# Was it overregulation or deregulation that led to the Financial Crisis of 2007/08? **URL:** \ **Category:** Great Debates\ **Created:** [September 12, 2013, 12:55pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649 "2013-09-12T12:55:36Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![newcomer](https://avatars.discourse-cdn.com/v4/letter/n/e5b9ba/32.png) [@newcomer](https://boards.straightdope.com/u/newcomer)\ **Post date:** [September 13, 2013, 2:35pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/41 "2013-09-13T14:35:11Z")
Many factors were in play. One of them is this: > [@](#): > > Two key Republicans in the U.S. House of Representatives are questioning whether federal securities regulators are spending too much of their time conducting compliance examinations of private equity fund advisers, saying sophisticated investors need less protection. [http://www.reuters.com/article/2013/09/13/us-house-sec-privateequity-idUSBRE98C0EO20130913](http://www.reuters.com/article/2013/09/13/us-house-sec-privateequity-idUSBRE98C0EO20130913) There’s a “lobbyist” somewhere lol-ing all the way to the bank. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [September 13, 2013, 4:14pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/42 "2013-09-13T16:14:17Z")
> [@Gack](#): > > Deregulation and non-punishment went hand in hand, and by all accounts I’ve read contributed mightily to the crash. > > Ferguson is IMO a great writer but he is also the Rothchild family historian. I don’t know if he was paid by the Rothchilds’, but he was given access to previously unseen source materials while writing his history of the family. I would take his pronouncements on economic matters with a huge grain of salt. In this vid he absolves the Rothchilds of all accusations, past and present, > > [http://www.youtube.com/watch?v=Nk4XYPNA1iQ](http://www.youtube.com/watch?v=Nk4XYPNA1iQ) > > including some that I think are beyond question true, e.g. involvement in the creation of the US Fed. So… it’s the Jews’ fault? ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [September 13, 2013, 4:49pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/43 "2013-09-13T16:49:04Z")
> [@Really\_Not\_All\_That\_Bright](#): > > So… it’s the Jews’ fault? Apparently. Gack’s in real good company. > **[The Rothschilds and the Federal Reserve](https://www.angelfire.com/music2/fullcircle/rothschild.html)** > > A web site on The Rothschild Family. > [@](#): > > What does the United States Federal Reserve have to do with Hitler’s extermination of 42 million people? > > Both were created and funded by the Rothschild family. Today the Federal Reserve Bank is still owned and controlled by the Rothschild family and you and I are forced to pay taxes to them every time we get a paycheck from our employers, this is the federal tax on our paystub. > **[Federal Reserve: A Private Jewish Bank Strangling America | Real Jew News](https://www.realjewnews.com/?p=177)** > [@](#): > > FEDERAL RESERVE: > A PRIVATE JEWISH BANK > STRANGLING AMERICA [http://politicalvelcraft.org/2012/05/17/ron-paul-repeal-the-1913-rothschild-federal-reserve-the-hidden-treasonists/](http://politicalvelcraft.org/2012/05/17/ron-paul-repeal-the-1913-rothschild-federal-reserve-the-hidden-treasonists/) > [@](#): > > Ron Paul: Repeal The 1913 Rothschild Federal Reserve: The Hidden Treasonists! That’s in addition to the numerous claims that the Rothschilds are behind all the presidential assassinations. No, really. Gack, you make me defend Ferguson. I hate that. In our real world, the statement that large banks are involved in the world banking system is a tautology. So is the statement that large banks were needed to create a central bank in this country. Trying to create sinister implications from those trivial facts is conspiracy theory territory. And rabid anti-semitism is only inches behind. ---
**Author:** ![Gack](https://avatars.discourse-cdn.com/v4/letter/g/ecccb3/32.png) [@Gack](https://boards.straightdope.com/u/Gack)\ **Post date:** [September 13, 2013, 5:01pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/44 "2013-09-13T17:01:34Z")
> [@Exapno\_Mapcase](#): > > In our real world, the statement that large banks are involved in the world banking system is a tautology. So is the statement that large banks were needed to create a central bank in this country. Trying to create sinister implications from those trivial facts is conspiracy theory territory. And rabid anti-semitism is only inches behind. No ‘one tries to create sinister implications from those trivial facts’, instead sinister implications are made from a detailed study of history … so, my reference here would be ‘The Creature that Came from Jekyll Island’ which tells the story of the entirely secret origins of the Fed at Jekyll Island SC and the preeminent role played by Paul(?) Warburg who was closely associated with the Rothchilds, at least that’s how I remember it. Gotta run now but it could be a topic of discussion. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [September 13, 2013, 5:24pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/45 "2013-09-13T17:24:32Z")
> [@Voyager](#): > > How were the non-bank mortgage sellers regulated again? Are you aware that a number of state AGs asked the Fed to regulate, and Greenspan turned them down? > And the big problem is that with the securitization of bad mortgages, and the fact that the riskier the mortgage the higher the return, the mortgage writers could write risky mortgages with what they thought was little risk to themselves. No one was forcing the mortgage writers to actively market to those who couldn’t really afford the houses - except the profits they made doing so. The non-bank mortgage sellers have to comply with the Real Estate Settlement Procedures Act , the Truth in Lending Act , the Home Ownership and Equity Protection Act , the Fair Credit Reporting Act , the Equal Credit Opportunity Act , and the Gramm-Leach-Bliley Act. Forty nine state require that mortgage brokers be licensed. Many states have their own regulatory agencies such as California’s Department of Real Estate. What caused the mortgage crisis was the belief that because housing prices had never gone down in the last fifty years they would never go down. Using historical data people built models predicting the number of defaults and what would happen if certain numbers of people defaulting. They then used those models to build and price investments. For example, Lehman brothers built five scenarios of what would happen in the mortgage bond market based on housing prices. They assigned probablities of 80% to the top three scenarios, 15% to house prices plateauing and 5% to a meltdown scenario. That was the thinking of the time, that housing prices would go up and any possibility were they did not was remote. Regulators shared this feeling about house prices. As long as house prices were going up then lending standards did not matter. If a homeowner could not make payments they could sell the house, pocket the profit, and be better off. If they could make the payments then they got a place to live and a great investment at the same time. Regulators were mostly concerned about banks giving too few loans to people who were credit risks. Fannie and Freddie had quotas starting in 1992 that 30% of all loans they bought had to be to people below the median income in their communities. That number was raised to 50% in 2000 and to 55% in 2007. Meanwhile the Community Reinvestment Act was also causing banks to give more loans and [those loans had a much higher risk of default.](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2172549) The CRA really started to hit as the bubble started to rise. From 1977 to 1991 they were 8.8 billion dollars negotiated by community groups. From 1992 to 2000 there was 1.9 trillion dollars negotiated by community [groups](http://policylink.info/EDTK/CRA/action.html). The bank that was most agressive in this area was Washington Mutual which made commitments of hundreds of billions of dollars to community banking. Because of this they were a favorite of regulators and they were allowed to acquire 20 other banks during this time. Not coincidentally Washington Mutual was one of the few actual banks which was destroyed by the mortgage meltdown. The only significant deregulation was the repeal of Glass-Steagall which allowed investment banks to get into commercial banking. However the only commercial banks which went under were Washington Mutual and Wachovia, which had purchased a mortgage lender. The other entities that went under Lehman, Bear Stearns, Goldman Sachs, and AIG which were investment banks or insured investment banks. Glass Steagall did not affect them. If the regulators had seen the meltdown coming they could have prevented it. But they did not and they instead added to it. An all knowing and prescient regulator for the financial industry would be a great thing like a useful UN or Santa Claus, but it is just not reality. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [September 13, 2013, 5:27pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/46 "2013-09-13T17:27:34Z")
> [@Gack](#): > > To find out about the banking crisis the best guy IMO is Bill Black, he was a banking regulator in the S&L crisis so he speaks from first hand experience … > [http://www.youtube.com/watch?v=ukL7qX2pWNs](http://www.youtube.com/watch?v=ukL7qX2pWNs) I listened (it was just audio) and think Bill Black is worth listening to. You can find written opinions by him and others at [this site](http://neweconomicperspectives.org/). These are _not_ crackpot opinions ( **Gack** must get his information on Rothschild’s from another source. 🆒 ) but do have a rational perspective often missing from the U.S. debate, even among “moderates.” ---
**Author:** ![SlackerInc](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slackerinc/32/275_2.png) [@SlackerInc](https://boards.straightdope.com/u/SlackerInc)\ **Post date:** [September 13, 2013, 5:33pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/47 "2013-09-13T17:33:27Z")
The real answer, which no one in this thread has yet identified, and which is only very rarely identified in the media, is fairly straightforward: inequality of wealth reached a tipping point level that led to a crash. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [September 13, 2013, 6:14pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/48 "2013-09-13T18:14:00Z")
> [@SlackerInc](#): > > The real answer, which no one in this thread has yet identified, and which is only very rarely identified in the media, is fairly straightforward: inequality of wealth reached a tipping point level that led to a crash. How does that work? I’d always heard it was the rise of subprime lending combined with the securitization of those subprime mortgages into CDOs and mortgage backed securities that built the house of cards, and then a rash of foreclosures and delinquencies on those sub prime loans made the whole thing fall down, so to speak. Nothing to do with inequality of wealth, except that nobody in their right mind should have loaned money to people without the wherewithal and track record to pay it back. ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [September 13, 2013, 6:43pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/49 "2013-09-13T18:43:44Z")
> [@septimus](#): > > I listened (it was just audio) and think Bill Black is worth listening to. You can find written opinions by him and others at [this site](http://neweconomicperspectives.org/). These are _not_ crackpot opinions ( **Gack** must get his information on Rothschild’s from another source. 🆒 ) but do have a rational perspective often missing from the U.S. debate, even among “moderates.” That article is an attack on the Obama-era SEC for not properly pursuing Lehman Brothers several years after the fact. How in any way is that an explanation for why the financial crisis - of which Lehman was a small part among many - occurred in 2008? And how does it give a different perspective in any way? We’ve already agreed that a lack of oversight and punishment characterized the entire era, and is opposite to the claim of overregulation. It’s not often you can find something that is simultaneously irrelevant and redundant, but this hits the jackpot. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [September 13, 2013, 7:24pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/50 "2013-09-13T19:24:05Z")
> [@Exapno\_Mapcase](#): > > That article is an attack on the Obama-era SEC for not properly pursuing Lehman Brothers several years after the fact. How in any way is that an explanation for why the financial crisis - of which Lehman was a small part among many - occurred in 2008? And how does it give a different perspective in any way? We’ve already agreed that a lack of oversight and punishment characterized the entire era, and is opposite to the claim of overregulation. It’s not often you can find something that is simultaneously irrelevant and redundant, but this hits the jackpot. Oh my.(\*) “That article” is actually a home page that will give you access to many articles (yes, the website could be organized better – [this page](http://neweconomicperspectives.org/category/william-k-black) will lead you to all articles by Black, though even it could be organized better), many of which offer a _much_ better informed view of regulatory failures than exhibited in this thread. Black himself had several hands-on jobs in banking regulation; other contributors to the site include Professors of Economics. And I’m not sure why you specify “Obama-era SEC.” Democrats on SEC included some appointed by GWB, and all are more in the “Wall St” camp than the “Occupy WS” camp. 😉 - - Sorry if this sounds snarky, and perhaps I should post only in BBQ Pit, but I often post useful links only to see them derailed, as my detractors delight in nitpicking the messenger and ignoring the useful message. ---
**Author:** ![GIGObuster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gigobuster/32/421_2.png) [@GIGObuster](https://boards.straightdope.com/u/GIGObuster)\ **Post date:** [September 13, 2013, 7:32pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/51 "2013-09-13T19:32:16Z")
Looking at what happened in other countries that avoided the crisis, the big difference remains the regulations in place and as I think a doper once mentioned, be as boring as possible; that is, to have good management and less incentives to create new financial Frankenstein tools. > **[Canada's banks shake off global sector crisis](https://financialpost.com/news/fp-street/canadas-banks-shake-off-global-sector-crisis)** > > Canadian banks are among the few financial institutions in the world that have so far avoided the growing crisis in the sector > [@](#): > > In its Global Financial Stability Report, the IMF looks at those connections and concludes that banks in Canada and Australia “relied far less on foreign liabilities than most peer groups before the [financial] crisis” and that regulatory policies in Australia and Canada “share some features that might have resulted in less globally integrated banking systems.” > Advertisement > > “One important policy they have in common is the de facto prohibition of mergers among the major domestic banks,” the report says. > > “While its primary objective is to retain competition, the prohibition has prevented an increase in the size of these banks and the creation of national ‘champions’ that could compete with major global financial institutions. This may have been a factor limiting their banks’ international activities.” > > The IMF groups Canada and Australia in a peer group of banks that includes India and Malaysia. > > The report goes on to say Canada and Australia “also impose restrictions on shareholder ownership, which limits acquisition of domestic banks by either other domestic banks or foreign ones, although establishment of subsidiaries and branches of foreign banks are not restricted, except on prudential grounds.” > > In Canada, a “widely held rule” prohibits a single shareholder — domestic or foreign — from owning more than 20% of voting rights in a major bank, the report says. > > In Australia, purchases above 15% require approval from banking authorities following a review of prudential requirements, the implications of foreign ownership and impact on competition, according to the IMF. India and Malaysia restricts most foreign bank operations. > > Terry Campbell, president of the Canadian Bankers Association, said there are many reasons why banks in this country “largely avoided the problems that have plagued banks elsewhere.” > > “Our banks are well-capitalized, well-managed and well-regulated,” he said. “Canada’s banks are well-diversified organizations with investment banks anchored by solid deposit-taking institutions.” ---
**Author:** ![IceQube](https://avatars.discourse-cdn.com/v4/letter/i/dfb087/32.png) [@IceQube](https://boards.straightdope.com/u/IceQube)\ **Post date:** [September 13, 2013, 7:58pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/52 "2013-09-13T19:58:13Z")
It was Jimmy Carter’s fault and his push to give black families housing in the 1970s. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [September 13, 2013, 8:05pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/53 "2013-09-13T20:05:50Z")
> [@GIGObuster](#): > > Looking at what happened in other countries that avoided the crisis, the big difference remains the regulations in place and as I think a doper once mentioned, be as boring as possible; that is, to have good management and less incentives to create new financial Frankenstein tools. > > [IMF: Canada banks avoid global banking crisis thanks to regulation | Financial Post](http://business.financialpost.com/2012/10/10/canadas-banks-shake-off-global-sector-crisis/) Or it could be that Canada and Australia never had a sustained drop in the price of houses. If prices had stayed high in America there would not have been a financial crisis. ---
**Author:** ![GIGObuster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gigobuster/32/421_2.png) [@GIGObuster](https://boards.straightdope.com/u/GIGObuster)\ **Post date:** [September 13, 2013, 8:05pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/54 "2013-09-13T20:05:53Z")
> [@IceQube](#): > > It was Jimmy Carter’s fault and his push to give black families housing in the 1970s. No. > **[The right blames the credit crisis on poor minority homeowners. This is not...](https://slate.com/business/2008/10/the-right-blames-the-credit-crisis-on-poor-minority-homeowners-this-is-not-merely-offensive-but-entirely-wrong.html)** > > We've now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday's congressional roasting of... > [@](#): > > The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong. > > … > > Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it’s the fault of Jimmy Carter, Bill Clinton, and poor minorities? > > These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let’s be honest. Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd. > > Here’s why. > > The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. ---
**Author:** ![GIGObuster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gigobuster/32/421_2.png) [@GIGObuster](https://boards.straightdope.com/u/GIGObuster)\ **Post date:** [September 13, 2013, 8:21pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/55 "2013-09-13T20:21:41Z")
> [@puddleglum](#): > > Or it could be that Canada and Australia never had a sustained drop in the price of houses. If prices had stayed high in America there would not have been a financial crisis. IIRC the price drop was a result of how the financial Frankenstein tools like derivatives were used. Because housing prices were increasing, banks put lots of money into derivatives, it may had work, but many loans were offered to many sub-prime lenders. Very sub I must say. But that was the result of the banks and other institutions realizing that if homes prices increased as expected, they still made and would make a profit if a lender failed to pay as the home would be re-sold almost right away. Unsurprisingly, much more than the expected number of lenders could not pay, (that should not had been a surprise) and then foreclosures caused housing prices to drop. So saying that if the prices had stayed high that then everything would had been fine, sounds to me like attempting to cure the symptom but not the disease. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [September 13, 2013, 8:29pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/56 "2013-09-13T20:29:37Z")
It is very difficult to say what was the cure and what was the disease. If home prices had not been going up, no one would have wanted to invest in derivatives. The nature of bubbles is that they are easy to see afterwords. Perhaps Canada and Australia are currently in housing bubbles and when they pop things will be just as bad for their banks. ---
**Author:** ![SlackerInc](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slackerinc/32/275_2.png) [@SlackerInc](https://boards.straightdope.com/u/SlackerInc)\ **Post date:** [September 13, 2013, 9:05pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/57 "2013-09-13T21:05:36Z")
> [@bump](#): > > How does that work? > > I’d always heard it was the rise of subprime lending combined with the securitization of those subprime mortgages into CDOs and mortgage backed securities that built the house of cards, and then a rash of foreclosures and delinquencies on those sub prime loans made the whole thing fall down, so to speak. > > Nothing to do with inequality of wealth, except that nobody in their right mind should have loaned money to people without the wherewithal and track record to pay it back. Indeed not, but inequality is what created the housing bubble and took the “right mind” out of the equation. First off, the germ of the idea came after listening to the Polk and Peabody award winning episode of This American Life entitled [The Giant Pool of Money](http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money). If you haven’t heard it, I strongly urge you to do so, or read the transcript. Then, take a look at [this graph of income inequality.](http://scatter.files.wordpress.com/2008/04/0329-biz-subtaxweb.gif) Thirdly, note what [this university history website](http://www.library.hbs.edu/hc/crises/forgotten.html) calls the forgotten housing bubble (and subsequent skyrocketing level of foreclosures) of the 1920s. I do not believe these parallels are coincidental. As for the exact theoretical basis for how they are connected, the following come from a blog comment I wrote on Nate Silver’s 538 blog in early 2009, followed by an email I wrote a friend following up on that in 2011. References to the comments of others that I am responding to are edited out for clarity. The blog comment: > [@](#): > > My theory is that aside from the essential unfairness of a situation where the top one percent have a ridiculous lion’s share of national wealth, it leads to bubbles because when people have untold millions or billions of dollars, they aren’t content with sticking it in safe, staid investments like the middle class might do. They want higher returns–in fact, as inordinately wealthy people, they feel entitled to them. So the money chases investment rather than the other way around, and all kinds of bubbles get created, along with Ponzi schemes and other scams. In the quest for financial instruments that can provide the higher returns investors are insisting on, lenders look for people who will borrow money but pay a higher premium for doing so because their credit is not great. > > Looked at from another angle, all that money tied up in the hands of the top one percent (who have gotten much richer while the vast majority of people saw their incomes stagnate), like water finding its level, naturally “wants” to be circulating in the economy in a more equal and sensibly distributed way. But since it is not being distributed in the form of higher wages (the rich taking greater and greater amounts of “surplus value” from their workers[…]), the wealthy feed it back to the hoi polloi in the form of debt. Sort of like a “company town” or a sharecropper setup where the capitalist charges workers every which way. > > But as happened to the plantation owners when their workers got all uppity and abandoned the plantations for the North, or as happened to mining companies when the workers got fed up and went on strike (even when that meant getting shot at), the greedy rich people took it too far and their debt-ridden, leveraged house or cards collapsed–but unfortunately the collapse hurts the rest of us as well. > > [When people blame] individuals for “living beyond their means”, [they] are pushing the standard narrative that lets the superrich off the hook. It’s not true that “the entire Western world” ran up debt. Who do you think was doing the lending? Not “bankers”–they are just middlemen (middlepeople?). It is mostly the top one percent, who have become obscenely wealthy at the expense of most of the rest of us. Larry Summers laid it out quite well: > > > [@](#): > > > > In the last 29 years, Summers said, “you’ll find that the share of income going from 80 to 99th percentiles has stayed the same. And those in top one percent have gained about $600 billion. Those in bottom 80 percent have lost about $600 billion.” > > > > Summers then calculated that this overall transfer of wealth averaged out to an additional $500,000 per year in earnings for those in the top one percent, and an $8,000 loss every year for those in the bottom 80 percent. > > “If the bottom 80 percent had kept pace and earned that $8,000 … their income growth would have been twice as high over the last generation as what we in fact observed. Think about this number: $600 billion a year. It is immense compared to any discussion of changing the tax system here or there,” Summers added. > > Another way to put it is that if these respective shares of wealth had remained constant, average Americans could have experienced a rise in their standards of living without it being financed through borrowing. And then we wouldn’t be in the pickle we’re in. The email: > [@](#): > > A lot of the people who got the “subprime” mortgages that really made a mess were people of quite low incomes (and of course a big part of the reason for that is all the surplus value skimmed off by those at the top). In any normal time, it would be obvious to a lender or mortgage broker that these “subprime” clients were bad risks, and they wouldn’t get a loan, period. But with the insanely huge amounts of money that were sloshing around, both from rich fatcats and from sovereign wealth funds like China’s, and with conservative investments like bonds providing what were seen as unacceptably low returns, a lot of investment managers were under serious pressure from their richest clients to find them better returns. > > The stock market wasn’t cutting it; it had roared up in the late '90s but has been up and down but overall flat ever since the turn of the millennium. My theory on this relates to the overall issue: when a small elite controls such a large amount of wealth, their first instinct is to put it in stocks. But this causes the market to be overvalued, and makes it sputter along with a series of boomlets and busts. > > Fundamentally, when the bottom 80% of the population has such a paltry slice of the pie, the top one percent has maxxed out their plunder of surplus value beyond any reason to the point where it’s going to have disruptive effects. After all, the wealth of a nation isn’t actually represented by piles of money; money itself is just an “I.O.U.” for various goods and services. > > So if the wealth of a society increases remarkably but the increase goes only to a small elite, what does that mean in practical terms? Those goods and services become far too much for this small number of people to actually use. And it wouldn’t make a lot of sense for a billionaire to acquire thousands of new cars, warehouses full of Blu-ray players, etc., and say “this is my wealth, the rest of you can’t afford to have it so I’m just going to keep it”. You’re paying warehouse costs, stuff depreciates, and it just isn’t getting any use. Madness. And how exactly could these billionaires warehouse services, from oil changes to haircuts to plumbers’ housecalls? > > So instead, the ultra-rich let those goods and services circulate in the economy in the way they would if wealth were distributed more evenly (not in some theoretical utopian setup, just the distribution we saw in the postwar years up until the election of Reagan, when the modern ascent toward massive inequality began). But they don’t do so freely: instead they claim an I.O.U. for those goods and services, plus interest. This makes about as much economic sense as payday loans, of course: it’s just not sustainable. The interest people with stagnating incomes have to pay on today’s loans is going to keep them from being able to take out loans next year or the year after, when rich people will have even more surplus value loot they will be looking to collect interest on. So of course it ends up collapsing eventually. > > But getting back to the specifics of 2008, the global pool of money was sloshing around and putting pressure on Wall Street to find places for it where it could provide some returns. Therefore they pushed credit cards on people who couldn’t afford them, encouraged them to buy expensive furniture and appliances at “no money down”, etc.; all in a desperate scramble to get that money out there “working for them”. > > […]If you shove money and shiny consumer goods in people’s faces and whisper sweet nothings in their ears about easy terms, practically beg them to take the credit, there are enough people out there who will succumb to the pitch just because the temptation for instant gratification is so great (and let’s not fail to credit the credit marketers for having developed psychologically effective sales techniques over the years). > > Of course, the worst excesses in what I’d call credit pushing rather than credit granting, were in the housing sector. I mean, hello–NINJA loans? > > It is now pretty well established, too, that these loans tended to go not merely to the poorest families, but, in general, were marketed at America’s black and Hispanic populations. They were the most likely to take on the so-called “ninja” loans (no income, no job, no assets). According to one real estate broker in Oakland, all some credulous households were told was: “firma, fecha” - Spanish for “signature, date.” > > What other possible explanation can we find for this insanity other than my inequality thesis–that a tiny number of people had too much money and were running out of places to put it and getting desperate to find new “customers” for their credit? But hey, if you lend money to people without much money and with bad credit ratings, you can charge them a lot higher interest rates, which means higher returns for those putting up the money. Pool lots of these loans together and you’ve got a new type of investment instrument to soak up some of that money sloshing around. Sure, the loans are risky individually; but collectively the higher returns offset the risk…and besides, if people default, housing prices are going up-up-up and you can foreclose the property and maybe even sell it at a profit. > > That is, until the bubble bursts and housing prices go down and a bunch of people find themselves “underwater” (owing more than their house is now worth): > > One family - the husband is a janitor, the wife a cleaner - bought their two bedroom bungalow in Oakland for $420,000 in 2005. Now their mortgage rate has reset and it is on the market for $119,000. It probably won’t fetch the list price. > > …and so they start defaulting on a massive scale, and as the economy suffers, more people are thrown out of work and they join the ranks of the defaulters, and it all spirals downhill and you know the rest. > > Too bad the field of economics is so dominated by an ultraconservative ideology that won’t allow the vast majority of economists to even begin to question whether severe inequality–even leaving aside all questions of ethics and fairness–might actually be bad for the economy. And yes: I actually do picture people decades or centuries from now looking back and saying “wow, that one dude with no economics training got what everyone else missed.” 😃 Though I unfortunately cannot find any information going back to the 1920s, it is also worth looking at [this graph](http://www.housingviews.com/2011/07/27/chat-questions-on-rent-vs-buy/price-rent-ratio/) of the ratio between rent and housing ownership prices. Seems to parallel inequality pretty well. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [September 13, 2013, 9:09pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/58 "2013-09-13T21:09:30Z")
There are two kinds of people in the world: [del]those who like to write “there are two kinds of people” and those who don’t[/del] those who look for a single specific cause of the 2007 financial crisis (“Was it all about repealing Glass-Steagall? Let’s just stop repealing Glass-Steagall then!” 😃 ) and those who see that American capitalism has become lost in corruption and greed. Corporate profits are setting records _and much of the profits accrue to the financial sector_. Many opinion makers oppose almost all regulations in the interest of a “pure capitalism” … ignoring that their Great Prophet, Adam Smith himself, _ **advocated government regulation of banking.** _ Some people view SDMB as a debating society and would ask me to argue this case in detail or shut up. No, I have neither the time nor the talent to do so. I pointed Dopers toward Naomi Klein and _got only a single response_: one Doper was proud to announce that he’d never heard of Ms. Klein. I recommend Bill Black and get only a snarky gibbering in reply. _ **If demonstrating the insidious and pervasive failure of American banking regulation is the object, it doesn’t really matter whether the examples occurred in the 1980’s, the 2000’s or the 2010’s.** _ Those looking for the “silver bullet” (“If only we hadn’t repealed Glass-Steagall” 😛 ) are … under-informed. > [@puddleglum](#): > > If home prices had not been going up, no one would have wanted to invest in derivatives. The vast majority of derivative contracts were not tied to housing, but were interest rate swaps, foreign exchange swaps, and misc. default swaps. (Some of these were _indirectly_ tied to the housing bubble in the sense that anything that caused economic collapse would have huge effect on interest-rate swaps and other credit derivatives.) BTW,I am somewhat astounded to [read at Wikipedia](https://en.wikipedia.org/wiki/Derivative_(finance)) that the nominal (“notional”) value of derivatives in 2011 totaled no less than $708 trillion! Yes, “nominal” value is misleading, but even the “gross market value” was a whopping $11 trillion. > [@puddleglum](#): > > The nature of bubbles is that they are easy to see afterwords. They’re not always so very hard to see beforehand either. Warren Buffett didn’t buy Internet stocks! In hindsight there’s plenty of evidence that big Wall Street bankers were betting big on a housing bust. > [@Exapno\_Mapcase](#): > > It’s not often you can find something that is simultaneously irrelevant and redundant, but this hits the jackpot. Do you want to learn? … Or play snarky games in a “debating-society”? ---
**Author:** ![SlackerInc](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slackerinc/32/275_2.png) [@SlackerInc](https://boards.straightdope.com/u/SlackerInc)\ **Post date:** [September 13, 2013, 9:21pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/59 "2013-09-13T21:21:29Z")
If you don’t want to listen to that entire _Giant Pool of Money_ show or read the transcript, great as it is, here are really the key portions: > [@](#): > > Think how attractive a mortgage loan is to that $70 trillion pool of money. > > Remember, they’re desperate to get any kind of interest return. They want to beat that miserable 1% interest Greenspan is offering them. And here are these homeowners paying 5%, 9% to borrow money from some bank. So what if the global pool could get in on that action? > > There are problems. Individual mortgages are too big a hassle for the global pool of money. They don’t want to get mixed up with actual people, and their catastrophic health problems, and their divorces, and all the reasons that might stop them from paying their mortgages. So what Mike and his peers on Wall Street did, was to figure out a way to give the global pool of money all the benefits of a mortgage-- basically higher yield-- without all the hassle and risk. > […] > In the beginning, he’d only buy mortgages that were pretty standard and pretty safe. Mortgages where people had come up with a down payment and proven that they had a steady income and money in the bank. And they sold so many of these mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one, had gotten one. > > But the pool of money had just gotten started. They wanted more mortgage-backed securities. So Wall Street had to find more people to take out mortgages, which meant lending to people who never would have qualified before. > […] > An interesting fact here. Mike Garner’s bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years like they used to. They didn’t have to wait and see if they’d be paid back. Banks like Garner’s would just own the mortgages for a month or two. And then they sold them on to Wall Street. And then Wall Street would sell them on to the global pool of money. > […] > Lots of people in the mortgage industry had this faith that housing prices in the US simply never go down. > > So from the bank’s perspective, even if the worst happens and someone defaults, the bank would then own a house, which is now worth even more than what they gave out in the loan. So all Mike cared about was whether or not his customers, the Wall Street investment banks, would buy those mortgages from him. > > And he was under pressure to approve more and more loans. Because other guys in his company-- the actual guys cruising strip malls all across Nevada buying mortgages from brokers-- their commission depended on selling more loans. And occasionally those guys would hear about some loan that some other mortgage company offered that they weren’t allowed to offer. And they’d complain to Mike. > > Mike Garner: “Three of them would show up at your door first thing in the morning, and say, I lost 10 deals last week to Meritius Bank. And they’ve got this loan. Look at the guidelines for this loan. Is there any way we can do this, because we’re losing deals left and right?” > […] > “Yeah, and then once I got a hit, then I’d call the other people back and say, listen, Bear Stearns is buying this loan. And I would like to give you the opportunity to buy these loans too. And once one person buys them, usually all the rest follow suit.” ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [September 13, 2013, 10:42pm UTC](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649/60 "2013-09-13T22:42:50Z")
> [@septimus](#): > > Oh my.(\*) > “That article” is actually a home page that will give you access to many articles (yes, the website could be organized better – [this page](http://neweconomicperspectives.org/category/william-k-black) will lead you to all articles by Black, though even it could be organized better), many of which offer a _much_ better informed view of regulatory failures than exhibited in this thread. Black himself had several hands-on jobs in banking regulation; other contributors to the site include Professors of Economics. So your argument is that I should somehow know that the particular irrelevant article that you linked to is not what I should be evaluating as your argument. It is not snark to say that I cannot read your mind. If you want to make a cite, then link to it. > [@](#): > > And I’m not sure why you specify “Obama-era SEC.” I’m sure. Because of: > [@](#): > > Cannelos and his teams were not brave martyrs for “justice” and Schapiro was not exerting “political pressure” to force them to bring an abusive suit motivated by the Obama administration’s (non-existent) desire to punish Lehman’s looters for their politics. And: > [@](#): > > Let me be clear that the ultimate responsibility for the SEC fiasco lies with Schapiro. She was appointed to head the SEC by Obama for his traditional reason – she was an abject failure as the leader of securities industry’s self-regulatory body that took no effective action against the epidemics of accounting control fraud that devastated that industry and our Nation. Apparently, my mistake was that I actually read your cite. Perhaps you didn’t. Yes, that’s snark and well deserved. > [@](#): > > - > - Sorry if this sounds snarky, and perhaps I should post only in BBQ Pit, but I often post useful links only to see them derailed, as my detractors delight in nitpicking the messenger and ignoring the useful message. Your link was not useful. You have not provided any useful evidence of anything. Nor have you provided any new information, since many people in this very thread have pointed out the lack of oversight. More importantly, they have also pointed out a great many other reasons which you have thus far failed to even mention, let alone evaluate. > [@septimus](#): > > Some people view SDMB as a debating society and would ask me to argue this case in detail or shut up. Yes, some would. [Previous page](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649.md?page=2) [Next page](https://boards.straightdope.com/t/was-it-overregulation-or-deregulation-that-led-to-the-financial-crisis-of-2007-08/668649.md?page=4)