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The Fed may have triggered the '08 crash by accident

WCH said:
Both of those failed to stop the loans to the unqualified even though, IIRC, Bush tried. It still falls on the bankers who made those loans, IMO. They were charging excessive rates.
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No, Bush didn't try. You've got it 180 degrees wrong. In fact the Bush administration sued to PREVENT states from regulating subprime lenders. This action was opposed by an amazing 50 of 50 state AGs.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
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And his regulators promised to not regulate. This is my favorite picture of the era.

chainsaw-regulation.jpg

The guy with the chainsaw is the one who led the efforts to pre-empt state regulations on subprime lending. So the Bush administration promised not to regulate, didn't regulate, sued states to prevent their efforts, and somehow the story still persists that Bush tried to regulate subprime lending.
 
Mycroft said:
Bankers...if left alone...wouldn't give loans to unqualified people. They know better than that.

No, the bankers were forced to make those loans. Everything went downhill from there.
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That's just nonsense, false, a myth. The banks got from the Bush administration and the Clinton administration before them the exact set of regulations they wanted, and it worked for them until the crash, with banks begging the poor to take out loans, which made them record profits, record stock prices, and record pay and bonuses, all without a peep of protest until the wheels came off and they collapsed. You're old enough I know to have lived through that era, and surely you recall the PR effort, the ads, begging everyone to borrow against their house, to borrow a house, no money down, no credit check - the so-called liar loans. No one forced that.

What facilitated all this was $trillions in derivatives, which thanks to intense lobbying by the banks were completely unregulated, no one even knew how much was outstanding, which peaked at an estimated $60 Trillion, with a T.

And the thing is the housing bubble was even BIGGER in Europe. So when you try to explain what caused the housing bubble in the U.S. you have to also explain what happened in Europe, and CRA and related didn't exist in the UK or Ireland or Spain.

6348174491_caa4e19018_o.jpg
 
itsforthekids said:
It all started with the "community reinvestment act" under Carter. Look it up and follow the trail which lead to it all. Banks were forced into making bad loans based on the government mandate...they moved those risky loans around in order to not absorbing all of the risk. The free market is much smarter than government bureaucrats.
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Nonsense. How do you explain even BIGGER housing bubbles in much of Europe? See my post above.

And the biggest bubbles and crashes didn't occur in inner cities but in the suburbs of Las Vegas, condos in Florida, and other geographic areas not covered by CRA by lenders exempt from CRA regulations, which only applied to the big national banks. And CRA for them was just a bookkeeping nuisance, not an actual problem.

CRA is a boogie man invented by apologists for the banks to explain their own recklessness.
 
WCH said:
Trouble is, they own us and Congress.

I wonder what the Pols traded for giving up the power to control the money?
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Right, so if they own Congress, and the WH, and it's clear the big banks get what they want, the government cannot "force" them into making bad loans to the poor. If the banks made the loans, it was because the banks believed doing so was profitable, or else we'd have seen massive lobbying that successfully overcame those unprofitable mandates. And it was profitable - record profits, record stock prices, record pay and record bonuses.

So the idea that lending practices that resulted in record pay and record stock prices for banks was 'forced' on them is just absurd.
 
Aberration said:
The reason why those derivative were created is important. And the reason why the spiral started is also important. And that lies squarely on unqualified people defaulting.
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However, those people were told they qualified.
 
JasperL said:
Yes, it's the powerless little people's fault, as always, not the banks who begged the unqualified to borrow money, and gave them the loans, and paid themselves like kings all along the way until the crash.
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While I agree for the most part, people had to have realized what they could or couldn't afford.
 
WCH said:
The gut-wrenching slide of the 2008 stock market crash is unforgettable for those caught in it. In the six weeks from the Lehman Brothers bankruptcy on Sep. 17, the stock market lost over 40 percent of its value.

A quarter of trading days had plunges of 4 percent or more. Investors saw life’s savings dissipate. Traders saw a year’s work and bonus compensation vaporize.

The Federal Reserve and U.S. Treasury, which had been scrambling to cope with the developing financial crisis, accelerated their efforts to a frenetic pace, developing program after program to stem the panic. A chart of the Fed’s balance sheet during this time looks like an EKG gone haywire:...

snip...

http://thehill.com/opinion/finance/406536-the-fed-may-have-triggered-the-08-crash-by-accident


Personally, I don't believe it at all. I like to think of it as the "Great Theft of 2008"

Opinions?
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After doing some independent research on the Crash of 2008 and helping to coach a high school debate team who debated it, I think the following happened:

In the Carter Admnistration, Congress passed and Carter signed into law the Housing and Community Development Act of 1977. Title VIII of this bill, known as the Community Reinvestment Act (CRA), required each appropriate Federal financial supervisory agency to assess each bank’s record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods. In other words, this was a mandate for banks to make special efforts to seek out and lend to minority borrowers of meager to modest means.

Because banks were being more diligently monitored, everything chugged along without much incidence through the remainder of the Carter years and the Reagan years. Trouble was brewing as lending institutions, especially Fannie Mae and Freddie Mac were becoming over leveraged with loans to low income people exacerbated by plummeting interest rates making those loans even more attractive to people with questionable ability or inclination to repay them. And lessened bank regulation was making it tempting for more and more financial institutions to take on a piece of those debts.

The two recessions generated by 9/11 in 2001 and Katrina in 2005 put increasing pressure on the whole system. The Bush Administration warned Congress 21 times--working from memory here--that Fannie Mae and Freddie Mac and any lending institutions doing business with these were getting into serious trouble. Congress blew it off with people like Barnie Frank and Chris Dodd assuring everybody that everything was just fine and the F-Macs were in no trouble and Congress did nothing to amend the law.

By 2007 escalating into 2008 a lot of people began defaulting on their mortgages creating a slippery slope effect of plummeting home values that put a lot of good loans under water and eventually resulted in the crash.

No one President or Congress can be blamed for it as it was a cummulation of circumstances, all government blunders but unintended blunders, that created the crash of 2008.
 
JasperL said:
No. The biggest problem with this bogus narrative is the CRA didn't exist in the UK, Ireland, Spain and elsewhere in Europe, and they all had BIGGER housing bubbles and debt bubbles than the U.S. So how did CRA rules in the U.S. cause housing bubbles in those places? They didn't.
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Those other countries got in on the act after it was already going downhill.
 
AlbqOwl said:
After doing some independent research on the Crash of 2008 and helping to coach a high school debate team who debated it, I think the following happened:

In the Carter Admnistration, Congress passed and Carter signed into law the Housing and Community Development Act of 1977. Title VIII of this bill, known as the Community Reinvestment Act (CRA), required each appropriate Federal financial supervisory agency to assess each bank’s record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods. In other words, this was a mandate for banks to make special efforts to seek out and lend to minority borrowers of meager to modest means.

Because banks were being more diligently monitored, everything chugged along without much incidence through the remainder of the Carter years and the Reagan years. Trouble was brewing as lending institutions, especially Fannie Mae and Freddie Mac were becoming over leveraged with loans to low income people exacerbated by plummeting interest rates making those loans even more attractive to people with questionable ability or inclination to repay them. And lessened bank regulation was making it tempting for more and more financial institutions to take on a piece of those debts.

The two recessions generated by 9/11 in 2001 and Katrina in 2005 put increasing pressure on the whole system. The Bush Administration warned Congress 21 times--working from memory here--that Fannie Mae and Freddie Mac and any lending institutions doing business with these were getting into serious trouble. Congress blew it off with people like Barnie Frank and Chris Dodd assuring everybody that everything was just fine and the F-Macs were in no trouble and Congress did nothing to amend the law.

By 2007 escalating into 2008 a lot of people began defaulting on their mortgages creating a slippery slope effect of plummeting home values that put a lot of good loans under water and eventually resulted in the crash.

No one President or Congress can be blamed for it as it was a cummulation of circumstances, all government blunders but unintended blunders, that created the crash of 2008.
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You left out one thing: The actions of organizations like ACORN and their effects on the mortgage lending industry.

After CRA took effect, ACORN and groups with similar goals entered the shakedown business. At one ACORN conference, Jesse Jackson urged an aggressive approach: “Why did Jesse James rob banks? Because that’s where the money was.” This megaphone-assisted panhandling intensified when the Clinton administration put the CRA on steroids. CRA allowed activists to blackmail lenders into handing out mortgages to people with little regard for their ability to keep up payments. Banks felt the heat from community organizers and CRA examiners and instead of fighting, they made loans they shouldn’t have made, and they paid out millions of dollars in protection money to ACORN and its brethren.

If banks refused to play ball with ACORN, they risked receiving a failing CRA report card from government bureaucrats.

https://capitalresearch.org/article/acorns-blackmailing-of-banks/
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Mycroft said:
You left out one thing: The actions of organizations like ACORN and their effects on the mortgage lending industry.
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And...yer leaving out the default rates of CRA lending.

Protip: it was much lower than subprime private mortgage lending, so this "blackmailing" (a tone deaf comment) if it occurred, is moot.
 
AlbqOwl said:
After doing some independent research on the Crash of 2008 and helping to coach a high school debate team who debated it, I think the following happened:

In the Carter Admnistration, Congress passed and Carter signed into law the Housing and Community Development Act of 1977. Title VIII of this bill, known as the Community Reinvestment Act (CRA), required each appropriate Federal financial supervisory agency to assess each bank’s record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods. In other words, this was a mandate for banks to make special efforts to seek out and lend to minority borrowers of meager to modest means.
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We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

https://s3.amazonaws.com/real.stlouisfed.org/wp/2012/2012-005.pdf
 
Gimmesometruth said:
And...yer leaving out the default rates of CRA lending.

Protip: it was much lower than subprime private mortgage lending, so this "blackmailing" (a tone deaf comment) if it occurred, is moot.
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Those subprime loans got their start from the loans made because of the blackmailing. Everything went downhill from there.
 
Mycroft said:
Those subprime loans got their start from the loans made because of the blackmailing. Everything went downhill from there.
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Here is a novel idea:

Prove it.

I just linked to a Federal Reserve analysis showing otherwise.


We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

https://s3.amazonaws.com/real.stlouisfed.org/wp/2012/2012-005.pdf

PS...before you go any further, I suggest learning the meaning of conforming loans.
 
holbritter said:
While I agree for the most part, people had to have realized what they could or couldn't afford.
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Not too long ago analysis revealed that it was investor types, hopeful "flippers", walking away from their projects that precipitated the crash.

Defaults among the lowest tiers of borrowers remained constant at historic levels throughout. IOW, poor people defaulted on their loans at about the same rate they had for years. There was no substantial uptick.
 
Mycroft said:
Those subprime loans got their start from the loans made because of the blackmailing. Everything went downhill from there.
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“Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis . . .

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”

Governor Randall S. Kroszner
 
WCH said:
The gut-wrenching slide of the 2008 stock market crash is unforgettable for those caught in it. In the six weeks from the Lehman Brothers bankruptcy on Sep. 17, the stock market lost over 40 percent of its value.

A quarter of trading days had plunges of 4 percent or more. Investors saw life’s savings dissipate. Traders saw a year’s work and bonus compensation vaporize.

The Federal Reserve and U.S. Treasury, which had been scrambling to cope with the developing financial crisis, accelerated their efforts to a frenetic pace, developing program after program to stem the panic. A chart of the Fed’s balance sheet during this time looks like an EKG gone haywire:...

snip...

http://thehill.com/opinion/finance/406536-the-fed-may-have-triggered-the-08-crash-by-accident


Personally, I don't believe it at all. I like to think of it as the "Great Theft of 2008"

Opinions?
Click to expand...
I think the collapse of 2008 which cause by events a couple of decades earlier. Back in the Carter era the government started getting involved in lending and mortgage business. They arbitrarily decided that the only reason people in certain areas weren't granted mortgage was do to prejudice and racism. The "cure" they developed was to force lenders to make a certain percentage of their loans to people who didn't meet normal credit/income requirements. In the mid to late 90's that requirement was strengthened even more. Lenders developed a variety of "creative financing" options to stack their portfolios to satisfy lending criteria. In the late 90's some experts began warning that these "sub-prime" loans could become a problem but they were politically beneficial to politicians of the time (generally Dems but, full disclosure some GOPers went along.

Problems arose on a couple of fronts - first many of these subprimes got packaged into Freddy Mac and Fanny Mae instruments. In the 00's the healthy economy and growing housing boom made buying houses with subprimes, letting the price rise and flipping it into another. This all worked fine as long as home prices continued to rise. But when the housing market hiccuped and some loan rates jumped people were caught with a house they could afford and one where they owed more than they could sell it for. Walkaways and foreclosures ensued causing many of those mortgages to become worthless. Securities like the Freddy/Fanny bonds lost a huge amount of value and derivative investments based on them became worthless.
 
Mycroft said:
Those other countries got in on the act after it was already going downhill.
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There is no evidence for that theory - it's directly contradicted by the graph of housing prices by country.

Beyond that, why would the UK get in on our "act" which is presumably the housing bubble, and how did that happen if not for the U.S. Congress forcing banks to lend to poor people with the CRA?
 
JasperL said:
There is no evidence for that theory - it's directly contradicted by the graph of housing prices by country.

Beyond that, why would the UK get in on our "act" which is presumably the housing bubble, and how did that happen if not for the U.S. Congress forcing banks to lend to poor people with the CRA?
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Housing prices have nothing to do with it. The crash was the result of crappy loans being made.
 
AlbqOwl said:
After doing some independent research on the Crash of 2008 and helping to coach a high school debate team who debated it, I think the following happened:

In the Carter Admnistration, Congress passed and Carter signed into law the Housing and Community Development Act of 1977. Title VIII of this bill, known as the Community Reinvestment Act (CRA), required each appropriate Federal financial supervisory agency to assess each bank’s record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods. In other words, this was a mandate for banks to make special efforts to seek out and lend to minority borrowers of meager to modest means.

Because banks were being more diligently monitored, everything chugged along without much incidence through the remainder of the Carter years and the Reagan years. Trouble was brewing as lending institutions, especially Fannie Mae and Freddie Mac were becoming over leveraged with loans to low income people exacerbated by plummeting interest rates making those loans even more attractive to people with questionable ability or inclination to repay them. And lessened bank regulation was making it tempting for more and more financial institutions to take on a piece of those debts.

The two recessions generated by 9/11 in 2001 and Katrina in 2005 put increasing pressure on the whole system. The Bush Administration warned Congress 21 times--working from memory here--that Fannie Mae and Freddie Mac and any lending institutions doing business with these were getting into serious trouble. Congress blew it off with people like Barnie Frank and Chris Dodd assuring everybody that everything was just fine and the F-Macs were in no trouble and Congress did nothing to amend the law.

By 2007 escalating into 2008 a lot of people began defaulting on their mortgages creating a slippery slope effect of plummeting home values that put a lot of good loans under water and eventually resulted in the crash.

No one President or Congress can be blamed for it as it was a cummulation of circumstances, all government blunders but unintended blunders, that created the crash of 2008.
Click to expand...

There's a lot wrong there, but just for starters, any explanation about the housing and debt bubble that doesn't mention the CDS derivative market starting from roughly 0 in 2000 and exceeding $60,000,000,000,000 ($60 trillion) by the middle of 2007 has missed the entire boat, because it's those instruments that allowed for the credit and housing bubble to emerge, and the defaults on which that caused the financial crisis. And thanks to bank lobbying, this $60 TRILLION market was entirely and completely unregulated.

The derivatives market was also worldwide, which is in part why the debt bubbles and related housing bubbles were also worldwide - a worldwide factor to explain worldwide bubbles. The CRA and related doesn't do that - it's a local to the U.S. set of rules that cannot explain similar or worse bubbles happening at the same time in England, Ireland, Spain, etc.

CDS_volume_outstanding.png


I remember in the early days of the crisis, lots of commentators were saying that debts related to mortgages just weren't big enough to cause a threat to the system, which was true. The problem is there was a mortgage, then bets on bets on bets on bets on bets.... based on that mortgage, and the default on the original set off a cascade of payoffs on bets, which required payoffs on other bets, and it's this process that was the crisis. AIG was at the center, but were only one player - they 'insured' many of these bets but didn't have the capital to pay off their side of the losses. Etc....
 
Mycroft said:
Housing prices have nothing to do with it. The crash was the result of crappy loans being made.
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The fix was 'required' since those crappy loans were government insured.
 
Mycroft said:
Housing prices have nothing to do with it. The crash was the result of crappy loans being made.
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That's not actually correct - if housing prices don't drop, the crappy loans aren't a problem because the borrower lives in the house for a year or two or three, sells the house and gets more than the loan amount, pays off the loan. It was this near-religious faith that housing prices never drop except regionally that allowed for the crappy loans, based on the expectation that housing prices always going up meant defaults don't result in a loss of principle.
 
ttwtt78640 said:
The fix was 'required' since those crappy loans were government insured.
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Some were, but a lot weren't. During the boom years, the share of mortgages insured by Fannie and Freddie dropped every year, with the share of loans issued by unregulated/uninsured lenders rising. It's those that were the real garbage loans and fueled the boom.
 
JasperL said:
Some were, but a lot weren't. During the boom years, the share of mortgages insured by Fannie and Freddie dropped every year, with the share of loans issued by unregulated/uninsured lenders rising. It's those that were the real garbage loans and fueled the boom.
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The housing market in general was in deep trouble so those insured loans (the vast majority) would suffer as well.
 
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