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What Created The 2008 Financial Meltdown?

What Created The 2008 Financial Meltdown?


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I wanted to select all of the above. Although, I would not have qualified the home buyers as poor.

Yes, you had people buying homes as investments to sell in a couple of years and no real chance of ever paying off the loan. Yes, you had banks giving loans to people that could not afford the homes. Yes, you had regulation and enforcement that forced banks to give loans they didn't want to give (on top of the other bad loans they did want to give).

Like any tragedy, if you remove one of those factors you prevent the event. I would have preferred less government regulation.
 
I wanted to select all of the above. Although, I would not have qualified the home buyers as poor.
I agree that "poor" was a, well, poor choice of wording. They were people who did not borrow their money wisely.


Yes, you had people buying homes as investments to sell in a couple of years and no real chance of ever paying off the loan. Yes, you had banks giving loans to people that could not afford the homes. Yes, you had regulation and enforcement that forced banks to give loans they didn't want to give (on top of the other bad loans they did want to give).

Like any tragedy, if you remove one of those factors you prevent the event. I would have preferred less government regulation.
In theory I would prefer government regulation as well. But, loosening the regs allowed human nature to kick in. As I get older I come to believe that human nature will always thwart the best theories if allowed to do so, thus some kind of balance needs to be found.

You and I and some others may have the self-discipline to not do unwise things, but too many people do not. Regardless how much we would like to think otherwise, we do not live in a bubble protected from their actions.
 
I agree that "poor" was a, well, poor choice of wording. They were people who did not borrow their money wisely.



In theory I would prefer government regulation as well. But, loosening the regs allowed human nature to kick in. As I get older I come to believe that human nature will always thwart the best theories if allowed to do so, thus some kind of balance needs to be found.

You and I and some others may have the self-discipline to not do unwise things, but too many people do not. Regardless how much we would like to think otherwise, we do not live in a bubble protected from their actions.

No matter how unwise, people have to be allowed to make their own decisions. If they are not, what is the difference between them and a slave?
 
You wouldn't believe how many disagreements I had with friends 5-8 years ago over whether or not their equity was "real". They were adamant that it was. I kept saying it was an illusion based on hype and excitement. They didn't want to hear that.

Of course not. A lot of people took a lot of that false equity out of their house to blow on frivolous things and when the market crashed and their houses were revalued, they had a second or third mortgage hanging over their head and a house that wasn't worth what they paid for it.

People are dumb.
 
No matter how unwise, people have to be allowed to make their own decisions. If they are not, what is the difference between them and a slave?

That's fine but they have to be fully responsible for their own decisions as well. That means nobody bails them out when they act like idiots.
 
That's fine but they have to be fully responsible for their own decisions as well. That means nobody bails them out when they act like idiots.

Absolutely. What's to stop people from taking risks if there is no potential for loss?
 
Of course not. A lot of people took a lot of that false equity out of their house to blow on frivolous things and when the market crashed and their houses were revalued, they had a second or third mortgage hanging over their head and a house that wasn't worth what they paid for it.

People are dumb.

I would argue differently. Cheap credit and easy credit will always be taken advantage of. Companies do it, Governments do it, individuals do it. Generally the restriction is that credit is not generally cheap and easy except for the most qualified of borrowers.

The breakdown happened when banks and loaning agencies loaned out money, turned around and sold those loans that were bundled, then those bundled loans were stamped with a AAA rating due to this faulty logic that didn't account for mass foreclosures and mass dropping of housing prices.

There was a serious breakdown of what consitutes risk. Some individuals made a killing because by going through AAA CDO's they realized that risk was misrepresented and bet against it. This is nothing new and constantly get played out. Some new financial instrument redefines risk, people buy into the hype, and when reality sets in the bubble bursts. The Junk Bond fad of the 80's played out the same exact way. By bundling Junk Bonds you decreased the risk and under a normal market the amount received in interests payments offset companies that failed. People bought into the hype and Junk Bonds made a lot of people insanely wealthy. Then reality sets in, bankruptcies of companies rise due to the cyclical nature of the economy and those bundled junk bonds go from a safe investment to a toxic asset.

In the pase say, regarding the margin trading and the great depression people in government looked at the situation and asked "how do we prevent this from happening again?". Hence the regulations after the Great Depression. In the 80's people bought this bill of goods that A) Things are different, we understand risk and how the markets work so the idea of another Great Depression happening is ridiculous and B) That regulation created after the Great Depression was unneeded because financial firms are self regulating due to their better understanding of markets and risk.

I personally see it as dumb by ignoring history and recent events and doubling down on deregulation.
 
No matter how unwise, people have to be allowed to make their own decisions. If they are not, what is the difference between them and a slave?
Spare me the 'slave' rhetoric.

If you don't see the need for a balance between individual choice and some modicum of standards, that's fine. Just don't say one word of complaint when your investment portfolio takes a dive because a bunch of other people made their own decisions.
 
What Created The 2008 Financial Meltdown?

Greedy Wall Street Investment Bankers /Deregulation of the financial industry

Barney Frank, Chris Dodd and the CRA

Poor people buying houses they can’t afford.

Other

A combination of all three.
 
the 2008 meltdown was the culmination of more than three decades of failed economic strategy.

put simply, we outsourced / eliminated too many middle class jobs. we attempted to replace earned income with easier credit. this allowed consumption to continue even in the face of reduced or stagnated wages. in 2008, we experienced a large part of the correction which we would have been experiencing all along had credit not been made more available to displaced workers.

the moral of the story is that if you live in a country with a GDP that is largely consumer spending based, you had better hire some people domestically and pay them wages that allow for some discretionary spending without extensive borrowing.
 
the 2008 meltdown was the culmination of more than three decades of failed economic strategy.

put simply, we outsourced / eliminated too many middle class jobs. we attempted to replace earned income with easier credit. this allowed consumption to continue even in the face of reduced or stagnated wages. in 2008, we experienced a large part of the correction which we would have been experiencing all along had credit not been made more available to displaced workers.

the moral of the story is that if you live in a country with a GDP that is largely consumer spending based, you had better hire some people domestically and pay them wages that allow for some discretionary spending without extensive borrowing.

I would agree, I would go further and say that shareholder wealth maximization has created an environment of short term profits over long term sustainability of companies. In the words of Jack Welch "On the face of it, shareholder value is the dumbest idea in the world"
 
I would agree, I would go further and say that shareholder wealth maximization has created an environment of short term profits over long term sustainability of companies. In the words of Jack Welch "On the face of it, shareholder value is the dumbest idea in the world"
It seems that companies increasingly rarely look beyond the next fiscal quarter.
 
Translation: Since some people...scratch that...since most people are stupid, we have to give overwhelming power to government to act as daddy, slapping people's hands and shouting "no!" when they do something ridiculous?

Ah hell, that's just great. Our problem isn't stupidity - it's that we subsidize it. Making an example of these fools would be a powerful learning tool for the next crop of economically ignorant folk who have dollar-green dreams and lack the education to realize them. If it wasn't for people like that, Las Vegas would be a watering hole and pass-through truck stop.

We need to tell these homeless people to put out signs saying "Will work for food because I took out a loan I knew I couldn't pay back".
Precisely. When we keep people from having to learn from their mistakes we'll keep making them. After Wall St. gambled and lost, we should have let those "too big to fail" firms fail to show any other would be gamblers the consequences of their actions. Instead, we enacted Dodd-Frank which codifies "too big to fail" and allows these firms to get bigger and bigger. Dodd-Frank is going to be a crippler of small to medium sized banks that can't afford to either A) comply with the mountains of red tape and regulation or B) hire an army of lobbyists, accountants, and Congressmen to drill out loopholes for them. Usually people desire regulation to keep in line big and powerful companies and prevent monopolies, but what they usually can't see is that excessive regulation hurts small and medium sized business because they can't afford either option A or B. So they either go out of business or get bought up by larger businesses. Typically regulations come from a place of good intentions, but we all know what the road to hell is paved with.
 
What Created The 2008 Financial Meltdown?

Greedy Wall Street Investment Bankers /Deregulation of the financial industry

Barney Frank, Chris Dodd and the CRA

Poor people buying houses they can’t afford.

Other

this is a complicated matter that has been explained ad nauseum.

a vast-variety of things caused the meltdown.

Causes of the late-2000s financial crisis - Wikipedia, the free encyclopedia

1.1 The U.S. housing bubble and foreclosures
1.2 Sub-prime lending
1.2.1 Mortgage underwriting
1.2.2 Mortgage fraud
1.2.3 Down payments and negative equity
1.2.4 Predatory lending
2 Risk-taking behavior
2.1 Consumer and household borrowing
2.2 Home equity extraction
2.3 Housing speculation
2.4 Pro-cyclical human nature
2.5 Corporate risk-taking and leverage
3 Financial market factors
3.1 Financial product innovation
3.2 Inaccurate credit ratings
3.3 Lack of Transparency (behavior) and Independence in Financial Modeling
3.4 Off-balance sheet financing
3.5 Regulatory avoidance
3.6 Financial sector concentration
4 Macroeconomic conditions
4.1 Interest rates
4.2 Globalization and Trade deficits
4.3 Chinese mercantilism
 
There were a few causes, but a lot of it came from deregulation of the banks and the high leverage rates the banks then took when making their loans. The extremely large leverage they took eventually blew the system wide open. Now did it cause the housing bubble? No, that was there and known though. So while knowing their was a bubble, they still leveraged as high as they could and got government to remove restrictions to allow them to leverage even higher. And when the bubble popped, they should have lost their shirts. There was a still a lot of undesirable things going on in wall street as well due to lack of regulation. But the banks behavior and choices were a huge multiplier that really helped break the system to the degree to which it became broken.
 
Ikari said:
There were a few causes, but a lot of it came from deregulation of the banks and the high leverage rates the banks then took when making their loans. The extremely large leverage they took eventually blew the system wide open. Now did it cause the housing bubble? No, that was there and known though. So while knowing their was a bubble, they still leveraged as high as they could and got government to remove restrictions to allow them to leverage even higher. And when the bubble popped, they should have lost their shirts. There was a still a lot of undesirable things going on in wall street as well due to lack of regulation. But the banks behavior and choices were a huge multiplier that really helped break the system to the degree to which it became broken.

So you're saying the financial sector is guilty of lie by omission? I wouldn't argue that. What I would argue is that they had a moral obligation to allow an authoritarian stance about it. They act like used car dealers with their "once it's off the lot, it's a sale" mentality. The burden goes on the ultimate consumer to do a little research and not act like a tool.
 
Can you back these ridiculous claims up with any evidence? Why would a lender lend money to someone who can't pay them back?

because:

A- their loans were insured incase of default. hence the AIG bailout.

B- they broke up the loans into little pieces and sold them as investments all over the globe.
 
Gipper and A Pierce already talked about the main cause. We deregulated banks enough to let them do what they wanted, but the government continued to insure against risk. The banks knew they were going to get bailed out if they did something stupid, so we should not be shocked that they allowed themselves to do something stupid. When you combine this with easy money and lax fraud enforcement we shouldn't be surprised that a huge bubble formed.
 
Mr. Pearce echoed my thoughts. Definitely #1 and #3, possibly some #2 thrown into it.

Glass-Steagall gets crucified in this because too many people want to shirk responsibility involved in this. The true crime existed when regulations allowed for high-risk ventures to essentially be compensated when they would fail. If a business tried to bust coffers with derivatives and risky money market tools, the government would just recoup losses. That never should have come to be.

I give the bulk of the blame to two parties - the dumbass who walked into the bank making $30,000 a year wanting a loan for a $250,000 house, and the dumbass bank who OK'd it. Put both of them in front of a firing squad.

The only real problem is that it happened en masse, and while we could punish handfuls of individuals who do this, when they come out in full force and exert stupidity, you can't turn your back. If a fool and his money are soon parted, government should part too.

so you don't think the massive bleed of jobs had any effect? also, the willingness of people today to walk out of their mortgages?
 
It seems that companies increasingly rarely look beyond the next fiscal quarter.
That's probably because their CEO's get bonuses based on whatever profits the board members made that quarter. It's the incentives that are short sighted, I think.

so you don't think the massive bleed of jobs had any effect? also, the willingness of people today to walk out of their mortgages?
The bleeding of jobs? Are you referring to outsourcing of jobs by American companies? Well, it's not necessarily a bad thing, but our loss of the manufacturing sector in particular is some what concerning. I think we ARE just a bit too dependent on the service industry, though. If we aren't going to go into more debt, you're right we will need more jobs like manufacturing here. But that doesn't mean it had anything to do with the financial collapse.
 
The congress critters weren't going to let that happen. The bankers would have released all kinds of docs showing how the government pressured them into making all those bad loans.

Are you speculating or do you have a source?
 
I can't help but wonder what happens next. Home-ownership used to be a foundation of success in America. Many people bought into it while being unable to afford it. Banks took advantage of that, and Wall Street diffused these bad loans into every facet of the economy. I'm oversimplifying tenfold, of course, but correct me if I'm wrong. Do you think we're seeing a shift in American psychology, a shift towards thrift (as in the Depression era)? And if that's the case, how do we spend ourselves out of a second slump?
 
So you're saying the financial sector is guilty of lie by omission? I wouldn't argue that. What I would argue is that they had a moral obligation to allow an authoritarian stance about it. They act like used car dealers with their "once it's off the lot, it's a sale" mentality. The burden goes on the ultimate consumer to do a little research and not act like a tool.

Maybe it's that term, I'm probably not up to date with all the terminology. I don't necessarily fault the banks, their job is to make money. During normal economic times, they can make more money through higher leverage. What higher leverage means, however, is that should something go wrong, you're going to lose more. Because there is no natural market limiter to this, the government has put in regulation to cap how much banks and such can leverage. Those regulations were removed/loosened. The banks were allowed to raise their leverage rates, and raise them they did. It's hard to justify not doing so when your competitors do so and are making money hand over fist. There's not long term feedback innate to the system which would say "you can't do this because if it breaks, you're dead". Particularly when the banks are then bailed out, thus removing the consequence of failure.

This isn't the only thing, it didn't start the housing bubble. The housing bubble was there. But in the banks management of mortgages and leveraging, they took very very high risks that they knew were very very high risks. Should the system bust, you're screwed because you leveraged too high. And bust it did. And that feedback fed right into the system and all of a sudden banks were looking and a meltdown which required the tax payers to bail them out.

While individuals most certainly need to be more responsible with their contract, there is no denying the sort of predatory loans which were occurring at the time. Get the mortgage, sell it off in a package somewhere else. Where does it go? No one knows (which was why the banks foreclosing on houses they couldn't prove they owned turned out to be such a huge scandal). Nothing is quite so simple in reality and there are various factors. But certainly deregulation played a major role in the magnitude of collapse.
 
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