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What Created The 2008 Financial Meltdown?

What Created The 2008 Financial Meltdown?

  • Greedy Wall Street Investment Bankers /Deregulation of the financial Industry

    Votes: 29 56.9%

  • Barney Frank, Chris Dodd and the CRA

    Votes: 6 11.8%

  • Poor people buying houses they can’t afford

    Votes: 3 5.9%

  • Other

    Votes: 13 25.5%
  • Total voters
    51
liblady said:
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?
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I don't think whatever you refer to as a "massive bleed of jobs" had hardly any effect. This wasn't caused by a cyclical hiccup or by the elimination of certain domestic jobs. This was caused by large-scale consumer ignorance. The buck stops there. Nowhere else.

And people walk out of their mortgages because of what we've been discussing - when they realize 6 months afterward that they obviously bit off more than they can chew.

Hey, if you want to subsidize the average American's ignorance, that's fine. Write 'em a check. Don't sit there and cry foul and point fingers where they don't need pointed.
 
Gipper said:
I don't think whatever you refer to as a "massive bleed of jobs" had hardly any effect. This wasn't caused by a cyclical hiccup or by the elimination of certain domestic jobs. This was caused by large-scale consumer ignorance. The buck stops there. Nowhere else.

And people walk out of their mortgages because of what we've been discussing - when they realize 6 months afterward that they obviously bit off more than they can chew.

Hey, if you want to subsidize the average American's ignorance, that's fine. Write 'em a check. Don't sit there and cry foul and point fingers where they don't need pointed.
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Now gip the real esate market was nothing more then a money pit from the broker up, ie:a 200,000 home was financed for 250,000 giving the buyer a 50,000 bonus to buy, buyers were told they would be able to refinance to lower high payments. The market offered lots of enticements to lure unqualified buyers into buying. Loans were made to buyers that obviously would not be able to keep up to payments. Bottom up predatory lending

Subprime mortgage crisis - Wikipedia, the free encyclopedia

The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006.[5][6] High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. Additionally, the economic incentives provided to the originators of subprime mortgages, along with outright fraud, increased the number of subprime mortgages provided to consumers who would have otherwise qualified for conforming loans. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Falling prices also resulted in 23% of U.S. homes worth less than the mortgage loan by September 2010, providing a financial incentive for borrowers to enter foreclosure.[7] The ongoing foreclosure epidemic, of which subprime loans are one part, that began in late 2006 in the U.S. continues to be a key factor in the global economic crisis, because it drains wealth from consumers and erodes the financial strength of banking institutions.
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EarlzP said:
Now gip the real esate market was nothing more then a money pit from the broker up, ie:a 200,000 home was financed for 250,000 giving the buyer a 50,000 bonus to buy, buyers were told they would be able to refinance to lower high payments. The market offered lots of enticements to lure unqualified buyers into buying. Loans were made to buyers that obviously would not be able to keep up to payments. Bottom up predatory lending
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You are quite right, and who came up with the idea of providing variable mortgage rates?
 
Catawba said:
You are quite right, and who came up with the idea of providing variable mortgage rates?
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ARMs, in my opinion, aren't the primary cause. ARMs have been around for decades. It was sudden the lack of qualification criteria that was the primary cause. The lack of qualification criteria presented an illusion of ability to honor the contract. An illusion that was false in way too many cases. Again, in my opinion.
 
pbrauer said:
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
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The 1st and 3rd option. It takes two to tango_One group trying to buy homes they can't afford and the other saying alright here is your loan.
 
Harry Guerrilla said:
They were called stated income loans, aka liar loans.
Many of them were done by fly by night lenders, who then sold the loans off.

Stated income loan - Wikipedia, the free encyclopedia
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A lot of good comments here, and I am likely echoing others, but your post was as good as any to pick up on.

Picking up where you left off, I do not see how we can blame those who lied to get loans, etc. I am not saying such is the right thing to do, but under normal circumstances, lenders would have never been willing to take folks at their word, make such "risky" loans, etc. The normal mechanisms of capitalism had always kept such to a minimum.

The root enabler of the crisis was the monstrous inflation in the market. It helped to eliminate the risk of these sub-prime (and worse) loans, because it did not matter if the new owners couldn't afford it a year or two down the road. You could take the house back, cover all foreclosure costs, and resell it still at a profit with such insane inflation. Too much money to be made too easily to not predict that the bubble would do as bubbles do, which is make money for everyone ..... until it popped.

So what enabled the inflation at levels we had never seen before ? Too many new buyers. Where did they come from ? Fannie and Freddie underwriting the subprimes starting in larger measure beginning in 1997.

Hate to admit it, but nothing was going to stop the bubble once it got going. Not a politician in the world was going to say "hey wait" and be able to draw much of an audience.

But as George Bush was politician #1, it was his responsibility #1. And all the rest with him.

The repeal of Glass Steagle added to the frenzy, but we were going to have a bubble, and a burst, and 25% of American mortgages underwater regardless. And a recession.
 
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radcen said:
ARMs, in my opinion, aren't the primary cause. ARMs have been around for decades. It was sudden the lack of qualification criteria that was the primary cause. The lack of qualification criteria presented an illusion of ability to honor the contract. An illusion that was false in way too many cases. Again, in my opinion.
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I never said they were the primary cause, but they were a factor, and they were not an idea that came from consumers.
 
Two major causes (there are lots of minor ones):

1) Wall street shenanigans. Basically wall street was operating several steps ahead of the regulators. They were doing sorts of transactions that were clearly fraudulent, but in most cases not illegal yet. For example, creating a corporation, destroying it intentionally, and betting against it in the market. Or creating a shell corporation that assumes all your liabilities while your corporation takes all the profits, then just bankrupting and abandoning the shell when it was used up. These sorts of practices were going on across the board with disastrous consequences.

2) Destruction of the middle class. Ultimately it is the middle class that drives the US economy. They drive consumer spending and that is what determines the revenues of these companies. Consumer spending has been more or less stagnant for about 15 years because our tax and regulatory policies have been aggressively redesigned to funnel all the economic growth to the super rich. Without a corresponding growth in revenues, investor driven market surges cannot be sustained. We can't get the economy back on track until we stop rigging the game for the super rich.
 
Other: Mortgage banking socialization caused the bubble. Fannie and Freddie are still protected from prosecution.
 
I think Eighty Deuce hit the nail on it's head. There was a confidence in the market that you would always be insured against the costs, and the market would always go up, and up, hence it made sense to give out those crappy loans. In 2001 the politicians should have popped the bubble. However, Bush did the exact opposite and tried to fuel the bubble to prevent a recession. This did not solve the underlining problems, and caused the bubble to be 10 times worse when it popped.

Lack of regulation made the crisis worse, but was not the underlining cause.
 
Catawba said:
I never said they were the primary cause, but they were a factor, and they were not an idea that came from consumers.
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They are a factor, absolutely. And in a level-headed economy they also have their proper place. They should always be the exception to the rule, not the rule itself. I think they were an otherwise legitimate tool that was abused.
 
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teamosil said:
Two major causes (there are lots of minor ones):

1) Wall street shenanigans. Basically wall street was operating several steps ahead of the regulators. They were doing sorts of transactions that were clearly fraudulent, but in most cases not illegal yet. For example, creating a corporation, destroying it intentionally, and betting against it in the market. Or creating a shell corporation that assumes all your liabilities while your corporation takes all the profits, then just bankrupting and abandoning the shell when it was used up. These sorts of practices were going on across the board with disastrous consequences.

2) Destruction of the middle class. Ultimately it is the middle class that drives the US economy. They drive consumer spending and that is what determines the revenues of these companies. Consumer spending has been more or less stagnant for about 15 years because our tax and regulatory policies have been aggressively redesigned to funnel all the economic growth to the super rich. Without a corresponding growth in revenues, investor driven market surges cannot be sustained. We can't get the economy back on track until we stop rigging the game for the super rich.
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I agree, as do the OWS protesters. These major causes are addressed in their proposed demands:

" 1. CONGRESS PASS HR 1489 ("RETURN TO PRUDENT BANKING ACT" H.R. 1489: Return to Prudent Banking Act of 2011 (GovTrack.us) ). THIS REINSTATES MANY PROVISIONS OF THE GLASS-STEAGALL ACT. http://en.wikipedia.org/wiki/Glass–Steagall_Act --- Wiki entry summary: The repeal of provisions of the Glass–Steagall Act of 1933 by the Gramm–Leach–Bliley Act in 1999 effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. Most economists believe this repeal directly contributed to the severity of the Financial crisis of 2007–2011 by allowing Wall Street investment banking firms to gamble with their depositors' money that was held in commercial banks owned or created by the investment firms. Here's detail on repeal in 1999 and how it happened: http://en.wikipedia.org/wiki/Glass–Steagall_Act#Repeal

2. USE CONGRESSIONAL AUTHORITY AND OVERSIGHT TO ENSURE APPROPRIATE FEDERAL AGENCIES FULLY INVESTIGATE AND PROSECUTE THE WALL STREET CRIMINALS who clearly broke the law and helped cause the 2008 financial crisis in the following notable cases: (insert list of the most clear cut criminal actions). There is a pretty broad consensus that there is a clear group of people who got away with millions / billions illegally and haven't been brought to justice. Boy would this be long overdue and cathartic for millions of Americans. It would also be a shot across the bow for the financial industry. If you watch the solidly researched and awared winning documentary film "Inside Job" that was narrated by Matt Damon (pretty brave Matt!) and do other research, it wouldn't take long to develop the list.

3. CONGRESS ENACT LEGISLATION TO PROTECT OUR DEMOCRACY BY REVERSING THE EFFECTS OF THE CITIZENS UNITED SUPREME COURT DECISION which essentially said corporations can spend as much as they want on elections. The result is that corporations can pretty much buy elections. Corporations should be highly limited in ability to contribute to political campaigns no matter what the election and no matter what the form of media. This legislation should also RE-ESTABLISH THE PUBLIC AIRWAVES IN THE U.S. SO THAT POLITICAL CANDIDATES ARE GIVEN EQUAL TIME FOR FREE AT REASONABLE INTERVALS IN DAILY PROGRAMMING DURING CAMPAIGN SEASON. The same should extend to other media.

4. CONGRESS PASS THE BUFFETT RULE ON FAIR TAXATION SO THE RICH AND CORPORATIONS PAY THEIR FAIR SHARE & CLOSE CORPORATE TAX LOOP HOLES AND ENACT A PROHIBITION ON HIDING FUNDS OFF SHORE. No more GE paying zero or negative taxes. Pass the Buffet Rule on fair taxation so the rich pay their fair share. (If we have a really had a good negotiating position and have the place surrounded, we could actually dial up taxes on millionaires, billionaires and corporations even higher...back to what they once were in the 50's and 60's.

5. CONGRESS COMPLETELY REVAMP THE SECURITIES AND EXCHANGE COMMISSION and staff it at all levels with proven professionals who get the job done protecting the integrity of the marketplace so citizens and investors are both protected. This agency needs a large staff and needs to be well-funded. It's currently has a joke of a budget and is run by Wall St. insiders who often leave for high ticket cushy jobs with the corporations they were just regulating. Hmmm.

6. CONGRESS PASS SPECIFIC AND EFFECTIVE LAWS LIMITING THE INFLUENCE OF LOBBYISTS AND ELIMINATING THE PRACTICE OF LOBBYISTS WRITING LEGISLATION THAT ENDS UP ON THE FLOOR OF CONGRESS.

7. CONGRESS PASSING "Revolving Door Legislation" LEGISLATION ELIMINATING THE ABILITY OF FORMER GOVERNMENT REGULATORS GOING TO WORK FOR CORPORATIONS THAT THEY ONCE REGULATED. So, you don't get to work at the FDA for five years playing softball with Pfizer and then go to work for Pfizer making $195,000 a year. While they're at it, Congress should pass specific and effective laws to enforce strict judicial standards of conduct in matters concerning conflicts of interest. So long as judges are culled from the ranks of corporate attorneys the 1% will retain control.

8. ELIMINATE "PERSONHOOD" LEGAL STATUS FOR CORPORATIONS. The film "The Corporation" has a great section on how corporations won "personhood status". THE CORPORATION [2/23] Birth - YouTube . Fast-forward to 2:20. It'll blow your mind. The 14th amendment was supposed to give equal rights to African Americans. It said you "can't deprive a person of life, liberty or property without due process of law". Corporation lawyers wanted corporations to have more power so they basically said "corporations are people." Amazingly, between 1890 and 1910 there were 307 cases brought before the court under the 14th amendment. 288 of these brought by corporations and only 19 by African Americans. 600,000 people were killed to get rights for people and then judges applied those rights to capital and property while stripping them from people. It's time to set this straight."

PROPOSED LIST OF DEMANDS (please help edit/add so this can be submitted for consideration to those maintaining the official list) | OccupyWallSt.org Forum
 
De-regulation was a huge part. Then add in financial institutions knowing a crash was going to happen and bet against their clients. Even if the financial fallout of 2008 never happened, I would still a have bone to to pick with Chris Dodd! Barney Frank's love of de-regulation will set us back. Then add in house "flippers" over pricing housing, causing house prices to rise even on bad properties. The final nail in the coffin is banks allowed to give out tweleve times what they can't pay back, but yet given incintives for doing so, if they did not give to bad loan they would be fined! I've covered many things but I'm sure I've probably missed something. Those are my two cents, in this 14.5 trillion dollar mess!
 
I just heard Geithner, in an interview with Rand Paul, just a couple days ago, say it was due to government underwriting. The deregulation/regulation debate misses the whole point, that the epic scale was caused by the government. Otherwise it would have been like a bank or two.
 
JMJ said:
...it was due to government underwriting. The deregulation/regulation debate misses the whole point, that the epic scale was caused by the government. Otherwise it would have been like a bank or two.
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Absolutely right. The government "guaranteed" loans. The loans were packaged and sold based on that guarantee. The government didn't have the ability to back the loans when they went bad. Barney Frank and his cronies fought tooth and nail to keep the process in place and publically scoffed at anyone who was critical, anyone who predicted what was going to happen down the line - basically accusing them of racism and prejudice.
 
I know that I commented on this about 6 months ago, but now here again. Many builders, e.g. the ones building hundreds of homes along the edge of north Phoenix AZ. They buy the property a year or more before building, design the plots and roads and get approvals. Get sewers, electric, drainage, etc. built. Buy trusses, air conditioning units etc. sometimes months before building. So, when the market goes south they are committed to finishing hundreds of homes. What do you think ‘small’ over supply of new homes does to the price? How hard would a builder or anyone selling homes ‘work’ with a lender to get a loan for a buyer? I sold our home in the north phoenix area when I understood this was happening. Could have got about 480k if I was quicker with the remodel, but got 450k. It dropped to 320K.
 
More: I was even advised by a realtor on a flight back to Phoenix buy a house to be built in these areas and sell it when it was done. I didn’t do it; but we had quite a few ‘investors’ doing this. Of course the investors were very small time, buy one sell it when it was done and make 10k or so, make 20k in a year, contribute to false demand numbers. Then owning two homes, loose 200k in when the market collapsed or default on the mortgage. You don’t need much false demand to drive up prices.
 
If a kindergarten teacher passes out pixie sticks & soda pops, leaves the classroom, and the kindergartens wreck the place...who do you blame?
 
jasonxe said:
If a kindergarten teacher passes out pixie sticks & soda pops, leaves the classroom, and the kindergartens wreck the place...who do you blame?
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The corporation with the deepest pockets... and a willingness to pay a settlement. ;)
 
pbrauer said:
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.
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I think all are responsible to a degree, but I think Wall Street and deregulation is more responsible than the others.
 
iliveonramen said:
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.
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I had some first-hand exposure to what happened here as I did some strategic planning work for a mortgage producer in the middle of the decade. Here are my observations:

This was a supply-side problem that was allowed to happen because of lack of regulatory oversight. Investment banks created sophisticated financial instruments around mortgages, then pushed mortgage companies to place money with large signing bonuses and kick-backs. These mortgage companies (including my client) created boiler-room sales operations with out-bound telemarketers to find people with financial needs. This mortgage company did re-fi’s, 2nd and 3rd mortgages and mortgages to finance vacation homes and real estate speculation. The firm I worked with had a $200M open line with Countrywide and a $100M line with Lehman. They did their own loan approval. Though Lehman and Countrywide had the right to reject a loan, they rarely/rarely did. Between discounts, commissions and spifs (kickbacks), a typical $150,000 mortgage created $15,000 in closing fees to the Company (first sign this stuff makes no sense: where is their room for a 10% commission in a mortgage?).... and that is just the commission the mortgage retailer earned. There were far more commissions to be earned upstream. The core financing of this endeavor looked much more like a pyramid scheme than banking. (second sign of a house of cards: This little mortgage company had revenue of about $15M, but $300M in open credit lines)

The buyers of these mortgages were not poor (at least they way we think of the poor), but were doctors, lawyers, dentists, businessmen. They were generally overextended (living on home equity), had undocumented income or were real estate speculators (remember that?). Rarely did a warm body get a “no” on his mortgage app as very few deals were too ugly as there were good commissions to be made. This was a house cards and pretty obvious from my vantage point in 2005.

I am also a big believer that a big problem in our economy is that highest marginal tax rates are too low. The current system is such that people are encouraged to move money from the business to their personal accounts. There is no incentive to keep money in the business and re-invest. In the case of the mortgage melt-down the net-net of the activity was the financiers effectively stole the real estate equity of others, created these sophisticated financial instruments on which they received personal fees (placement fees, origination fees and success bonuses). Remember, the hedge funds, which were often the money source and packagers of these financial products
This is also a crude explanation of the meltdown, but a bit more illustrative. A meltdown of this magnitude could only happen if the very fiber of our financial system were threatened, as was the case in 2008, the problem was so sophisticated the very integrity of the world's banking and insurance system was in question.....

Sorry, but those that think the Community Reinvestment Act of 1977 suddenly reared its ugly head 30 years later and caused (primarily or secondarily) this problem are either ignorant or….. For those that think that poor people over buying was the issue, please explain how AIG a financial insurance company could be brought down in the process....

Sorry, this was just rape and pillage by Wall Street.
 
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radcen said:
The corporation with the deepest pockets... and a willingness to pay a settlement. ;)
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corps are the kindergarten students :-D.
 
jasonxe said:
If a kindergarten teacher passes out pixie sticks & soda pops, leaves the classroom, and the kindergartens wreck the place...who do you blame?
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In this case there wasn’t a teacher. Just Free Enterprise. Rewards given to the highest private positions were based on quarterly performance, well maybe a few on the year. Some could see it coming, a few were issuing warnings, but there were punishments doled out to stop most of that. (That even happens in engineering, e.g. haw late, etc. was the 787?) Oh yes, there were a few rules being broken, but the enforcers, oh the teachers, were emasculated. After all, the enforcers aren’t from the free enterprise class.
 
It's a weird riddle but I imagine someone will get it.
 
Rothschild family and USA's wars costs.
 
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