# Was the economy really "on the verge of collapse"? **URL:** \ **Category:** Great Debates\ **Created:** [October 4, 2012, 5:37pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721 "2012-10-04T17:37:39Z")\ **Posts on this page:** 10\ **Page:** 3
**Author:** ![Runs\_With\_Dogs](https://avatars.discourse-cdn.com/v4/letter/r/6a8cbe/32.png) [@Runs\_With\_Dogs](https://boards.straightdope.com/u/Runs_With_Dogs)\ **Post date:** [October 9, 2012, 5:27am UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/41 "2012-10-09T05:27:14Z")
> [@msmith537](#): > > This statement doesn’t make any sense. > > AIG has actually paid back most of the money it borrowed, at a profit. > > [They also changed to friendlier, less “Wall Street” logo](http://ca.finance.yahoo.com/photos/aig-unveils-logo-photo-154900010.html) Tru dat, but they still got to keep those bonuses and no one has been brought before a grand jury to answer for their crimes. I find that kind of sickening, that they get to live like royalty while a lot of plain ol’ folks don’t know where their next meal is coming from. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 9, 2012, 6:18am UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/42 "2012-10-09T06:18:32Z")
> [@msmith537](#): > > This statement doesn’t make any sense. > AIG has actually paid back most of the money it borrowed, at a profit. > > [They also changed to friendlier, less “Wall Street” logo](http://ca.finance.yahoo.com/photos/aig-unveils-logo-photo-154900010.html) Immaterial. The bailout was necessary, but helping to bring down the economy is not a reason for a bonus in my book. ---
**Author:** ![MDKSquared](https://avatars.discourse-cdn.com/v4/letter/m/b9e5f3/32.png) [@MDKSquared](https://boards.straightdope.com/u/MDKSquared)\ **Post date:** [October 9, 2012, 1:47pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/43 "2012-10-09T13:47:55Z")
> [@Voyager](#): > > If you haven’t read “The Black Swan” you should. That guy called it. But it did not come from nowhere. Krugman had been warning of the effects of the end of the bubble for some time, and recommended Fed policies, such as raising interest rates, which might have led to a softer landing. As you mention, when people’s bonuses depend on them being optimistic, it is hard for them to face reality. I’ve read Fooled by Randomness, but not Black Swan. It was my understanding that the crisis didn’t “come out of nowhere” which is why I was so confused when people were acting like it was (I couldn’t tell if people were simply ignorant or trying to pass the buck of responsibility). Perverse incentives certainly didn’t help, but it makes me wonder why people in control of these incentive structures wouldn’t do the NPV/EV calculations to figure out that “Hmmm, maybe these bonuses/investments are bad ideas since the event of a bubble-burst would be catastrophic.” In other words, I am not yet convinced that it really WAS a black swan event when there were so many floodgates opened in recent years to allow it to happen. Or perhaps I am falling victim to hindsight/confirmation bias here. I just don’t understand why people were willing to engage in so much risk. If I have a chance to earn lots of money by playing a game of Russian Roulette, there’s no amount of money you could pay me to play that game simply because the downside is so ridiculously bad. > [@Voyager](#): > > Greenspan was holding interest rates low partially to help Bush. That meant people were looking for high yield investments, and mortgage backed securities were just the thing, especially when the ratings agencies gave them AAA ratings. The demand for these drove the mortgage companies to write ever worse mortgages. Then there was a lot of leverage, and insurance. Why were these securities given AAA ratings when they weren’t nearly so safe at all? > [@Voyager](#): > > Say you have $100K in investments. The market crashes and you now have only $80K. One person selling low affects the value of your stock also, even if you haven’t sold. Now, a couple of things can happen. > > 1. People panic and sell, which drives things down even further and locks in their losses. The best advice at the time was to not look at your statement. I didn’t, and I made it all back. > 2. People who have to sell, for instance the retired, cut consumption, as do those planning to sell some of their investments for consumer purchases. This drives down consumption. > 3. Companies, seeing the market drop and knowing that this reduces consumption begin to retrench, by freezing hiring or cutting staff. Those people now are really going to cut back. Gotcha – thanks for the explanation. > [@Voyager](#): > > How many people are going to have to suffer to teach the banks a lesson? Thanks to regulations we went for almost 80 years without a major problem. Get rid of them, belittle them, and boom. And of course there was greed and all that other stuff before this. If you are going to punish anyone, let’s throw the bankers in jail and bail out the banks, and get some tough regulations in place to try to keep it from happening again. Of course this cuts down the short term profitability of the banks - tough. As it stands if we followed his advice the people who put us in this mess would have been fine while the innocents would have suffered even more than they did. You remember AIG - the very people who screwed up were supposed to get big bonuses to retain them, since only they knew the secrets of the crash. > It is not like there wasn’t greed before this - see Enron, for example. I agree with this. I’m completely befuddled, though, why none of the bankers have been sent to jail (at least to my knowledge). ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [October 9, 2012, 2:59pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/44 "2012-10-09T14:59:47Z")
My question is when did we shift from using money to buy good to using money to service debt? It seems that at the height of the bubble, Americans were spending a higher percentage of their income on housing, utilities and car payments - i.e. money that doesn’t get cycled into the economy as quickly as shopping. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 9, 2012, 6:28pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/45 "2012-10-09T18:28:15Z")
> [@MDKSquared](#): > > I’ve read Fooled by Randomness, but not Black Swan. It was my understanding that the crisis didn’t “come out of nowhere” which is why I was so confused when people were acting like it was (I couldn’t tell if people were simply ignorant or trying to pass the buck of responsibility). Perverse incentives certainly didn’t help, but it makes me wonder why people in control of these incentive structures wouldn’t do the NPV/EV calculations to figure out that “Hmmm, maybe these bonuses/investments are bad ideas since the event of a bubble-burst would be catastrophic.” In other words, I am not yet convinced that it really WAS a black swan event when there were so many floodgates opened in recent years to allow it to happen. There is no simple answer to this. One issue is that in a competitive environment, a CEO who reined back on this high return products would see his profitability erode versus his competition, and thus his stock price and his compensation. Second people are very bad about dealing with low probability events, and they also tend to act as if current trends will continue. I have no idea if they actively ignored the consequences of a bust or subconsciously filtered out the possibility. There is a concept called availability, which says your decisions are based on the concepts available to you, often based on your experience. People think the murder rate is higher than the suicide rate because murders are covered in the paper and suicides are not, and so murder as a means of death is more available. Housing crashes covering the entire country never happened before, so perhaps the idea was not available to the CEOs. > [@](#): > > Or perhaps I am falling victim to hindsight/confirmation bias here. I just don’t understand why people were willing to engage in so much risk. If I have a chance to earn lots of money by playing a game of Russian Roulette, there’s no amount of money you could pay me to play that game simply because the downside is so ridiculously bad. How about if the person getting shot was not you but some faceless person in the mob? And if your worst enemy was playing also and was lording over his winnings and laughing at you? > [@](#): > > Why were these securities given AAA ratings when they weren’t nearly so safe at all? Two reasons. First banks picked the rating agency. Agencies knew that if they gave bad ratings to bonds the banks would pick another one the next time, and they would be out the business. Second, the rating agencies seemed to have told the banks their rating algorithm, which let the banks structure products to be the very worst (and most profitable) collection that would still get AAA. > [@](#): > > I’m completely befuddled, though, why none of the bankers have been sent to jail (at least to my knowledge). Now, how can they be job creators in jail? ---
**Author:** ![MDKSquared](https://avatars.discourse-cdn.com/v4/letter/m/b9e5f3/32.png) [@MDKSquared](https://boards.straightdope.com/u/MDKSquared)\ **Post date:** [October 9, 2012, 7:04pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/46 "2012-10-09T19:04:18Z")
Seriously though, shouldn’t the evidence condemn them? I never did understand the whole “job creator” thing during times when the problem is demand-side. Maybe if people had money to spend, putting more money into the companies would be a defensible position. But when costs are high and people can’t afford to consume more, it doesn’t make sense to me to call these guys “job creators.” I could sure create more jobs in the luxury car industry by giving more money to those companies, but the participants in that market are going to be rich to begin with. Profitability by itself seems meaningless without context. The distribution of market participants matters, too. How else could companies get such huge profits and record-high cash reserves during economic downturns? Profit = Revenue - Cost, after all… So, I mean, given the evidence… I seriously don’t understand why more hammers aren’t being dropped here. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 9, 2012, 8:13pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/47 "2012-10-09T20:13:41Z")
> [@MDKSquared](#): > > I am completely ignorant so please bear with me. > > 1. What was so bad when we let the first bank fail? Should we have saved it instead? What happened here? > > 2. I always hear people say that we SHOULD have just let the banks fail because “it would correct the market” in terms of letting the crap die and the strong survive – a sort of natural selection. Why would this be a bad idea? Is the idea to float the bad stuff just for a bit to take a risk and hope that you can emerge from it better than you would be via market correction by keeping things flowing? > > 3. What is the main difference between Keynesian economics and Austrian economics? I hear Ron Paul supporters talk about this stuff a lot, too. I tend to get the impression that the Austrian school is loaded with crackpottery, but I don’t know for sure. In school we always learned the Keynesian stuff. I see that most of these questions have been answered. Let me just add that we let a LOT of banks fail because they were beyond saving. One interesting fact that led to a lot of bank failures: FNMA and FHLMC preferred stock got preferential treatment for bank regulatory reserve purposes so there were some banks that were heavily invested in these assets. They went bankrupt and there was nothing anyone would or should do to stop it. It was poor asset management by the banks facilitated by poor regulation. Another point I’d like to make is that most banks were only underwater by a small percent of their overall assets. It would have only taken a few years of normal profits and no dividends for a lot of these banks to achieve solvency. > [@MDKSquared](#): > > I guess my next question is why everyone acted like this was some big black swan out of nowhere? A lot of people thought this was a bubble, most of them didn’t think it would be this bad. > [@](#): > > If this is indeed a huge “bet”, how does value get destroyed here? Usually in a bet, there’s a winner and loser. Did someone just “win big” during the collapse while the rest of the country suffered? Instead of bailing out the banks with taxpayer money, couldn’t they just figure out some way to unwind the bets from the banks? > > I am trying to understand when a bet destroys value vs. redistributes value, on that latter point. Lets say you own a million shares of stock and 100 shares of stock trades for $1 higher than its current price. You are a million dollars richer even though only 100 shares have changed hands. That 100 share trade created $1,000,000 of wealth in your hands. The opposite is also true. If the stock sold for $1 less, even though only 100 shares traded hands, you are a million dollars poorer. Are you talking about the credit default swaps? > [@](#): > > Here is a response over a PM from one of my friends on Facebook a long time ago when he was talking about this: > > "I also think the banks and bankrupt companies should have been allowed to fail… Your friend is wrong. The failure of the banking system would have done more than punish the banks, it would have cratered the global economy. The government has always been the ultimate guarantor of economic stability. > [@MDKSquared](#): > > Or perhaps I am falling victim to hindsight/confirmation bias here. I just don’t understand why people were willing to engage in so much risk. If I have a chance to earn lots of money by playing a game of Russian Roulette, there’s no amount of money you could pay me to play that game simply because the downside is so ridiculously bad. People felt they had a good handle on the default risks. They had almost a century of data for their modelling. True story: I’m having drinks with a bunch of bankers and their greatest concern was not default risk, it was pre-payment risk. They were pretty comfortable with the default risk, and they believed that all the reasonably likely tail end scenarios were manageable. Sure there was still a risk but there is a remote risk of getting into a fatal car accident on my commute to work. Should I stay at home because the worst case scenario is so bad? A lot of times I don’t even do it for a paycheck, sometimes I just do it to pick up dinner from that really awesome thai place that doesn’t deliver. > [@](#): > > Why were these securities given AAA ratings when they weren’t nearly so safe at all? Conflicts of interest. Failure to understand the risks. googobs of money. > [@](#): > > I agree with this. > > I’m completely befuddled, though, why none of the bankers have been sent to jail (at least to my knowledge). Because our regulators are pussies. Angelo Mozilo, the former CEO of countrywide and one of the people most responsible for the bubble and the crash settled with the SEC for securities fraud and served no jail time. He paid almost 40 million dollars out of almost a billion dollars he got from from being CEO of countrywide and selling stock. They basically wont go after you unless they have a slam dunk case. None wants to lose a big case and one of the problems with government is that you are punished much more for losing than you are rewarded for winning. > [@Voyager](#): > > There is no simple answer to this. One issue is that in a competitive environment, a CEO who reined back on this high return products would see his profitability erode versus his competition, and thus his stock price and his compensation. This is precisely how Angelo Mozilo got into the subprime game. He was losing market share to two bit operations like the Money Store and felt he had to get involved. Then he ran with it. > [@MDKSquared](#): > > So, I mean, given the evidence… I seriously don’t understand why more hammers aren’t being dropped here. It takes a lot of political will to send a rich person to jail. The IRS is about the only government agency that does it on a regular basis. Other agencies tend to settle for monetary fines. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 9, 2012, 9:03pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/48 "2012-10-09T21:03:57Z")
> [@MDKSquared](#): > > Seriously though, shouldn’t the evidence condemn them? > > I never did understand the whole “job creator” thing during times when the problem is demand-side. Maybe if people had money to spend, putting more money into the companies would be a defensible position. But when costs are high and people can’t afford to consume more, it doesn’t make sense to me to call these guys “job creators.” I could sure create more jobs in the luxury car industry by giving more money to those companies, but the participants in that market are going to be rich to begin with. Profitability by itself seems meaningless without context. The distribution of market participants matters, too. How else could companies get such huge profits and record-high cash reserves during economic downturns? Profit = Revenue - Cost, after all… > > So, I mean, given the evidence… I seriously don’t understand why more hammers aren’t being dropped here. Sorry, job creators was a joke. We’ve had threads about the inanity of that term. My impression is that financial crimes of this nature are very hard to prove. You can’t lock people up for making bad bets. I think it is hard to get a jury to understand the issues, you are fighting people with a lot of money, and the damage is indirect. There appears to be some movement by the NY State Attorney General, in league with the DoJ and other states, to get judgements against the banks, at least. ---
**Author:** ![psikeyhackr](https://avatars.discourse-cdn.com/v4/letter/p/97f17d/32.png) [@psikeyhackr](https://boards.straightdope.com/u/psikeyhackr)\ **Post date:** [October 16, 2012, 9:21pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/49 "2012-10-16T21:21:29Z")
> [@Voyager](#): > > Probably not, but he certainly heard radio commercials. Not much different. > And the term planned obsolescence goes back to 1932 ([Cite.](http://en.wikipedia.org/wiki/Planned_obsolescence)) so he knew about it. That increases consumption - so what. He did know about breaking windows. > > How does technology change economics again? How do you know Keynes knew about it? He may have heard of it but then again he may not. Unless he wrote about it or someone else wrote about him saying something about it how does anyone know. Does technology affect economics? Don’t economists use buggy whip manufacturers as an example. They call it creative destruction or come up with some other fancy term. But as technology changes things which may have been valuable may become less so, like horses or vacuum tubes. And things which were not very valuable may become more so, like crude oil or tantalum. psik ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 17, 2012, 7:51pm UTC](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721/50 "2012-10-17T19:51:40Z")
> [@psikeyhackr](#): > > How do you know Keynes knew about it? He may have heard of it but then again he may not. Unless he wrote about it or someone else wrote about him saying something about it how does anyone know. I’ve only read his first book, on philosophy and theory of knowledge, but I suspect any economist of the time would know of such a well broadcast topic. [/quote] Does technology affect economics? Don’t economists use buggy whip manufacturers as an example. They call it creative destruction or come up with some other fancy term. But as technology changes things which may have been valuable may become less so, like horses or vacuum tubes. And things which were not very valuable may become more so, like crude oil or tantalum. psik [/QUOTE] Technology affects the economy, obviously. But does it affect economics? There is nothing new about certain items becoming valuable - see tulips or spices. Technology lets us do price comparisons on a global scale, but it that fundamentally different from a farmers’ market? [Previous page](https://boards.straightdope.com/t/was-the-economy-really-on-the-verge-of-collapse/636721.md?page=2)