t. It took a credit injection by the Fed, which was already regulating the money supply. I could just as easily argue that if the Fed hadn’t been monkeying with the money supply in the first place, the sudden demand for all that credit would have driven up interest rates and helped check the mortgage bubble. You can trace the start of this back to the Fed intentionally choosing to hold interest rates at historically low levels to stimulate the economy.

The amount of regulation required to fix this does not equate to a complete failure of capitalism. We need regulations to fix the specific failures in this market. Maybe not even more regulations - maybe they just need to be re-written and broadened, or a shift made to more principle-based regulation. We need better regulation. But again, I have to point out that regulators can also fail - and did. It’s not like the warning signs weren’t there. There were plenty of people begging Congress to pay attention. They didn’t. And it was a bipartisan failure. In recent years, it was Republicans sounding the alarm, and Democrats refusing to listen. Earlier, it was Republicans who refused to listen.

So if you want to call this a failure of capitalism, we can just as easily say it was a failure of government. Especially so in this case, because government wasn’t just caught napping, it was a willing participant in the shenanigans. You’ll find out more about that soon, because Fannie and Freddie are still sitting on $5 trillion dollars in mortgages, many of them subprime or Alt-A. The Congressional Budget Office says bailing them out will cost almost 400 billion dollars, and other estimates put the at-risk liability at over a trillion. That’s a government failure.

There’s plenty of blame to go around here.

[Damuri_Ajashi]

@Sam_Stone

Banking regulations or the lack thereof didn’t create the bubble, though. Or at least, they weren’t wholly responsible.

They may not have created the bubble but they didn’t do a lot to interfere with it. I don’t think anyone thinks that regulations were wholly responsible, there were multiple failures, all of them market failures except one. We already know enough about the market to know that it fails from time to time. This is where regulations come in, they didn’t this time.

The bankers basically just took advantage of the glut of liquidity and created instruments that allowed them to maximize their profit and minimize their risk.

They did considerably more than that.

This triggered the financial crisis, but even if the banks had been responsible and well regulated, the real estate bubble would eventually have popped, and the existence of all those subprime and alt-A loans would still have triggered waves of foreclosures and a downturn in the economy. The difference would have been that the collapse of the housing bubble wouldn’t have necessarily triggered a liquidity crisis in the economy as a whole.

You are assuming the bubble would necessarily have occurred and gotten as inflated as it did. I think a well regulated system would have made the worthlessness of some of these securities more obvious and would have discouraged banks from looking the other way while mortgage brokers lied to them about the quality of the mortgages they were writing. I can see how regulation could have prevented this bubble, I am surprised that you cannot. Now I have the benefit of 20/20 hindsight but at least in hindsight I can tell you exactly what sort of regulations would have prevented this bubble and in the light of day it seems like these precautions would not be horrible ideas today.

The development of CDOs and other ways of securitizing mortgages was the result of market pressure. There was more money out there looking for good rates of return than there were people who qualified for traditional mortgages. So there was a lot of pressure on banks and government as well to help ‘streamline’ mortgage financing to take advantage of the available capital.

And there was a lot of lobbying pressure to prevent the regulation of these securities, especially CDS’s.

This is why I don’t think the government could have regulated this. The evidence we have is that the government was a completely willing partner in helping put more mortgages in the hands of increasingly unqualified people.

Untrue.

We can debate how much the government’s involvement through Fannie and Freddie and the CRA and such contributed to the problem, but the existence of these programs indicates that had the government had more regulatory power, they wouldn’t have used it to stop what the banks were doing. Regulators can be just as wrong as bankers.

We have debated this several times and every time we come to the conclusion that financial institutions created 40 or 70 years ago and legislation passed 40 years ago were not the factors that caused the current crisis any more than the creation of mortgages centuries ago or the creation of mortgage backed securities decades ago was the cause of today’s crisis. The cause of today’s crisis is the activity that occurred AWAY from the GSE and the subprime mortgages that were NOT made due to the CRA. Sure regulators can be wrong, but they are much more likely to be wrong when their President tells them not to regulate.

Anyway, even without the financial shenanigans, there probably still would have been a recession, but it wouldn’t have been as severe. Without the financial crisis coming on top of the mortgage meltdown we wouldn’t have had the crises of confidence that the world just went through and which has caused demand to dry up and companies to become more conservative.

I don’t think the real estate bubble was necessary but you are right, if it was in fact inevitable, tighter regulation would have mollified the size of the bubble.

@emacknight

But in the US, the banks were okay lowering their standards further and further. Why? Because US banks don’t hold on to mortgages the way Canadian banks do. They bundle them up and sell them to Federally regulated banks like Freddie and Fanny.

Fanny and Freddie have standards, the conforming mortgages were not what drove the bubble, it was the stuff being sold by Countrywide and Ameriquest that drove this bubble.

Why is all this relevant? Because capitalism couldn’t do anything at this point. Like a locust population that ate everything available, the only thing left to do is die.

It took socialist policies to try and stop the slide.

Well I would say that good gf\overnment can go a long way towards preventing these sort of things but when one of two parties in the most powerful country in the world doesn’t believe the words good and government belong in the same sentence…

@Sam_Stone

No it didn’t. It took a credit injection by the Fed, which was already regulating the money supply. I could just as easily argue that if the Fed hadn’t been monkeying with the money supply in the first place, the sudden demand for all that credit would have driven up interest rates and helped check the mortgage bubble. You can trace the start of this back to the Fed intentionally choosing to hold interest rates at historically low levels to stimulate the economy.

I thought you said it was all the cheap money from China. Second of all, I think Greenspan was so intent on proving his economic theories correct that he kept trying to create conditions that would prove them correct (my pet conspiracy theory).

But again, I have to point out that regulators can also fail - and did. It’s not like the warning signs weren’t there. There were plenty of people begging Congress to pay attention. They didn’t. And it was a bipartisan failure. In recent years, it was Republicans sounding the alarm, and Democrats refusing to listen. Earlier, it was Republicans who refused to listen.

How was it ever a Democratic failure in spite of Republican pressure to regulate?

You’ll find out more about that soon, because Fannie and Freddie are still sitting on $5 trillion dollars in mortgages, many of them subprime or Alt-A. The Congressional Budget Office says bailing them out will cost almost 400 billion dollars, and other estimates put the at-risk liability at over a trillion. That’s a government failure.

The fact that Fannie and Freddie are adversely impacted by a crushing real estate market is hardly evidence that they were the cause of the crisis. I would suggest that if every mortgage in this country had to meet Fannie and Freddie standards for a conforming loan, we would never have gotten into this mess in the first place with or without the CRA.

There’s plenty of blame to go around here.

Yeah, but most of it lies with the market, Greenspan and his desire to vindicate his less mainstream theories (see Ayn Rand) and politicians that felt that government shouldn’t regulate the market.

[Dick_Dastardly]

@Sam_Stone

1.The housing bubble was a global phenomenon, although it was especially acute in America due to unique American policies and culture

2.This is why I don’t think the government could have regulated this. The evidence we have is that the government was a completely willing partner in helping put more mortgages in the hands of increasingly unqualified people.

3.We can debate how much the government’s involvement through Fannie and Freddie and the CRA and such contributed to the problem, but the existence of these programs indicates that had the government had more regulatory power, they wouldn’t have used it to stop what the banks were doing. Regulators can be just as wrong as bankers.

It was especially acute in America owing to the complete abandonment of any kind of lending standards. Bush put former banking lobbyists who’d spent their entire careers trying to get banking regulations scrapped in charge of the regulatory bodies :

http://www.papolicyblog.com/pablog/chainsaw.jpg
and they did a heckuva job. Other countries maintained some kind of standards, like canada. Want to completely prevent any housing bubble from happening? Just mandate a 20% down minimum to get any mortgage with no extra loans allowed to loan the 20%. Problem solved. Would that add too much regulatory burdent o the system?
2. The government could have regulated the whole thing quite easily, instead they did away with any kind of attempt to regulate the mortgage business or the financial system.

3. We can debate this and we often try to with you but you run away at the first sign of facts and evidence. How does the existence of the CRA indicate that if the government had more regulatory power they wouldn’t have used it? And is this seriously the reason you’re now telling us makes the CRA partly responsible for the meltdown? You now accept rhat they didn’t make vast numbers of bad loans, that it was non-CRA firms that made 98+% of them?

[gonzomax]

A Capitalistic takeover will result in extreme rich and a lot of poor. Capitalists do not want to share the wealth. A decent society requires regulation and policing of capitalists. What our capitalists did in South America shows how little conscience is involved. Eventually they justify their excessive wealth by claiming they are special and deserve it. Thus the ruling class will gobble up everything they can. The poor deserve to suffer. They did such a poor job of being born.