The 2007-2010 financial crisis

[ArrowSmith]

1. Households over-leveraged themselves with credit-card debt and too high mortgage payments(auto, student loans, etc...)

2. In mid-2007 a large amount of households defaulted thus triggering a cascade failure through the financial system, creating toxic assets at each level to the point that huge firm like Bear Stearns and Merryl Lynch were threatened.

My take on the whole thing is that financial institutions allowed too many loans to customers based on short-term thinking and not solid fundamentals(ability to pay off the loans). There was a disconnect between mortgage securities and the average loanee. In addition the insurance of these securities was another "innovation" not well thought out because it was not based on the fundamentals of ability to repay the loans. I think in the end too many complex financial instruments were mis-used in the name of short-term profits without regard to the fact they were creating toxic assets, combined with too many layers of indirection between financial instruments and real people on the ground facing financial ruin.

Anyone in the industry should have been able to easily predict it and speak up at a board meeting. But they didn't. History will remember. :mad:

[Desertrat]

ArrowSmith, you're correct as far as you go, but there's a lot more to it, and it begins in 1977.

The Community Reinvestment Act required lenders to make "sub-prime" loans. These were to be made to people who could not meet the old standard practice: 20% down payment, and principal/interest/taxes/insurance (PITI) of no more than some 25% of household income. IOW, a higher than usual percentage of these mortgages would fail. ACORN kept an eagle eye on banks in minority areas to make sure that the percentages were done, and filed suit when they thought a lender was sinning. This of course is a policy doomed to fiscal failure.

Lenders were open to any method to get out from under this toxic paper, so they were happy to sell it at some discount to Fannie Mae or others when Congress made that possible.

In the middle 1990s, ACORN and Barney Frank enlisted the help of Sen. Gramm of Texas to change banking laws; a repeal of a law from the 1930s which kept banking activities separated among the various types of banks. Previously, a bank could not invest its funds into the stockmarket, among other things. (I'm blanked on the name of that 1930s law.) The change allowed the ensuing elephantiasis of such as Goldmann Sachs and Lehman Brothers--among others.

Another thread in this skein goes back to the high consumer price inflation of the 1970s. Volcker raised the Fed rate at the end of 1979 to previously unknown heights; around 14% or 15%. That caused the severe recession of 1980-1983. In turn, the public's reaction to the misery led to a new policy: No more pain and agony, if the Fed could help it. And it could, to some extent, by holding interest rates down. The next several recessionary periods were thus mild. "Soft landings". The big flaw in that ointment was that the necessary market corrections didn't happen; debt wasn't cleared and failures didn't fail. Malinvestment remained.

We thus had a soft landing at the end of the dot-com bubble via low Fed interest rates.

The hype then began that "houses always rise in value", which with low interest rates set off the housing bubble and excess construction of commercial buildings. Malls, hotels, etc.

Many "counter-culture" analysts of economic and monetary matters were predicting the end of the housing bubble two and three years before its peak in mid-2005. Since so much of the GDP depended on construction, it was obvious by 2006 that a serious recession was coming. In late 2006, Soros predicted a recession would begin in the fall of 2007. And sure enough, it did.

Keynesian ideas led Bush's advisors and the Congress to get into the Hoover game of what in 1930 was called "pump priming" and now we know it as stimulus spending. Obama and his advisors (Many of whom were advisors to Bush) are continuing in the FDR fashion.

As far as foreclosures, most of the sub-prime mess is behind. The trouble is that the commercial real estate market is in the toilet and is crashing. Add to that the AltA and ARM mortgages which will fail in large numbers during these next two and three years. IOW, "You ain't seen nuthin', yet."

These gigantic federal deficits, coupled with the loss of tax revenues at all levels of government, have put us in an untenable position. We had too much debt; we're adding to it as though a debt-caused problem can be solved via more debt. That has never worked, anywhere, any time. Never.

You can expect a further loss of capital value in real estate, and more bankruptcy or near-bankruptcy at the state level. California, Michigan, Illinois and Arizona are in the toilet.

The bad part is that the increase in the money supply will be followed by a much higher rate of consumer price inflation than what we now have. And what we now have is in actuality at least double the official numbers from the BLS. And at a time when U6 is at nearly 20% of the workforce.

Best luck...

'Rat

[KingYaba]

Here's a nifty little video if you're interested. http://www.crisisofcredit.com/ Pretty much the too long and didn't read version. :D

[nbs2]

<snip>

That's most of the economy in a nutshell, but you're forgetting the accounting problems that turned paper into gold at the same time as the housing collapse.

As a result of consumer outrage in the 1970's you had the creation of stock option policies that essentially tied CEO earnings to the company performance in the stock market. As a result, you had executives manipulating their numbers with their fancy new math and increasing the value of their shares in what was essentially a high stakes, legal, pump and dump system. To counter that problem Sarbanes-Oxley required institutional holders (the company that holds your shares for you) to present their portfolios as losing money when the underlying assets lose value, regardless of intent to sell. That is, even though the losses are only on paper (40 yo A's retirement account went from 100k to 50k, so they have to say that they lost 50k of value even though they aren't retiring for another 25 years), they have to be presented as if they were actual losses. That compounded investor fears and helped the meltdown to snowball.

Between the crashing housing market and the stock market, it appeared that the sky was falling. And rather than stay calm and rational, both administrations and plenty of doomsayers on both sides of the aisle rushed off to rob Peter to give Paul some money.

[leekohler]

1. Households over-leveraged themselves with credit-card debt and too high mortgage payments(auto, student loans, etc...)

2. In mid-2007 a large amount of households defaulted thus triggering a cascade failure through the financial system, creating toxic assets at each level to the point that huge firm like Bear Stearns and Merryl Lynch were threatened.

My take on the whole thing is that financial institutions allowed too many loans to customers based on short-term thinking and not solid fundamentals(ability to pay off the loans). There was a disconnect between mortgage securities and the average loanee. In addition the insurance of these securities was another "innovation" not well thought out because it was not based on the fundamentals of ability to repay the loans. I think in the end too many complex financial instruments were mis-used in the name of short-term profits without regard to the fact they were creating toxic assets, combined with too many layers of indirection between financial instruments and real people on the ground facing financial ruin.

Anyone in the industry should have been able to easily predict it and speak up at a board meeting. But they didn't. History will remember. :mad:

I knew it was going to happen, and I'm not in the industry. It's not rocket science.

That's most of the economy in a nutshell, but you're forgetting the accounting problems that turned paper into gold at the same time as the housing collapse.

As a result of consumer outrage in the 1970's you had the creation of stock option policies that essentially tied CEO earnings to the company performance in the stock market. As a result, you had executives manipulating their numbers with their fancy new math and increasing the value of their shares in what was essentially a high stakes, legal, pump and dump system. To counter that problem Sarbanes-Oxley required institutional holders (the company that holds your shares for you) to present their portfolios as losing money when the underlying assets lose value, regardless of intent to sell. That is, even though the losses are only on paper (40 yo A's retirement account went from 100k to 50k, so they have to say that they lost 50k of value even though they aren't retiring for another 25 years), they have to be presented as if they were actual losses. That compounded investor fears and helped the meltdown to snowball.

Between the crashing housing market and the stock market, it appeared that the sky was falling. And rather than stay calm and rational, both administrations and plenty of doomsayers on both sides of the aisle rushed off to rob Peter to give Paul some money.


'Rat doesn't like to talk about that. He only wants to point the finger at liberals and poor people. I mean- they're the cause of everything that's wrong in the world, don't you know that? ;) It couldn't possibly be that people with money did anything wrong.

[flopticalcube]

I agree with your sucinct analysis ArrowSmith. Many people did see it coming but to speak against a profitable venture, even just to point out the risks, in such institutions is very dangerous to your career. Risk Control Officers were told to shut up if they got in the way of short term profit. Many people knew the housing boom and all enterprises built on top of it were doomed.

[nbs2]

I agree with your sucinct analysis ArrowSmith. Many people did see it coming but to speak against a profitable venture, even just to point out the risks, in such institutions is very dangerous to your career. Risk Control Officers were told to shut up if they got in the way of short term profit. Many people knew the housing boom and all enterprises built on top of it were doomed.

Those many people may have been shunted out of the way before, but they are finding that they are getting the last laugh.

While new construction and home prices are down, there is a steady hum below the surface where folks that sat out the housing bubble are cashing in their chips and making buys. There was one short sale outlier, but the foreclosures on my street have been getting scooped up pretty quickly. It helps that folks are paying close to half the original purchase price, but the street is turning from investment homes into family homes.

At work, the folks that would squeeze every penny before spending money are getting attention while the "you have to spend to make" personalities have moved to the back row.

[Rodimus Prime]

I think another huge problem that came about is our savings ratio in the US was and still is crap. Instead as a people we are debt ridden and I am not talking about longer term debt like mortgages. Those have been that way for a long long time but just other debt.

The American people have been under 5% savings for a very long time to quite often at 1% to even negative savings. Now what makes this scarier is when you learn how those numbers are figured and you can see another ticking time bomb that will be going off.

Saving rate is calculated based on the precent of money after taxes that some one brings in that is not spent.. That means retirement accounts like 401k are included in that savings ratio. To me that tells me no one is saving for retirement and when I was working my personal savings rate was over I think over 30% based on how the government calculates it at one time. Over 20% of my gross went into savings.

That to me is waht really scares me is learning how that number if figured. People are living pay check to pay check with nothing to fall back on so when something bad happens personally it snowballs out of control very quickly.

[Desertrat]

"'Rat doesn't like to talk about that. He only wants to point the finger at liberals and poor people."

Bat guano. My finger-pointing is and has been directed toward extremely foolish monetary policy. If the fools happen to have been liberals, using the CRA as the example, sobeit. What I will point out insofar as "poor people": Who was it who induced them to take on debt they could not repay? It darned sure wasn't a bunch of right-wing reactionaries, unless I'm misreading such as ACORN.

As far as pay being tied to profits, it's the usual two-fold problem. Good, in that it provides an incentive to improve the company; bad, in that it's an incentive for pump and dump in order to increase the share price. But that all had little to do with creating this present mess. I'd bet that since last March, there's been more pumping and dumping among the investment banks than ever before, and anybody who's been gambling in this present market has been able to do quite well. But P&D was not causative of the sub-prime meltdown.

[leekohler]

"'Rat doesn't like to talk about that. He only wants to point the finger at liberals and poor people."

Bat guano. My finger-pointing is and has been directed toward extremely foolish monetary policy. If the fools happen to have been liberals, using the CRA as the example, sobeit. What I will point out insofar as "poor people": Who was it who induced them to take on debt they could not repay? It darned sure wasn't a bunch of right-wing reactionaries, unless I'm misreading such as ACORN.


I stand by my post. That's still all you can talk about, one apsect of what happened. CRA was a very small part of it, as has been pointed out to you before. Stop acting like it was the main cause. It wasn't. Either have a fact-based debate or continue to be irrelevant.

The Fed study, however, found nearly 60% of higher-priced loans went to middle- or higher-income borrowers or neighborhoods outside of the scope of CRA lending. Additionally, the 20% of subprime loans that did go low- or moderate-income areas or borrowers were originated by nonbank lenders not covered by CRA obligations.

"Our analysis found, in fact, that only 6% of all higher-priced loans were made by CRA-covered lenders to borrowers and neighborhoods targeted by the CRA," said Duke, a former chairman of the American Bankers Association and former chief operating officer of Portsmouth, Va.'s Towne Bank. She also was once an executive vice president of Wachovia Corp.

She added that foreclosure rates for loans originated by CRA-covered lenders were significantly lower than those originated by independent mortgage companies.

"Clearly, claims that CRA caused the subprime crisis are not supported by the facts," she said.

http://www.thedeal.com/dealscape/2009/02/fed_report_cra_not_cause_of_ho.php

[fivepoint]

ArrowSmith, you're correct as far as you go, but there's a lot more to it, and it begins in 1977.

The Community Reinvestment Act required lenders to make "sub-prime" loans. These were to be made to people who could not meet the old standard practice: 20% down payment, and principal/interest/taxes/insurance (PITI) of no more than some 25% of household income. IOW, a higher than usual percentage of these mortgages would fail. ACORN kept an eagle eye on banks in minority areas to make sure that the percentages were done, and filed suit when they thought a lender was sinning. This of course is a policy doomed to fiscal failure.

Lenders were open to any method to get out from under this toxic paper, so they were happy to sell it at some discount to Fannie Mae or others when Congress made that possible.

In the middle 1990s, ACORN and Barney Frank enlisted the help of Sen. Gramm of Texas to change banking laws; a repeal of a law from the 1930s which kept banking activities separated among the various types of banks. Previously, a bank could not invest its funds into the stockmarket, among other things. (I'm blanked on the name of that 1930s law.) The change allowed the ensuing elephantiasis of such as Goldmann Sachs and Lehman Brothers--among others.

Another thread in this skein goes back to the high consumer price inflation of the 1970s. Volcker raised the Fed rate at the end of 1979 to previously unknown heights; around 14% or 15%. That caused the severe recession of 1980-1983. In turn, the public's reaction to the misery led to a new policy: No more pain and agony, if the Fed could help it. And it could, to some extent, by holding interest rates down. The next several recessionary periods were thus mild. "Soft landings". The big flaw in that ointment was that the necessary market corrections didn't happen; debt wasn't cleared and failures didn't fail. Malinvestment remained.

We thus had a soft landing at the end of the dot-com bubble via low Fed interest rates.

The hype then began that "houses always rise in value", which with low interest rates set off the housing bubble and excess construction of commercial buildings. Malls, hotels, etc.

Many "counter-culture" analysts of economic and monetary matters were predicting the end of the housing bubble two and three years before its peak in mid-2005. Since so much of the GDP depended on construction, it was obvious by 2006 that a serious recession was coming. In late 2006, Soros predicted a recession would begin in the fall of 2007. And sure enough, it did.

Keynesian ideas led Bush's advisors and the Congress to get into the Hoover game of what in 1930 was called "pump priming" and now we know it as stimulus spending. Obama and his advisors (Many of whom were advisors to Bush) are continuing in the FDR fashion.

As far as foreclosures, most of the sub-prime mess is behind. The trouble is that the commercial real estate market is in the toilet and is crashing. Add to that the AltA and ARM mortgages which will fail in large numbers during these next two and three years. IOW, "You ain't seen nuthin', yet."

These gigantic federal deficits, coupled with the loss of tax revenues at all levels of government, have put us in an untenable position. We had too much debt; we're adding to it as though a debt-caused problem can be solved via more debt. That has never worked, anywhere, any time. Never.

You can expect a further loss of capital value in real estate, and more bankruptcy or near-bankruptcy at the state level. California, Michigan, Illinois and Arizona are in the toilet.

The bad part is that the increase in the money supply will be followed by a much higher rate of consumer price inflation than what we now have. And what we now have is in actuality at least double the official numbers from the BLS. And at a time when U6 is at nearly 20% of the workforce.

Best luck...

'Rat


Great post, Rat. If more of the citizenry read up on the issue as much as you do, we'd be in a whole lot better shape. The bottom line in my mind here is that greed certainly played it's part... but greed is not the outlier here... greed exists everywhere and is actually an important part of the free market system. The outlier here, the thing that stands out as unique and caused this crisis, is government's attempt to manipulate the free market and leaned on banks (along with race-baiting organizations like ACORN) to create loans they knew were risky with the promise of being able to sell them immediately to government backed organizations (another no-no) Freddie and Fannie, and THEN when the banks collapsed anyway under the weight of the worthless mortgages they did own... the government BAILED THEM OUT (three strikes and you're out) when it should have let them die on the vine so that the lesson would be learned and new management could bring the company and our country back into reasoned borrowing and solvency.

Without government intervention, the majority of banks would only make loans to individuals they knew could pay it back. The few that were irresponsibly risky and went bankrupt because of it would lose out and get sold to someone more capable of making quality long-term decisions for the organization.

It's sad to see liberals point at anyone who attempts to speak the truth, and calls them 'racists' or suggests that they hate poor people. How ludicrous. I guess in their eyes selling a poor person a house they can't afford and virtually ensuring they have to lose that house eventually and go bankrupt is better than letting them know ahead of time to make a better decision for themselves and their families. To buy a cheaper house, or rent for a while until you have enough saved or have enough revenue to pay for what you want. Thank goodness there are still people out there who care for poor people BUT ALSO understand that hand-outs, freebies, and housing programs aren't usually the best way to help them.

[leekohler]

Great post, Rat. If more of the citizenry read up on the issue as much as you do, we'd be in a whole lot better shape. The bottom line in my mind here is that greed certainly played it's part... but greed is not the outlier here... greed exists everywhere and is actually an important part of the free market system. The outlier here, the thing that stands out as unique and caused this crisis, is government's attempt to manipulate the free market and leaned on banks (along with race-baiting organizations like ACORN) to create loans they knew were risky with the promise of being able to sell them immediately to government backed organizations (another no-no) Freddie and Fannie, and THEN when the banks collapsed anyway under the weight of the worthless mortgages they did own... the government BAILED THEM OUT (three strikes and you're out) when it should have let them die on the vine so that the lesson would be learned and new management could bring the company and our country back into reasoned borrowing and solvency.

Without government intervention, the majority of banks would only make loans to individuals they knew could pay it back. The few that were irresponsibly risky and went bankrupt because of it would lose out and get sold to someone more capable of making quality long-term decisions for the organization.

It's sad to see liberals point at anyone who attempts to speak the truth, and calls them 'racists' or suggests that they hate poor people. How ludicrous. I guess in their eyes selling a poor person a house they can't afford and virtually ensuring they have to lose that house eventually and go bankrupt is better than letting them know ahead of time to make a better decision for themselves and their families. To buy a cheaper house, or rent for a while until you have enough saved or have enough revenue to pay for what you want. Thank goodness there are still people out there who care for poor people BUT ALSO understand that hand-outs, freebies, and housing programs aren't usually the best way to help them.

It's sad that both you and 'rat continue to lie and point to CRA as the cause of the bubble bursting. That's what's truly sad. It wasn't. It's been pointed out to you guys several times, but you continue to turn a blind eye.

Dig hole in sand, insert head.

Another link:

http://blogs.wsj.com/economics/2008/12/03/feds-kroszner-defends-community-reinvestment-act/

[nbs2]

But P&D was not causative of the sub-prime meltdown.

The timing doesn't work to argue that it did. SOX tried to kill the model for the major players, but in doing so created another beast that they weren't ready to handle.

However, I would go further and state that the stock market's collapse had almost nothing to do with the sub-prime meltdown. It was the other way around. As the sub-prime market collapsed, the stock market took hits that it should have recovered from. Instead, it was 1929 all over again and we had a run on the NYSE.

I stand by my post. That's still all you can talk about, one apsect of what happened. CRA was a very small part of it, as has been pointed out to you before. Stop acting like it was the main cause. It wasn't. Either have a fact-based debate or continue to be irrelevant

Just to be fair and antagonize everybody (it's what I do), I'm going to disagree with you as well. The CRA wasn't a direct cause, but like the Enron/WorldCom stock options fiascoes, it led to the sub-prime mess. What the CRA did was force lenders into situations that they might not have felt uncomfortable in. Because of that discomfort, they were loathe to let go of lending standards throughout the 80s and into the 90s. However, eventually they noticed that by cutting a corner here and there, they could increase profits without getting burned. Eventually, even on the most risky customers, banks could play fast and loose and still make enough to cover any losses. When the bubble finally burst, it was a host of folks that had been placed into untenable situations (both prime and subprime folks) that couldn't make payments and saw massive losses.

So, while the CRA didn't cause the collapse, it played a significant role in making lenders comfortable with the idea of making risky loans. Without the CRA, I'm willing to bet that a lot of good homeowners wouldn't own homes, but banks wouldn't have make so many risky loans either.

Last thought - while for a long time I would have given the Fed Board a lot of leeway, the last several years has pulled the mask off of their political neutrality. I don't doubt Ms. Duke's expertise, but I have a hard time thinking she is doing anything other than try to pin some of the blame her group shares with with her former employers fully on their shoulders.

[mactastic]

Don't listen to this drivel about the CRA being responsible for this disaster. The CRA played only a small part in this. Only one of the seven largest bank failures was even subject to the CRA. And even if all the subprime mortgages were aggregated, whether they ever entered default or not, is still only a fraction of the "money" that evaporated nearly overnight.

The real issues that lie behind this mess are the crazy pay structures at banks that reward short-term profits, coupled with the deregulation of the banking industry by corporatists and their allies in Congress. The most notable of these deregulatory victories was the repeal of the Depression-era law prohibiting investment banking companies from owning other financial institutions. That had the effect of kicking this speculative bubble into high gear, and allowed most of it to happen out of sight and unregulated.

And of course, none of that would have been possible had the bond rating agencies not been complicit in the whole thing. Why would they risk that? Because people decided it would be best if the companies seeking the good ratings were the ones to pay the bond companies. "Surely no bond company would risk it's good name by inflating bond ratings for money" was the argument, but sure enough they were willing to. Without some serious ratings agency reform, we'll just go down this road again and again. You'd think the free market would produce an alternative that could provide some guarantee of objectivity, but I don't see any such company forthcoming...

[leekohler]

The timing doesn't work to argue that it did. SOX tried to kill the model for the major players, but in doing so created another beast that they weren't ready to handle.

However, I would go further and state that the stock market's collapse had almost nothing to do with the sub-prime meltdown. It was the other way around. As the sub-prime market collapsed, the stock market took hits that it should have recovered from. Instead, it was 1929 all over again and we had a run on the NYSE.



Just to be fair and antagonize everybody (it's what I do), I'm going to disagree with you as well. The CRA wasn't a direct cause, but like the Enron/WorldCom stock options fiascoes, it led to the sub-prime mess. What the CRA did was force lenders into situations that they might not have felt uncomfortable in. Because of that discomfort, they were loathe to let go of lending standards throughout the 80s and into the 90s. However, eventually they noticed that by cutting a corner here and there, they could increase profits without getting burned. Eventually, even on the most risky customers, banks could play fast and loose and still make enough to cover any losses. When the bubble finally burst, it was a host of folks that had been placed into untenable situations (both prime and subprime folks) that couldn't make payments and saw massive losses.

So, while the CRA didn't cause the collapse, it played a significant role in making lenders comfortable with the idea of making risky loans. Without the CRA, I'm willing to bet that a lot of good homeowners wouldn't own homes, but banks wouldn't have make so many risky loans either.


Oh please. They would have found a way to do this on their own. Don't tell me they didn't know what they were doing. That's a load of horse s***. This was greed, plain and simple. You cannot blame CRA loans for this, especially when they had a much lower foreclosure rate than the rest.

[mactastic]

What I will point out insofar as "poor people": Who was it who induced them to take on debt they could not repay? It darned sure wasn't a bunch of right-wing reactionaries, unless I'm misreading such as ACORN.
Bankers are not usually liberals. In fact, the ones pushing the loans hardest on poor people were economic conservatives, who I generally consider to be corporatists.

[mcrain]

As much as I'm enjoying the discussion, there is a key piece of the puzzle that hasn't been discussed.

There is a preference for debt in this country over other forms of financing.

An entity can borrow money, and then deduct the interest. That deduction creates a financial incentive to finance through debt rather than through equity.

Just a thought to ponder.

Oh, and by the way, the fact that people obtained loans that were probably too large for their financial means wasn't what caused the bubble to pop.

These people had jobs, were paying their debts, and the loans were being serviced.

What changed? Banks started going belly up! They stopped lending! Corporations had to cut back, and in order to do so, they fired people.

Those people who got fired... stopped paying their debts. The banks and the assets that were bundled, sold, and re-sold, started to lose their value, and guess what, even more of a lending crisis.

More businesses went under or fired employees. Vicious circle.

More thoughts to ponder.

[nbs2]

Oh please. They would have found a way to do this on their own. Don't tell me they didn't know what they were doing. That's a load of horse s***. This was greed, plain and simple. You cannot blame CRA loans for this, especially when they had a much lower foreclosure rate than the rest.

I didn't say they wouldn't have. Nor do I deny that greed was the motive that led to the mess. Nor do I doubt that historically, CRA loans have had lower foreclosure rates - my time at Grameen taught me that microloans normally have a higher repayment rate than traditional loans. All I was saying was that the CRA opened bankers eyes to the idea that non-prime loans can be made and be successful. What was done with that knowledge is no fault of the CRA. You can teach someone how to be an effective radio personality. Whether that speaker turns out to be Rush Limbaugh or Tom Magliozzi is up to them - the banking industry just turned out to have a lot more Rushes than Toms.

[hulugu]

...

The Community Reinvestment Act required lenders to make "sub-prime" loans. These were to be made to people who could not meet the old standard practice: 20% down payment, and principal/interest/taxes/insurance (PITI) of no more than some 25% of household income. IOW, a higher than usual percentage of these mortgages would fail. ACORN kept an eagle eye on banks in minority areas to make sure that the percentages were done, and filed suit when they thought a lender was sinning. This of course is a policy doomed to fiscal failure.

Lenders were open to any method to get out from under this toxic paper, so they were happy to sell it at some discount to Fannie Mae or others when Congress made that possible....

I don't buy this argument. First of all because the failure rate for CRA loans continues to be significantly lower than other "sub-prime" loans—even if you account for banks fiddling with classifications—and secondly, if banks were so concerned about this toxic paper with CRAs, why did they also get involved in billions of dollars in similar toxic paper that wasn't covered the the CRA program.
At best, the CRA program created a wading pool, and the banks went and turned it into an ocean. Then they jumped in it and begged for rescue.

...In the middle 1990s, ACORN and Barney Frank enlisted the help of Sen. Gramm of Texas to change banking laws; a repeal of a law from the 1930s which kept banking activities separated among the various types of banks. Previously, a bank could not invest its funds into the stockmarket, among other things. (I'm blanked on the name of that 1930s law.) The change allowed the ensuing elephantiasis of such as Goldmann Sachs and Lehman Brothers--among others...

'Rat

The repeal of the Glass-Steagall Act was passed by a Republican majority in both the House and Senate, and was signed by Clinton in 1999. It's simply incorrect right to hang this albatross around Frank, when there were 90 other Senators and 362 Representatives who voted for the Act's repeal.

As I've stated before, the creation of the 2007-2010 financial crisis was driven by many interests, including ACORN, but also dozens of small and large mortgage companies and individual borrowers. You cannot reasonably drop this carcass at the feet of ACORN without acknowledging those who made billions trading these loans, and thousands more completely unconnected to ACORN or the CRA on the market and occluded their value to the detriment of everyone.

[mactastic]

As much as I'm enjoying the discussion, there is a key piece of the puzzle that hasn't been discussed.

There is a preference for debt in this country over other forms of financing.

An entity can borrow money, and then deduct the interest. That deduction creates a financial incentive to finance through debt rather than through equity.

Just a thought to ponder.
Well, it makes sense from the POV that the government has an interest in promoting high rates of owner-occupied housing. Most people don't have the equity available to purchase a house, so the mortgage interest deduction encourages people to have a financial stake in their neighborhood.

Where it gets hazy for me is how that somehow got extended to investment properties, which seems like it encourages the opposite -- high rates of renter-occupied housing.

I've got no issue with providing a tax-based incentive to people to buy their first, or even a second, home. But IMHO, once you get beyond that the tax break should vanish.

[StruckANerve]

The CRA caused a lending trend that is what led to the collapse. It doesn't matter that only a small percentage of loans were given under the CRA. Other lenders saw the profit that these loans were generating and jumped on the boat along with the CRA lenders. And then the GSE's bought up all these risky debts regardless of who was underwriting them.

But even still that's only half the problem. The other half comes from the credit default swaps and the process of issuing debt backed securities. That in itself is very high risk. The Governemnt should have just let the banks collapse. It would have been hell but other banks would have moved in to pick up the pieces. Now we are stuck under a crushing amount of debt that we have no hope of ever paying back.

[leekohler]

The CRA caused a lending trend that is what led to the collapse. It doesn't matter that only a small percentage of loans were given under the CRA. Other lenders saw the profit that these loans were generating and jumped on the boat along with the CRA lenders. And then the GSE's bought up all these risky debts regardless of who was underwriting them.

It does matter. No one's arm was twisted into making those loans outside the CRA. They did that all by themselves and they alone need to take the blame for that. The CRA did not force any independent lender into making loans they didn't want to make.

Would you also follow your friends off a cliff? Why is it that conservatives never shout "personal responsibility" in these cases? Those lenders knew exactly what they were doing. This was about greed, nothing else.

[mactastic]

The CRA caused a lending trend that is what led to the collapse. It doesn't matter that only a small percentage of loans were given under the CRA. Other lenders saw the profit that these loans were generating and jumped on the boat along with the CRA lenders. And then the GSE's bought up all these risky debts regardless of who was underwriting them.
So you're saying that the lenders had no personal responsibility here?

But even still that's only half the problem. The other half comes from the credit default swaps and the process of issuing debt backed securities. That in itself is very high risk. The Governemnt should have just let the banks collapse. It would have been hell but other banks would have moved in to pick up the pieces. Now we are stuck under a crushing amount of debt that we have no hope of ever paying back.
Haven't the banks paid almost all of that money back? Where is this mountain of debt that you refer to coming from?

[StruckANerve]

It dose matter. No one's arm was twisted into making those loans outside the CRA. They did that all by themselves and they alone need to take the blame for that. The CRA did not force any independent lender into making loans they didn't want to make.

Would you also follow your friends off a cliff? Why is it that conservatives never shout "personal responsibility" in these cases? Those lenders knew exactly what they were doing. This was about greed, nothing else.

Greed was what made the lenders take the risk. The CRA helped set the precedent for giving loans to people that couldn't afford them. ARM's are downright stupid and it's unfortunate that people would jump into them without knowing what they were getting into.

[rdowns]

The CRA caused a lending trend that is what led to the collapse. It doesn't matter that only a small percentage of loans were given under the CRA. Other lenders saw the profit that these loans were generating and jumped on the boat along with the CRA lenders. And then the GSE's bought up all these risky debts regardless of who was underwriting them.

But even still that's only half the problem. The other half comes from the credit default swaps and the process of issuing debt backed securities. That in itself is very high risk. The Governemnt should have just let the banks collapse. It would have been hell but other banks would have moved in to pick up the pieces. Now we are stuck under a crushing amount of debt that we have no hope of ever paying back.

Credit default swaps were and continue to remain the problem. If these don't exist, the risky loans never get made.

Which banks were solvent enough to move in and pick up the pieces?

[hulugu]

Greed was what made the lenders take the risk. The CRA helped set the precedent for giving loans to people that couldn't afford them. ARM's are downright stupid and it's unfortunate that people would jump into them without knowing what they were getting into.

This is fallacious. The CRA loans "may" have set a precedent, but the banks then went on to create a whole new set of loans, including high-ARM and balloon-payments that the CRA wouldn't have allowed. This is what allowed irresponsible mortgage lenders to make the market much, much larger than the CRA program ever would have been.

The banks have to take responsibility for their behavior rather than trying to pawn it off on the do-gooders at ACORN.

[StruckANerve]

So you're saying that the lenders had no personal responsibility here?


Haven't the banks paid almost all of that money back? Where is this mountain of debt that you refer to coming from?

Never said they weren't personally responsible for taking the risk.

Considering Fannie and Freddie are now under conservatorship of the U.S. Government and they hold roughly 5 trillion in debt on their books I would say that is pretty crushing.

[mactastic]

Never said they weren't personally responsible for taking the risk.
Of course you didn't. You just blamed the CRA and said the banksters were just following along. Totally different things.

Considering Fannie and Freddie are now under conservatorship of the U.S. Government and they hold roughly 5 trillion in debt on their books I would say that is pretty crushing.
Of which, how much is actual debt, and how much is backed by MBSs?

[leekohler]

This is fallacious. The CRA loans "may" have set a precedent, but the banks then went on to create a whole new set of loans, including high-ARM and balloon-payments that the CRA wouldn't have allowed. This is what allowed irresponsible mortgage lenders to make the market much, much larger than the CRA program ever would have been.

The banks have to take responsibility for their behavior rather than trying to pawn it off on the do-gooders at ACORN.

Thank you. I'm tired of people doing this. It's completely dishonest and they know it. But they keep saying it, hoping everyone will be fooled.

[ArrowSmith]

Oh, and by the way, the fact that people obtained loans that were probably too large for their financial means wasn't what caused the bubble to pop.

These people had jobs, were paying their debts, and the loans were being serviced.

What changed? Banks started going belly up! They stopped lending! Corporations had to cut back, and in order to do so, they fired people.

Those people who got fired... stopped paying their debts. The banks and the assets that were bundled, sold, and re-sold, started to lose their value, and guess what, even more of a lending crisis.

More businesses went under or fired employees. Vicious circle.

More thoughts to ponder.

It's a combination of banks going belly up because of construction loans that went unpaid in mid 2007 because of overbuilding and defaults among consumers who were too highly leveraged. You can't just absolve the average debt-ridden Joe of responsibility here.

Thank you. I'm tired of people doing this. It's completely dishonest and they know it. But they keep saying it, hoping everyone will be fooled.

ACORN has a responsibility not to commit voter fraud. :cool:

[hulugu]

ACORN has a responsibility not to commit voter fraud. :cool:

Yes, so do you.

And, that is an entirely separate issue than the one initially addressed.

[Ugg]

Greed was what made the lenders take the risk. The CRA helped set the precedent for giving loans to people that couldn't afford them. ARM's are downright stupid and it's unfortunate that people would jump into them without knowing what they were getting into.

Adjustable rate loans date back to the late 70s and early 80s. Reagan basically is the root of the current economic crisis. By destroying a common sense approach to regulation, he laid the foundation for this disaster. Greenspan and his libertarian policies is second to blame, the guy was a god to many on wall street but the history books will show that his devotion to Ayn Rand and her idiotic ideas basically led us into this sinkhole.

[Zombie Acorn]

Adjustable rate loans date back to the late 70s and early 80s. Reagan basically is the root of the current economic crisis. By destroying a common sense approach to regulation, he laid the foundation for this disaster. Greenspan and his libertarian policies is second to blame, the guy was a god to many on wall street but the history books will show that his devotion to Ayn Rand and her idiotic ideas basically led us into this sinkhole.

Lets forget the people who actually signed for the loans. Apparently the term "adjustable rate" was too much for them to comprehend.

[Desertrat]

Look: The sub-prime loans of the CRA were a key ingredient because of what was done with what was properly seen as toxic paper. No lender wanted to hold this stuff. Through various steps, these mortgages were "bundled" with prime-mortgages and then sold through Lehman and others as AAA-rated bonds. Moody's et al rated them. AIG et al insured them. Various mutual funds, retirement funds and university funds bought them.

The original CRA program was expanded via the cooperative efforts of ACORN, Barney Frank, Sen. Gramm and the big banks. The same effort got the repeal of Glass-Steagall, which allowed these investment banks to buy and to trade in all this mortgage paper.

Problem: "Leverage". These bonds and all these "financial instruments" were leveraged up to as much as 30:1.

So: For all that the Fed rate was low, there were a few upward blips. Resetting of mortgages during blips began the large increase in folks falling behind on all mortgages, not just the basic sub-primes and Alt-A and ARMs. That meant that the bonds interest payments were reduced, which brought the insurors into play, It meant that the leveraged folks didn't have the cash on hand to meet cashflow demands.

So, no, the sub-prime loans of the CRA were not THE sole cause. But if you think of a house of cards, you can rationally consider these sub-prime loans as the one card which when pulled brings down the entire house.

Sure, if a frog had wings he wouldn't bump his rump every time he jumps. But if there hadn't been a CRA, there would not have been a bunch of sub-prime loans. If there hadn't been a too-low Fed rate, there would not have later been Alt-A and ARMs--as well as NINJA loans. If there hadn't been a repeal of Glass-Steagall, there would not have been all this creation of fraudulent bond packages with toxic paper and AAA ratings. Without all this foregoing, there would not have been the incredible leveraging. Remember, this all developed over an eighteen-year period.

And so, if folks hadn't begun defaulting on sub-prime loans, the house of cards would not have come tumbling down.

Trouble is, the whole real estate market, both residential and commercial, is still in deep doo-doo.

[leekohler]

Look: The sub-prime loans of the CRA were a key ingredient because of what was done with what was properly seen as toxic paper. No lender wanted to hold this stuff. Through various steps, these mortgages were "bundled" with prime-mortgages and then sold through Lehman and others as AAA-rated bonds. Moody's et al rated them. AIG et al insured them. Various mutual funds, retirement funds and university funds bought them.

The original CRA program was expanded via the cooperative efforts of ACORN, Barney Frank, Sen. Gramm and the big banks. The same effort got the repeal of Glass-Steagall, which allowed these investment banks to buy and to trade in all this mortgage paper.

Problem: "Leverage". These bonds and all these "financial instruments" were leveraged up to as much as 30:1.

So: For all that the Fed rate was low, there were a few upward blips. Resetting of mortgages during blips began the large increase in folks falling behind on all mortgages, not just the basic sub-primes and Alt-A and ARMs. That meant that the bonds interest payments were reduced, which brought the insurors into play, It meant that the leveraged folks didn't have the cash on hand to meet cashflow demands.

So, no, the sub-prime loans of the CRA were not THE sole cause. But if you think of a house of cards, you can rationally consider these sub-prime loans as the one card which when pulled brings down the entire house.

Sure, if a frog had wings he wouldn't bump his rump every time he jumps. But if there hadn't been a CRA, there would not have been a bunch of sub-prime loans. If there hadn't been a too-low Fed rate, there would not have later been Alt-A and ARMs--as well as NINJA loans. If there hadn't been a repeal of Glass-Steagall, there would not have been all this creation of fraudulent bond packages with toxic paper and AAA ratings. Without all this foregoing, there would not have been the incredible leveraging. Remember, this all developed over an eighteen-year period.

And so, if folks hadn't begun defaulting on sub-prime loans, the house of cards would not have come tumbling down.

Trouble is, the whole real estate market, both residential and commercial, is still in deep doo-doo.

BS. No independent bank was forced to issue sub-prime loans. And given that the vast majority of those loans did not come under CRA, your argument is crap. This is about greed, 'rat. Even without a CRA, these same people would have figured out how to do this. You can't tell me they wouldn't.

[DZ/015]

They may not have been required, but they were strongly encouraged. By who? Our own government. Carter, Clinton and Bush all pushed home ownership as the key to the "American Dream". Our government, liberal and conservative, removed the barriers that prevented banks from having to cover this risky debt. The "greedy" bankers were only playing by the rules our own government created.

Our own government caused this crash. How? Slowly, with baby steps, starting with the CRA. Rapid change is never popular. Slow it down and it becomes more palatable.

[Ugg]

[QUOTE=DZ/015;9118849]They may not have been required, but they were strongly encouraged. By who? Our own government. Carter, Clinton and Bush...../QUOTE]

What, Reagan is now untouchable? He's mostly responsible along with that idiot Greenspan.

[leekohler]

They may not have been required, but they were strongly encouraged. By who? Our own government. Carter, Clinton and Bush all pushed home ownership as the key to the "American Dream". Our government, liberal and conservative, removed the barriers that prevented banks from having to cover this risky debt. The "greedy" bankers were only playing by the rules our own government created.

Our own government caused this crash. How? Slowly, with baby steps, starting with the CRA. Rapid change is never popular. Slow it down and it becomes more palatable.

Please. I absolutely refuse to believe that any independent bank was coerced into giving bad loans. The bankers need to take responsibility for their own actions, as do the people who took the loans. The very people who scream "personal responsibility" are now crying about it being everyone else's fault, and it's disgusting.

[DZ/015]

Of course; Ronnie is untouchable!






Nah, just a brain fart on my part. And when I said Bush, I meant them both. I'm an equal opportunity blamer.

They weren't bad loans. They were "higher risk" loans. Personal responsibility does not exist in politics. Or large corporations. And it is not everyone else's fault. It is everyone's fault. Including your's and mine for allowing it to happen.

[mactastic]

Look: The sub-prime loans of the CRA were a key ingredient because of what was done with what was properly seen as toxic paper. No lender wanted to hold this stuff. Through various steps, these mortgages were "bundled" with prime-mortgages and then sold through Lehman and others as AAA-rated bonds. Moody's et al rated them. AIG et al insured them. Various mutual funds, retirement funds and university funds bought them.
I'm well aware of the mechanism by which "toxic waste" was created and then disposed of, and it most certainly didn't go through the offices of ACORN.

The original CRA program was expanded via the cooperative efforts of ACORN, Barney Frank, Sen. Gramm and the big banks. The same effort got the repeal of Glass-Steagall, which allowed these investment banks to buy and to trade in all this mortgage paper.
And again, I'll refer you to the fact that only one of the big 7 banks that failed were subject to the CRA. Quit trying to pretend that the CRA is on the same par with Gramm-Leach-Bliley in terms of responsibility here. The big banks got all "et up with consumeritis". Those guys wanted the big houses, and the fancy cars, and were more than happy to put the entire financial system at risk to do so.

Problem: "Leverage". These bonds and all these "financial instruments" were leveraged up to as much as 30:1.
Huge problem. But you'll have to show me exactly how ACORN put a gun to the banksters heads and forced them to over-leverage themselves, as your narrative would seem to imply occurred.

So: For all that the Fed rate was low, there were a few upward blips. Resetting of mortgages during blips began the large increase in folks falling behind on all mortgages, not just the basic sub-primes and Alt-A and ARMs. That meant that the bonds interest payments were reduced, which brought the insurors into play, It meant that the leveraged folks didn't have the cash on hand to meet cashflow demands.

So, no, the sub-prime loans of the CRA were not THE sole cause. But if you think of a house of cards, you can rationally consider these sub-prime loans as the one card which when pulled brings down the entire house.
Or, you could rationally consider the surge in the creation of risky investment vehicles as the card that brought down the house. For a trillion dollars, we could have bought up every outstanding sub-prime mortgage in this country, whether the homeowner was in default or not -- and let's face it, most of these loans are still being paid off just fine. Sure, it's a higher foreclosure rate than standard loans, but nowhere near 100%. So why couldn't we just buy up all the bad loans for a few hundred billion, and stave off the economic collapse? Because the banksters had gotten themselves in trouble to the tune of over $100 TRILLION.

And, of course, we've been over this time and again.

Sure, if a frog had wings he wouldn't bump his rump every time he jumps. But if there hadn't been a CRA, there would not have been a bunch of sub-prime loans. If there hadn't been a too-low Fed rate, there would not have later been Alt-A and ARMs--as well as NINJA loans. If there hadn't been a repeal of Glass-Steagall, there would not have been all this creation of fraudulent bond packages with toxic paper and AAA ratings. Without all this foregoing, there would not have been the incredible leveraging. Remember, this all developed over an eighteen-year period.
Corporatists and their allies have been banging on the Glass-Steagal act for well over 18 years 'Rat. Again, this is something you know, you just seem to 'forget' every time.

And so, if folks hadn't begun defaulting on sub-prime loans, the house of cards would not have come tumbling down.
And if banks hadn't written loans to people they knew -- or should have known -- didn't have the ability to repay, the house of cards never would have come down either. Yeah, people who bought beyond their means share some blame, but they were getting the hard-sell from people who really should have known better.

It's hard for me to blame the user and ignore the culpability of the pusher.

Trouble is, the whole real estate market, both residential and commercial, is still in deep doo-doo.
Yes, yes it is. But not due to in any overwhelming capacity to ACORN or the CRA.

They may not have been required, but they were strongly encouraged. By who? Our own government. Carter, Clinton and Bush all pushed home ownership as the key to the "American Dream". Our government, liberal and conservative, removed the barriers that prevented banks from having to cover this risky debt. The "greedy" bankers were only playing by the rules our own government created.

Our own government caused this crash. How? Slowly, with baby steps, starting with the CRA. Rapid change is never popular. Slow it down and it becomes more palatable.
It's funny how the words "personal responsibility" disappear from the conservative vocabulary when the topic of bank lending comes up.

[leekohler]

It's funny how the words "personal responsibility" disappear from the conservative vocabulary when the topic of bank lending comes up.

Amazing, isn't it? :mad:

[hulugu]

Look: The sub-prime loans of the CRA were a key ingredient because of what was done with what was properly seen as toxic paper. No lender wanted to hold this stuff. Through various steps, these mortgages were "bundled" with prime-mortgages and then sold through Lehman and others as AAA-rated bonds. Moody's et al rated them. AIG et al insured them. Various mutual funds, retirement funds and university funds bought them.

Yes, "key" but not the single ingredient. There was a whole stew of bad decisions there.

The original CRA program was expanded via the cooperative efforts of ACORN, Barney Frank, Sen. Gramm and the big banks. The same effort got the repeal of Glass-Steagall, which allowed these investment banks to buy and to trade in all this mortgage paper.

The original CRA program was expanded, but the banks inflated the "idea" beyond anything that CRA or ACORN had ever intended.

Problem: "Leverage". These bonds and all these "financial instruments" were leveraged up to as much as 30:1.

The CRA didn't require the banks to do this. This was their own gamble.

But if you think of a house of cards, you can rationally consider these sub-prime loans as the one card which when pulled brings down the entire house.

Sure, if a frog had wings he wouldn't bump his rump every time he jumps. But if there hadn't been a CRA, there would not have been a bunch of sub-prime loans. If there hadn't been a too-low Fed rate, there would not have later been Alt-A and ARMs--as well as NINJA loans. If there hadn't been a repeal of Glass-Steagall, there would not have been all this creation of fraudulent bond packages with toxic paper and AAA ratings. Without all this foregoing, there would not have been the incredible leveraging. Remember, this all developed over an eighteen-year period.

And so, if folks hadn't begun defaulting on sub-prime loans, the house of cards would not have come tumbling down.

Trouble is, the whole real estate market, both residential and commercial, is still in deep doo-doo.

Yes, it is. But, notice the series of events that created our current predicament. It's like blaming the Serbians for WWII.

[mactastic]

It's like blaming the Serbians for WWII.
A perfect encapsulation of the argument.

Personally I blame Ben Franklin. Without an America, there's no ACORN, right?

[DZ/015]

It's hard for me to blame the user and ignore the culpability of the pusher.
It's funny how the words "personal responsibility" disappear from the conservative vocabulary when the topic of bank lending comes up.

But in this case, the pusher is our own government. Both the conservatives you abhor and the liberals you idolize. They made the laws that allowed the "greedy" bankers to do what they did. They put their money in the investment that would provide the highest returns for their investors. As would anyone.

Personally I blame Ben Franklin. Without an America, there's no ACORN, right?

Let's no go so far back. Without Marx, there is no VI Lenin, Joe Stalin, Fidel Castro, Che Guevara, Mao Zedong, Pol Pot, Kim Il-Sung or quite possibly, even Hitler. Then no Acorn either. Plus we would have approximately 100,000,000 people that would had lived instead of having been murdered by their own government.

[leekohler]

But in this case, the pusher is our own government. Both the conservatives you abhor and the liberals you idolize. They made the laws that allowed the "greedy" bankers to do what they did. They put their money in the investment that would provide the highest returns for their investors. As would anyone.



Let's no go so far back. Without Marx, there is no VI Lenin, Joe Stalin, Fidel Castro, Che Guevara, Mao Zedong, Pol Pot, Kim Il-Sung or quite possibly, even Hitler. Then no Acorn either. Plus we would have approximately 100,000,000 people that would had lived instead of having been murdered by their own government.

WTF are you talking about? CRA helped a lot of people and did what it was intended to do. It got a lot of people out of poverty and made them productive citizens. Their foreclosure rate is very low too.

You cannot blame a good program for what a bunch of irresponsible and greedy lenders did with their model. You have to hold those banks responsible. If you don't, then you conservatives "personal responsibility" BS mantra is exactly that- BS.

[Eraserhead]

But in this case, the pusher is our own government. Both the conservatives you abhor and the liberals you idolize. They made the laws that allowed the "greedy" bankers to do what they did.

The government shouldn't have removed the glass-steagall act, but in the end the bankers made their own bed.

They put their money in the investment that would provide the highest returns for their investors. As would anyone.

Not really, you have to make sure you manage your risk too, and buying debt that you don't know what it is is damn stupid.

Let's no go so far back. Without Marx, there is no VI Lenin, Joe Stalin, Fidel Castro, Che Guevara, Mao Zedong, Pol Pot, Kim Il-Sung

This is rather a bizarre collection of at least nominally communist leaders, and it includes some rather nasty people like Pol Pot (who was of course removed by the communist Vietnamese under Ho Chi Minh) and Kim Il Sung, as well as some who have been fairly harmless people like Che Guevara and Castro.

And frankly given how appallingly corrupt the late Qing dynasty and Tsarist Russia was its not surprising they had revolutions and other people took power - that would have happened with or without Marx.

[Desertrat]

Always think incentive. The "why" of actions. The CRA was the primary incentive. The lenders were desperate to get rid of this toxic paper.

Look at it this way: If you were required by law to make loans way outside of rational lending practices, would YOU want to keep this junk on your books? You'd be a blithering fool if you did. It is rational to look for a way out of a financial trap. The only ones who can open the trap's back door are the ones who created it: The government.

(Rational lending practice: 20% down payment. Monthly PITI no more than 25% of take-home pay. Those were the 1966 criteria that I had to meet for my first home loan. Anything less strict than that is an optimistic bet that the future will ALWAYS be better.)

The government dutifully rolled over. Among other things, bye-bye Glass-Steagall. Various laws guaranteed that the lenders could create "tranches" and "credit default swaps" and all the other baloney. The Fed and the Treasury stood by to make sure that nothing really bad happened. It happened anyway. Leverage killed Bear-Stearns and Lehman. AIG didn't have the cash to cover their insured obligations, so tax dollars went to their bailout--some of which flowed straight back to Goldmann Sucks.

All the other toxic loans (Alt-A, ARM, NINJA) merely rode the coattails of what the laws enabled. That is, a lender can continue to make junk loans when the government has provided an escape route. The lenders didn't enable Fannie Mae, et al, to guarantee those loans. Congress and the president did.

It all started with the CRA, and built up on that. One step at a time. Think of an inverted pyramid, with CRA at the bottom.

[leekohler]

Always think incentive. The "why" of actions. The CRA was the primary incentive. The lenders were desperate to get rid of this toxic paper.

Look at it this way: If you were required by law to make loans way outside of rational lending practices, would YOU want to keep this junk on your books? You'd be a blithering fool if you did. It is rational to look for a way out of a financial trap. The only ones who can open the trap's back door are the ones who created it: The government.

(Rational lending practice: 20% down payment. Monthly PITI no more than 25% of take-home pay. Those were the 1966 criteria that I had to meet for my first home loan. Anything less strict than that is an optimistic bet that the future will ALWAYS be better.)

The government dutifully rolled over. Among other things, bye-bye Glass-Steagall. Various laws guaranteed that the lenders could create "tranches" and "credit default swaps" and all the other baloney. The Fed and the Treasury stood by to make sure that nothing really bad happened. It happened anyway. Leverage killed Bear-Stearns and Lehman. AIG didn't have the cash to cover their insured obligations, so tax dollars went to their bailout--some of which flowed straight back to Goldmann Sucks.

All the other toxic loans (Alt-A, ARM, NINJA) merely rode the coattails of what the laws enabled. That is, a lender can continue to make junk loans when the government has provided an escape route. The lenders didn't enable Fannie Mae, et al, to guarantee those loans. Congress and the president did.

It all started with the CRA, and built up on that. One step at a time. Think of an inverted pyramid, with CRA at the bottom.

Sorry 'rat- no go. You have to blame the banks for what they did. You can't cry "personal responsibility" and absolve the banks for what they did willingly on their own.

[ToroidalZeus]

Very accurate post besides this one part.
They stopped lending! Corporations had to cut back
It was the other way around. Corporations fired people in order to raise their bottom line. So they exported jobs overseas or started to drive down wages here with H1-B visas. This in turn drove down the income people received and that caused people to be unable to pay off their debt. Which caused the viscous cycle you described.

Sad part is even with this recession, this problem has not been addressed.

[Desertrat]

leehohler, I'm not trying to "absolve" the banks of anything. I'm merely trying to point out the origin of the whole mess. Sub-prime loans were NOT done willingly until AFTER the original-lenders' risk was removed by the government.

Don't try to make me believe that you or anybody else would "willingly" lend money to somebody who had high odds of not paying it back.

Once the risk was removed, it was "off to the races". And note that it was not the original lenders who have been hit by the crash. The losers have been those who bought the toxic paper: That's now YOU, as a taxpayer, with Fannie Mae, et al, having bought this junk at above-market pricing. Several trillion buck's worth, of which as much as twenty percent may well be valueless or way "under water".

[SactoGuy18]

I KNOW I'll be flamed for this, but I myself personally think the entire financial crisis is a case of investment companies getting too "cute" with the type of exotic investments out there and the fact the downsides of the current income tax system are starting to catch up to us.

That's why I'm advocating serious reforms for our financial system to reduce the issue of risky investments and MASSIVELY overhauling our national taxation system to encourage Americans to keep their personal savings and capital investments in the USA. Do both and the US economy will turn around faster than a modern jet fighter doing a 9-G turn. :D

[Eraserhead]

but I myself personally think the entire financial crisis is a case of investment companies getting too "cute" with the type of exotic investments out there

Completely agreed.

and the fact the downsides of the current income tax system are starting to catch up to us.

What are the downsides?

That's why I'm advocating serious reforms for our financial system to reduce the issue of risky investments and MASSIVELY overhauling our national taxation system

Sounds good, if congress will pass it.

Its to encourage Americans to keep their personal savings and capital investments in the USA.

What's the justification for that as an overall policy? That said I think giving advantages to private investment in troubled regions (in the UK too) would probably be a good idea.

[opinioncircle]

Very accurate post besides this one part.

It was the other way around. Corporations fired people in order to raise their bottom line. So they exported jobs overseas or started to drive down wages here with H1-B visas. This in turn drove down the income people received and that caused people to be unable to pay off their debt. Which caused the viscous cycle you described.

Sad part is even with this recession, this problem has not been addressed.

You can't legally drive down wages with the H1B process. In order to qualify for the visa, corporations have to show evidence of the wage by the applicant to be similar to what a local citizen would have.

[Badandy]

I KNOW I'll be flamed for this, but I myself personally think the entire financial crisis is a case of investment companies getting too "cute" with the type of exotic investments out there...

That's why I'm advocating serious reforms for our financial system to reduce the issue of risky investments ...

Like what Obama is trying to do with the Volcker rules? As far as I understand it, those rules would not only be ineffective, they'd go against what they're made to remedy. Senior economy advisors within the Obama administration have warned him against instituting the Volcker rules, but Obama isn't listening. It seems obvious to me that he's trying to pass through something that looks effective on the surface, even if it's not effective where it counts. The way most people look at it is that there's something seriously wrong with our financial system and if Obama passes a big piece of legislation it would be a large step forward, no matter the regulations he'd put in place. I mean, more regulations, of whatever type, would be good, right? Not in actuality. The problem is that most people favoring this current regulation are ignoring the specific proposals.

The Volcker proposals have two main components. The first is that they disallow deposit-taking banks to engage in proprietary and other "risky" investments. Even though this sounds good superficially, it doesn't eliminate the risk that these banks are subjected to (it shouldn't, either). The banks are still able to make loans, the initial domino in the financial crisis and historically some of most catastrophic investments should they default. Not only that, these loans are still subsidized by the government, meaning that the reward-risk ratio will still be artificially high. This encourages risky behavior, but you can't have it both ways. If Obama wants people to have easy access to money to jumpstart the economy, he has to alter the supply and demand for capital. Imposing further restrictions on how banks can get returns on their investments while still demanding easy consumer access to capital are two incompatible ideas that can only be glued together by a large amount of government intervention or excessive risk-taking in the the ever-decreasing areas of investment. Secondly, eliminating any types of investments (especially the ones that didn't compose a huge amount of these banks' portfolios) just eliminates their ability to hedge risk and will expose them even more severely to changes in the even smaller number of investments that they'd be allowed to invest in.

Secondly, Volcker proposes to limit the market-share of individual banks. Unfortunately, it hasn't been detailed exactly how this is to happen. Let's suppose for a second that this can be done efficiently. Instead of dozens of large banks controlling a large portion of the financial system, we'd have hundreds or thousands of smaller ones. Even though this increases competition, it does little to fix the underlying problems. Capping market shares will just force the sector to leverage or de-leverage in unison. Did having thousands of small banks prevent the Great Depression? Of course not, because when you subject thousands of the same business models to the same macro-economic forces they'll react in similar ways.


Being cut off from trading securities for their own book will not stop banks from putting insured deposits at risk...The most time-honoured money-loser of all - making bad loans - remains available. While it is bad to subsidize banks' bets on MBS's, is it worse than backing their bets on plain old mortgages?

Paul Tucker, the Bank of England's deputy governor for financial stability, pointed out in a speech that many financial groups that do not take deposits still play the same economic function as banks: matching long-term illiquid assets with short-term liquid liabilities.

As this editorial so beautifully puts it, "It means more yield-hungry capital will flow to less regulated financial sectors instead of banks." Remember, it was those alternative financing markets that was the epicenter of the financial crisis.

I'll leave for now with this:

The American stream of populism has always been one that's basically ignored the reality of the marketplace in order to put out a political message that resonates at a very base level.

[Rodimus Prime]

Lets forget the people who actually signed for the loans. Apparently the term "adjustable rate" was too much for them to comprehend.




It's funny how the words "personal responsibility" disappear from the conservative vocabulary when the topic of bank lending comes up.

The problem I see with both those arguments is why the people signing the loans should be responsible for paying the money back I feel that the banks should be held at fault for lending the money as well.

The banks lent money to people who had a high risk of defaulting on the loan and they knew it. When I loan fails I blame both sides. Person who it failed on is responbile to pay it back and then the bank is at fault for giving out a loan the person could not afford.

The exception to the above rule is when the default is cause by things beyond either control. That being losing a job, cannot work due to injury and so on. All events that were not a factor at the time of the loan. Those I list as acceptable defaults and no one really is at fault.

Now if a person fails to be able to pay it back due to the fact that they never made enough I blame the banks for giving out the loan because they should of known better and should of said NO to giving the loan. Banks assume the risk of not getting the money back. In this mess they gave out a lot of loans they could never hope to collect on and they knew it and it caused a lot to fail. That snowballed into nailing people who did everything right.

[Badandy]

The problem I see with both those arguments is why the people signing the loans should be responsible for paying the money back I feel that the banks should be held at fault for lending the money as well.

The banks lent money to people who had a high risk of defaulting on the loan and they knew it. When I loan fails I blame both sides. Person who it failed on is responbile to pay it back and then the bank is at fault for giving out a loan the person could not afford.

No. Don't enter into a loan if there's not enough wiggle room to pay it back.

The banks don't want people to default, that's against their interest. When they do, that's on the borrower. They're the ones that indebted themselves financially to an external institution.

[Rodimus Prime]

No. Don't enter into a loan if there's not enough wiggle room to pay it back.

The banks don't want people to default, that's against their interest. When they do, that's on the borrower. They're the ones that indebted themselves financially to an external institution.

Hence the reason why I think if a loan fails it is on both sides.
Bank for making a loan the person could not pay back.

The person for taking a loan they could not pay.

It is not a get out of jail free card for the person taking the loan but it also does not let the bank off the hook.
I hold banks at fault for a lot of it because they gave out way to many high risk loans. They did not balance their risk. A few loans failing here and there is ok. But when a bank has a lot of loans fail. It is time to look at the bank and see what they were doing because they are at fault for taking on to much risk.

[ToroidalZeus]

You can't legally drive down wages with the H1B process. In order to qualify for the visa, corporations have to show evidence of the wage by the applicant to be similar to what a local citizen would have.
It is all about the loop-holes. You can give someone a visa for a 50k job, that does not mean he will be working a 50k job indefinitely. Maybe he will get a 60k job that used to pay 80k.

[Desertrat]

Rodimus is correct with "The banks lent money to people who had a high risk of defaulting on the loan and they knew it."

The reason for the willingness to make those toxic loans was because the government had taken the risk out of it. Congress enabled the selling oft hat toxic paper to Fannie Mae (and others). Otherwise, the loans would not have been made.

Separately: The US government tax policy discourages saving. That is, by taxing the interest on savings, people are induced to either go on and spend, or to seek riskier investments which pay more than basic savings accounts or CDs. And, the money from savings and CDs (as well as other deposits) provides much the money for lending for business development or expansion.

Oh: All this huffing and puffing about regulating and salary control of the big banks? Technically, because of the corporate structure, Goldmann Sachs is not a bank. The largest money-bunch of all won't be subject to the regulation or bonus caps.

[ToroidalZeus]

The reason for the willingness to make those toxic loans
The willingness was just plain old greed; Which influenced wall streets actions, main streets actions, and the governments actions too.

was because the government had taken the risk out of it. Congress enabled the selling oft hat toxic paper to Fannie Mae (and others). Otherwise, the loans would not have been made.
Exactly, the government allowed the market to do what it wanted. So the "free markets," as some would say, caused the problem.

[MyDesktopBroke]

***** democrat party raisin' our taxes. (http://finance.yahoo.com/taxes/article/108642/tax-breaks-for-almost-everyone?mod=taxes-filing)

[leekohler]

Rodimus is correct with "The banks lent money to people who had a high risk of defaulting on the loan and they knew it."

The reason for the willingness to make those toxic loans was because the government had taken the risk out of it. Congress enabled the selling oft hat toxic paper to Fannie Mae (and others). Otherwise, the loans would not have been made.



And you're still trying to let the banks off the hook. "It's not their fault! The government let them do it!" Sorry- that's not gonna work when you're always screaming "personal responsibility".

The willingness was just plain old greed; Which influenced wall streets actions, main streets actions, and the governments actions too.


Exactly, the government allowed the market to do what it wanted. So the "free markets," as some would say, caused the problem.

Thank you. The very people who scream "free markets!", "personal responsibility!", and "socialism!" are the ones who are crying that the government didn't do enough with regards to this. It's laughable.

[Desertrat]

leekohler, how in God's name do you keep coming up with this silly stuff like, "...let the banks off the hook."? All I'm showing is that no matter how greedy, they could not have done all that phony lending without the collusion of the Congress.

Along that line, here's a tidbit from Chuck Butler, in Everbank.com's "Daily Pfennig":

"I would have regulated them (the financial institutions and lenders) more... in other words... AUDIT THEM TRUTHFULLY, and not Bernie Madoff style audits!

These regulators have the power to make a financial institution change the way they do things, or put in more circuit breakers... They would have also stopped lenders from the lending practices that were so much a part of this debacle... I have been in the investment divisions of banks since 1979... I KNOW that they have the power to regulate using current laws!

Key: The regulators had the power.

Drifting: I get fed up with all this yap-yap about "greedy" this, that and the other. Congress isn't exactly over-loaded with a bunch of poverty-stricken altruists. Neither is the Administration.

Back to Goldmann Sucks for a moment: Apparently the corporate charter calls for 50% of the profits to be distributed among the employees--whence cometh these bonuses. Doesn't look like to me that anybody really has much room to complain, other than jealousy. In a sense, it's an "employee-owned" operation, long-desired by the Left.

[ToroidalZeus]

never-mind

[leekohler]

leekohler, how in God's name do you keep coming up with this silly stuff like, "...let the banks off the hook."? All I'm showing is that no matter how greedy, they could not have done all that phony lending without the collusion of the Congress.

Along that line, here's a tidbit from Chuck Butler, in Everbank.com's "Daily Pfennig":

"I would have regulated them (the financial institutions and lenders) more... in other words... AUDIT THEM TRUTHFULLY, and not Bernie Madoff style audits!

These regulators have the power to make a financial institution change the way they do things, or put in more circuit breakers... They would have also stopped lenders from the lending practices that were so much a part of this debacle... I have been in the investment divisions of banks since 1979... I KNOW that they have the power to regulate using current laws! \

Key: The regulators had the power.

Drifting: I get fed up with all this yap-yap about "greedy" this, that and the other. Congress isn't exactly over-loaded with a bunch of poverty-stricken altruists. Neither is the Administration.


FINALLY! Thank you! A post that doesn't blame everything on the CRA. Here's my point- the CRA is one thing, a very good thing that helps a lot of people get out of poverty and WORKS for the most part.

To blame the CRA on the financial crisis is completely irresponsible and implies that there should be no such program.

Now- of course Congress let the financial institutions run loose. Who do you think pays them off? You can't possibly think that isn't going on. And what is at the heart of this mess? Greed. You can't deny that. Could the regulators have stopped them? Sure- and they damn well should have. But everyone has his price. Now that corporations can now openly fund political campaigns, do you really expect this to get any better?

And gee, 'rat- you sound like a liberal today. At least you finally got honest about this.

[opinioncircle]

It is all about the loop-holes. You can give someone a visa for a 50k job, that does not mean he will be working a 50k job indefinitely. Maybe he will get a 60k job that used to pay 80k.

That's a good point, if the person has a green card or temporary residency in the US.
In the other case, each time the person will switch jobs (or even get promotion in the same company), the company has to start over with the same process. I do not know if this is really applied in reality though.

The H1B visa is a joke if you ask me, it is a lottery, and for foreigners (like I am), companies such as BMW NA, Volkswagen NA or Nintendo turned me down because of the H1B visa process.

In terms of crisis, outside of the factors that caused this meltdown, I am mostly surprised by the attitude by the heads of developed countries governments, coming up with such declarations as "It is over" or "We are done".
Banks are at fault, but I do believe this is a much broader issue going all the way down to morals and society norms. Do not get me wrong, I am not an anarchist, but things got out of hands when letting people do what they want. Somehow, someway, there has to be a way to check up on what is going on in the economy.

[ToroidalZeus]

I do not know if this is really applied in reality though.
It is not.

[Desertrat]

Again, leekohler you misunderstand: The CRA was the beginning impetus for lenders to seek ways to get out from under toxic paper. Without the CRA, only the already-known failure rate would have continued as usual. For prime loans, the failure rate has always been extremely low. There was never a need to escape a government-created trap.

As far as me, myownself, I don't really think in terms of "blame". When mistakes are made, or when bad events occur, I try to figure out causal relationships in order that they not be repeated. "Blame" is pointless.

As far as the morality, the CRA sort of thing is good if and only if you think that tying poorer people to property is inherently a Good Thing. If nothing else, it inhibits their freedom to seek work elsewhere when times turn bad.

Like right now, for instance. Read the newpapers, lately? Watched any TV? Read much on the Internet? All sorts of folks are tied to a location and can't leave--and are on their last financial legs. Owning your home is a myth until the mortgage is paid. Until then, you're merely paying rent with part of it being deductible off your income taxes.

('Scuse me, but I've been running the numbers on owning vs. renting since 1965. I've done my own I040 work since before then. I like to think I know a little bit about the good and the bad about money and a residence.)

I guess the CRA is good if you think you should have power over me to force me to lend to somebody who might not repay the loan. Or for me to have that power over you. But I don't see where it's good to force anybody into a money-losing situation. That really sounds cruel. For all I know, it might well be unconstitutional...

Regardless, the CRA was the beginning enabler. Pardon the pun, but it was the acorn from which has grown the Oak of Financial Destruction. Aside from the government and the banks, the other primary enabling entity was the Federal Reserve Bank, in the person of first Greenspan and then Bernanke, with artificially-set interest rates which were far below any rational market rate. It's the Keynesian bit about controlling the economy by controlling the money supply--which is done by controlling the Fed interest rate. A low Fed rate helps create boom times and lotsa money in circulation--as during the dot-com boom and then the housing boom.

That's worked quite well, hasn't it? Not.

As I've said numerous times before, booms are followed by busts. When you play the Fed games to ease the busts, you merely defer the ultimate correction. At the moment, this seems to be about as ultimate as anybody has ever seen or read about.

[leekohler]

Again, leekohler you misunderstand: The CRA was the beginning impetus for lenders to seek ways to get out from under toxic paper. Without the CRA, only the already-known failure rate would have continued as usual. For prime loans, the failure rate has always been extremely low. There was never a need to escape a government-created trap.

As far as me, myownself, I don't really think in terms of "blame". When mistakes are made, or when bad events occur, I try to figure out causal relationships in order that they not be repeated. "Blame" is pointless.

As far as the morality, the CRA sort of thing is good if and only if you think that tying poorer people to property is inherently a Good Thing. If nothing else, it inhibits their freedom to seek work elsewhere when times turn bad.

Like right now, for instance. Read the newpapers, lately? Watched any TV? Read much on the Internet? All sorts of folks are tied to a location and can't leave--and are on their last financial legs. Owning your home is a myth until the mortgage is paid. Until then, you're merely paying rent with part of it being deductible off your income taxes.

('Scuse me, but I've been running the numbers on owning vs. renting since 1965. I've done my own I040 work since before then. I like to think I know a little bit about the good and the bad about money and a residence.)

I guess the CRA is good if you think you should have power over me to force me to lend to somebody who might not repay the loan. Or for me to have that power over you. But I don't see where it's good to force anybody into a money-losing situation. That really sounds cruel. For all I know, it might well be unconstitutional...

Regardless, the CRA was the beginning enabler. Pardon the pun, but it was the acorn from which has grown the Oak of Financial Destruction. Aside from the government and the banks, the other primary enabling entity was the Federal Reserve Bank, in the person of first Greenspan and then Bernanke, with artificially-set interest rates which were far below any rational market rate. It's the Keynesian bit about controlling the economy by controlling the money supply--which is done by controlling the Fed interest rate. A low Fed rate helps create boom times and lotsa money in circulation--as during the dot-com boom and then the housing boom.

That's worked quite well, hasn't it? Not.

As I've said numerous times before, booms are followed by busts. When you play the Fed games to ease the busts, you merely defer the ultimate correction. At the moment, this seems to be about as ultimate as anybody has ever seen or read about.

Nope- never watch TV, never read the newspaper, and never read the internet. Nope never do any of that. :rolleyes:

Sorry, 'rat. We are not going to agree on this. The CRA loans did not default even remotely like the independent ones did. The folks with CRA were paying for the most part- so CRA wasn't a money-losing situation, was it? It was others who weren't paying and defaulting like crazy. Now you can try to spin that all you like, but that's the bottom line.

[SactoGuy18]

Looks like I have to explain myself. :rolleyes:

First, let's start with the issue of a financial system out of control. During the early 1990's, "math whizzes" coming out of places like MIT and the Ivy League schools thought they could apply sophisticated mathematical equations to create unusual investment schemes that at first made a LOT of money. Alas, when the Asian financial crisis hit in 1997, all those math formula methods collapsed like a house of cards, and there were SERIOUS financial losses for many investment companies, especially in Europe.

They tried again in the USA starting in the early 2000's, and you had an explosion of hedge funds, derivatives, credit default swaps, and other investment schemes no one had seen before in the USA. Unfortunately, sub-prime mortgage lending got caught up in these exotic investment schemes, so it was only a matter of time for something to go wrong and cause a massive stock market implosion. What made it worse was that once Glass-Steagall was phased out in 1999, banks got heavily into these investment schemes, and when Bear Stearns and finally Lehman Brothers failed the damage it caused was ENORMOUS, to say the least.

This is why I hope the Obama Administration just re-impose the 1933 Glass-Steagall Act with a 24 month phase-in period to allow banks to sell off investment divisions and investment companies to sell off their banking divisions in an orderly fashion. Once the phase-in completes, banks will become effectively "firewalled" against the ups and downs of the stock market; note how US banks did very well with the 1987 stock market crash and during the peak of the Asian financial crisis between 1997 and 1999 because bank assets weren't caught up with the downward spiral of the stock market like what happened in 1929 and 2008.

As for the income tax issue, let me explain why at least in the USA it's a terrible idea:

1) The Internal Revenue Code (Title 26) is 67,500-plus pages of code and additional rules that are so complex that even the IRS admits they can't figure much of it out.
2) This complexity results in compliance costs that some economists estimate at nearly US$500 BILLION per year.
3) Because we impose taxes on bank savings interest payments, corporate dividend payments, and capital gains, the US has among the lowest savings and investment rate in the industrialized world.
4) We also have the second highest corporate income tax rate in the world.
5) Americans participate in the illegal cash-only underground economy with nearly US$2 TRILLION involved in these activities, all done as means of avoiding income taxes.
6) American citizens and businesses use loopholes in the IRC to funnel circa US$13 TRILLION in American-owned liquid assets out of the USA to offshore financial centers beyond US borders to keep these assets out of the reach of the IRS. (Care to explain all those "banks" located in the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Nethlands Antilles, etc?)
7) Because of the high corporate income tax rate and the payroll tax, American businesses are outsourcing millions of jobs to keep their taxes low. Why do you think the Big Three automakers have large production plants in Canada and Mexico and so many goods are made in China?

All these income tax issues are just flat-out sheer economic stupidity, in my humble opinion. This is why I support repealing the 16h Amendment and replace the current income tax system with the FairTax national consumption tax system (H.R. 25/S. 296), a taxation system that costs only a tiny fraction of the current income tax system in terms of compliance costs and effectively ends all the bad practices I mentioned above in terms of taxation effects. Because under FairTax we no longer impose taxes on the process of earning money, this means Americans can confidently put their money in banks and capital investments with no worries about potential tax consequences, and that means most of that US$15 TRILLION in liquid assets now out of the US financial system for tax avoidance reasons returns, effectively the world's largest "private bailout." That much liquidity returning means we can make banks whole again, make many distressed companies whole again, help erase governmental deficits and provide a base for new loans and lines of credit so necessary for economy recovery and long term growth.

Indeed, all of the major economic naysayers out there (Gerald Celente, Catherine Austin Fitts, Joel Kousen, and several others) all say cleaning up the US financial system to reduce risky investments and fixing our national taxation system are CRITICAL in getting the American economy back on its feet.

[Desertrat]

Sacto, you've pretty well nailed it.

leekohler, it's not the dollar amount of the sub-prime loans made under CRA that merits "blame" or that I allege as causal. Again, it's the risk that was imposed by the CRA. It created a need to remove risk; that risk did not exist before the CRA was enacted. Once the risk was removed, the rest of the whole runup got going.

Or are you arguing that forcing loans to be made which have a higher probability of failure is not adding risk? That those upon whom risk is imposed will not try to the utmost to somehow get around that risk?

[hulugu]

Sacto, you've pretty well nailed it.

leekohler, it's not the dollar amount of the sub-prime loans made under CRA that merits "blame" or that I allege as causal. Again, it's the risk that was imposed by the CRA. It created a need to remove risk; that risk did not exist before the CRA was enacted. Once the risk was removed, the rest of the whole runup got going.

Or are you arguing that forcing loans to be made which have a higher probability of failure is not adding risk? That those upon whom risk is imposed will not try to the utmost to somehow get around that risk?

I undertand and appreciate your logic in calling the CRA an "acorn" that started much of this, but I'm still not sure that the CRA is really the "prime mover" you claim it to be. Had the CRA never existed, and Fannie Mae refused to bank all this toxic paper, can we really know that banks wouldn't have tried to integrate this risk into their operations?
I think your theory of propagation is correct, but only if you acknowledge that dozens of events and actions followed, several of which could have stopped this problem in its tracks and moreover the attempt to call the CRA the "beginning" makes it appear that all that follows was merely a consequence rather than its own series of actions.

Again, I refer to my metaphor about WWII starting with the Serbians. A historian could easily claim that the shooting of Franz Ferdinand caused the bombing of Hiroshima and show a similar flow of logical constructions, but doing so would ignore a myriad of decisions, including Major Thomas Ferebee's actual toggling of the bomb sight.

Accurate, yes, but historically incomplete. I believe that the story of the CRA is similar, while it created a market, per se, for toxic paper, the banks found the enterprise fantastically profitable, creating even more toxic paper in the process, and were so thrilled with the enterprise, that they demanded that the Glass-Steagall Act be repealed so everyone could get rich. Meanwhile, various banks and agencies were encouraging malfeasance throughout the market, including influencing appraisers to drum up values, the creation of ridiculously high LTV loans (which were proscribed under the CRA, along with loans without wage assurances), balloon payment structures, as well as bundled loans and the manipulation of the grading agencies.

The CRA was a decent idea created because banks were "redlining" entire ethnic neighborhoods. That it was later manipulated by Reagan, Bush, Clinton, and Bush also tells us some of the story. But, the original program was a modest attempt to solve a real problem for people who could otherwise afford houses, but just couldn't get a loan and I'm just not sure why so many have aimed their ire at this little law when there's so many other acts of complete and utter inanity to set sights upon.

[Badandy]

What made it worse was that once Glass-Steagall was phased out in 1999, banks got heavily into these investment schemes, and when Bear Stearns and finally Lehman Brothers failed the damage it caused was ENORMOUS, to say the least.

One of my finance professors, who was one of the main lobbyists responsible for repealing the Glass-Steagall Act, insists that it did not cause our current mess. I'll get a more detailed explanation soon, but she knows what she's talking about and she keeps saying that it's getting a bad rap in this whole deal.

[ToroidalZeus]

never-mind

[leekohler]

Sacto, you've pretty well nailed it.

leekohler, it's not the dollar amount of the sub-prime loans made under CRA that merits "blame" or that I allege as causal. Again, it's the risk that was imposed by the CRA. It created a need to remove risk; that risk did not exist before the CRA was enacted. Once the risk was removed, the rest of the whole runup got going.

Or are you arguing that forcing loans to be made which have a higher probability of failure is not adding risk? That those upon whom risk is imposed will not try to the utmost to somehow get around that risk?

Bottom line- and I AM NOT GOING TO SAY IT AGAIN:

The facts are that it was not defaults on CRA loans that caused this mess. It was loans given by independent banks that caused it. The CRA cannot force any bank to give loans that it has no power over. Those banks did that themselves!

I've linked to to information proving this over and over, and I am not going to do it again.

[hulugu]

One of my finance professors, who was one of the main lobbyists responsible for repealing the Glass-Steagall Act, insists that it did not cause our current mess. I'll get a more detailed explanation soon, but she knows what she's talking about and she keeps saying that it's getting a bad rap in this whole deal.

That would be interesting to hear.

[leekohler]

The CRA was a decent idea created because banks were "redlining" entire ethnic neighborhoods. That it was later manipulated by Reagan, Bush, Clinton, and Bush also tells us some of the story. But, the original program was a modest attempt to solve a real problem for people who could otherwise afford houses, but just couldn't get a loan and I'm just not sure why so many have aimed their ire at this little law when there's so many other acts of complete and utter inanity to set sights upon.

Because it suits their worldview that helping the poor better themselves is wrong.

[Desertrat]

hulugu, true that it was but one factor. What I'm saying--or trying to get across--is that the requirement in the law that a certain percentage of loans be made to borrowers with lesser credit ratings created risk. The efforts to reduce that risk led to other potentials for financial manipulations. Additive to this, of course, are Fed's role in interest rates and the profits available to Fannie Mae, et al. But even complex events have a starting point. They might "grow like Topsy", but there is always some point of beginning.

"Because it suits their worldview that helping the poor better themselves is wrong."

There may be people like that, but I've yet to meet one. Certainly, no business person would believe that. If the poor better themselves, they are no longer poor. They therefore can buy more "stuff".

Two groups NEED for the poor to remain poor: The bureaucrats whose salaries stem from government programs for the poor, and politicians who by promises of "goodies" can buy their votes.

Raw greed for money would prefer that the poor got rich. Rich folks spend more.

[hulugu]

hulugu, true that it was but one factor. What I'm saying--or trying to get across--is that the requirement in the law that a certain percentage of loans be made to borrowers with lesser credit ratings created risk. The efforts to reduce that risk led to other potentials for financial manipulations. Additive to this, of course, are Fed's role in interest rates and the profits available to Fannie Mae, et al. But even complex events have a starting point. They might "grow like Topsy", but there is always some point of beginning.....

Yes, but while that was the "point of beginning" the CRA has taken the brunt of criticism from many while ignoring a whole other bunch of factors, each of which had a major role to play in this debacle. Additionally, the story goes that without the CRA, the banks would never have figured out that they could engage in risky loans and that just seems wrong.
The banks might have walked off the same ledge without the CRA. That they did in going full-tilt while making billions of dollars while executives bought houses on Lake Cuomo seems like a bigger part of the problem than the modest CRA program.
What happened wasn't just do gooder happenstance, but a series of dumb decisions by people who knew better.

I know we're arguing in circles a bit, but I really want to make this clear. The CRA might have been the start, but there was a middle and a end to this story and many are so focused on "And then there was light..." while missing the Second Coming of Christ.

[Desertrat]

Maybe it's the use of the word "banks" that messes up these discussions.

There are banks which focus on home loans. That group is not part of the investment bank group like Bear Stearns, Lehman, Goldmann Sachs, et al.

Other banks focus more on commercial development loans. Same deal.

Then you have the biggies, where actual customer deposits and small loans are a trivial part of their overall financial activity. The Goldmann Sachs crowd, with G S being El Supremo.

Behind the first group are such as Fannie Mae, Freddie Mac and the FHA. The first two of these are public/private. Private corporations, tacitly backed by the government.

It was the home-loan banks who had the CRA risks imposed. They sold the paper to those who then packaged these mortgages into "tranches" and in turn sold them as AAA bonds. Ratings by Moody's; insured by AIG.

The interest on the bonds was to be paid via the income from mortgage payments.

So: Since any old paper, toxic or not, could now be sold to retirement funds, mutual funds and university funds, such loans as the Adjustable Rate, the interest-only and the "NINJA" loans were devised. NINJA: "No income, no job, no anything".

As loans reset and the payments jumped, the economy slowed down. Basically, the rest is well-publicized history. I'm not gonna repeat anything about leverage and derivatives, all of which ultimately rested upon mortgage payments.

As far as the near-term future, a huge amount of ARMS and Alt-A mortgages are resetting in these next two or three years. A large percentage is expected to default.

Commercial real estate is in the toilet. Within the last couple of days, e.g., a project which had over five billion dollars invested is now estimated to be worth not much over one billion dollars. The developer quit. Some estimate it will be well past 2013 before any recovery is possible, assuming it will be bottomed out by then.

Enough. I'm on the highway, tomorrow. Be back on the weekend, I guess...

Y'all have fun,

'Rat

[SactoGuy18]

Personally, let me explain why a MASSIVE overhaul of our national taxation system (like the FairTax proposal I mentioned earlier is a great idea:

1) Because we no longer tax bank savings interest, stock dividend payments, and capital gains, that means people can confidently put their money in a bank, stock investments, or capital investments with NO income tax consequences. That would result in banks overflowing with liquidity and the investment rate rocketing through the roof, both very necessary for future economic growth.
2) It means we end all incentives to take liquid assets out of the US financial system as a means of income tax avoidance (since there's no more income tax!). Most of that US$15 TRILLION now either participating in the underground economy or sitting in offshore financial centers return to the USA under better tax conditions, creating what amounts to a "private bailout" that vastly dwarfs any Obama Administration "stimulus" proposal.
3) Because we now favor financing by using real liquidity instead of debt financing, that means people can confidently save up for a retirement "nest egg" or save up for a big-ticket purchase such as a home, automobile or large appliance either with a cash payment or with far smaller loans, since Americans can now afford to put down much larger down payments.
4) Because of no more taxes on earning money, foreigners will do a HUGE "land rush" to put their liquid assets in American banks and do capital investment in the USA.
5) Because of no more corporate income taxes, capital gains taxes and payroll taxes, American companies can bring back most of the many millions of outsourced jobs now done beyond US borders for income tax avoidance reasons. Commercial real estate would suddenly become HUGELY valuable as offices and factories are filled with repatriated jobs.

So what are we waiting for, Godot? :rolleyes:

[Eraserhead]

1) Because we no longer tax bank savings interest, stock dividend payments, and capital gains, that means people can confidently put their money in a bank, stock investments, or capital investments with NO income tax consequences. That would result in banks overflowing with liquidity and the investment rate rocketing through the roof, both very necessary for future economic growth.

Not taxing unearned income is just a gift to the richest 1%.

2) It means we end all incentives to take liquid assets out of the US financial system as a means of income tax avoidance (since there's no more income tax!).

Alternatively you make tax evasion like this illegal and make it more likely for you to get caught.

[SactoGuy18]

Not taxing unearned income is just a gift to the richest 1%.

But that richest 1% are also the people that own the companies that provides those millions and millions of jobs all over the USA. Without a corporate income tax, payroll tax, capital gains tax and dividend payment tax to deal with, these company owners would have a LOT less incentive to outsource jobs as a means to keep the company tax burden down. That means thousands of factories all over the USA will stop being idled, get modernized and be active again.

Alternatively you make tax evasion like this illegal and make it more likely for you to get caught.

How well has that worked so far. :rolleyes: Why do you think the underground economy has exploded up in popularity and American citizens and businesses have used tax loopholes to funnel liquid assets to offshore financial centers all over the world? In fact, that recent settlement between the IRS and UBS Bank in Switzerland is actually a farce, since UBS probably quietly assisted UBS customers to move their assets to Swiss banks that have no US operations, and that makes these assets even less likely to be returned the USA by legal action.

Since you're from the UK and UK implements a progressive income tax, one wonders how much assets owned by British subjects and businesses are sitting in banks in Andorra, Monaco, Switzerland and other tax havens on the European continent beyond the reach of HM Revenue & Customs....

FairTax, because it no longer taxes bank savings interest, dividend payment interest and capital gains, means you can put your money into banks and investment accounts with NO tax consequences. You can imagine the GIGANTIC "land rush" of liquid assets going to the USA into banks and capital investments for this reason--US$20 TRILLION would probably be a conservative estimate of how much more liquidity the USA gains under FairTax.

[Eraserhead]

But that richest 1% are also the people that own the companies that provides those millions and millions of jobs all over the USA.

Bush already tried that - it failed.

How well has that worked so far. :rolleyes:

Its an arms race, they could tighten up the regime further if they want them to pay more tax.

Since you're from the UK and UK implements a progressive income tax, one wonders how much assets owned by British subjects and businesses are sitting in banks in Andorra, Monaco, Switzerland and other tax havens on the European continent beyond the reach of HM Revenue & Customs....

Probably a substantial amount.

[mcrain]

Economy soars 5.7 percent, fastest in 6 years

http://www.reuters.com/article/idUSN1416882220100129

I'm interested in what people think changed? Taxes didn't go down. Spending went up. The cash for clunkers spread a lot of money out to a lot of people who then used it. Extensions of unemployment benefits helped people, and gave them money to spend. Interest rates stayed low. The government kept pressure on the big companies, including banks, to rework regulations and to keep them from distributing huge amounts of money to the top employees.

I see that busniesses are ramping up their spending. They must see a need.

I'm not an economist or a business expert, so I'm curious what other people think.

Consumer sentiment in the US is currently at its highest point in since January 2008, according to the Reuters/Michigan Consumer Sentiment Index, which rose to 74.4 in January. This result betters market expectations of a more modest 72.3 increase from December's score of 72.5.
http://www.nasdaq.com/newscontent/20100129/correction-reutersmichigan-consumer-sentiment-index-at-two-year-high.aspx?storyid=20100129_00ece17a-53ac-4f3b-9a10-251cdfd120c3_fxstreet.com

[SactoGuy18]

Eraserhead, the Bush tax cuts didn't ultimately cut back on American job outsourcing because it failed to address two issues: high corporate income tax rates (the second highest in the industrialized world) and the FICA payroll tax. If they had been able to cut back on both of these taxes a lot less jobs would have left the USA.

This is why there is a lot of support for the flat tax system proposed by Steve Forbes or the even more radical FairTax consumption tax proposal to replace the income tax, which essentially makes corporate taxes a lot less onerous or even ends it altogether.

The fact you admit that British subjects and companies have likely funneled lot of Pounds sterling to tax havens in Andorra, Monaco, Switzerland, etc. is another proof that the current progressive income tax system used in most of the world is a terrible idea. We need taxation designed to encourage people to save and invest in their local countries, not have them funneled out using (legal or not!) tax loopholes to various tax haven countries around the world.

[mcrain]

Eraserhead, the Bush tax cuts didn't ultimately cut back on American job outsourcing because it failed to address two issues: high corporate income tax rates (the second highest in the industrialized world) and the FICA payroll tax. If they had been able to cut back on both of these taxes a lot less jobs would have left the USA.

This is why there is a lot of support for the flat tax system proposed by Steve Forbes or the even more radical FairTax consumption tax proposal to replace the income tax, which essentially makes corporate taxes a lot less onerous or even ends it altogether.

We need taxation designed to encourage people to save and invest in their local countries, not have them funneled out using (legal or not!) tax loopholes to various tax haven countries around the world.

First, let me start off by saying I completely disagree with the proposed flat tax by Forbes. He's a business man, and his proposal is designed to benefit certain people and businesses. Second, the "fair" tax proposal is really bad. Third, I think a flat tax would be great, but NO ONE has proposed one yet.

The Bush tax cuts didn't spur the economy because giving people with money more money doesn't encourage them to do anything. Adding more tax cuts to those would not have helped the economy or kept jobs in this country. The tax cut woudl have to be enormous to offset the labor, land, regulatory compliance, etc... savings from doing business overseas.

Flat taxes... in the archives I addressed this a long time ago, so I won't get into it too much, but I do want to say one thing. The Flat tax and Fair tax proposals fail to take into account a huge number of taxes and revenue sources. By failing to make the ENTIRE tax system flat, changing the federal income tax only or eliminating it all together drastically shifts the tax burden from its current roughly flat overall effect to a much more regressive taxation structure.

As for encouraging people to invest, let me ask you a question. If you had a billion dollars invested in various businesses and investments, and those investments gave you enough money to live your lifestyle, would giving you more money cause you to do anything drastic? On the other hand, if your take-home income went down due to higher taxes, and you had the ability to shift your investments from passive to active investments so that you could make more money and keep your lifestyle exactly the same...

Which does more for the economy? A wealthy investory taking extra money and putting it into the bank or that same investor agressively investing in the economy in an effort to make more money?

[ToroidalZeus]

edit

[Eraserhead]

The problem with the current 'free market' is that is not free or even close to being free.

So I presume you are against farm subsidies? And pro production moving to the developing world? And anti trade tariffs?

[ToroidalZeus]

You are completely misinterpreting what free means.

"A free market is a market without economic intervention and regulation by government except to regulate against force or fraud"

[SactoGuy18]

As for encouraging people to invest, let me ask you a question. If you had a billion dollars invested in various businesses and investments, and those investments gave you enough money to live your lifestyle, would giving you more money cause you to do anything drastic? On the other hand, if your take-home income went down due to higher taxes, and you had the ability to shift your investments from passive to active investments so that you could make more money and keep your lifestyle exactly the same...


And that's the crux of the problem. Since for billionaires moving liquid assets, production facilities and jobs to lower-tax locales means potentially savings in the many millions to billions of dollars, small wonder why so much production is done outside the USA and why there are so many "banks" located on various Caribbean islands (the Cayman Islands and British Virgin Islands are notorious for numerous financial institutions sheltering American-owned liquid assets to keep them out of the reach of the IRS).

Heck, even look at the NBA professional basketball league. Why are so many players wanting to play for the Dallas Mavericks, Houston Rockets, Miami Heat, Orlando Magic or San Antonio Spurs? The reason is simple: no state income taxes in Florida or Texas. And that's critical because it means larger take-home pay that could run into the tens of millions of dollars more in the bank for players for these teams.

This is why I am a major proponent of massive income tax reform. Our income tax system is hideously warping our economy in a bad way, and making it very easy to comply at a low rate or even tossing it out altogether is the ONLY way (in my humble opinion! :) ) for real economic recovery and subsequent growth in the USA.

[ToroidalZeus]

This is why I am a major proponent of massive income tax reform.
Fixing the tax problem is actually really easy. But even if we do fix it without tariffs all the jobs will still be exported overseas.

[Zombie Acorn]

Fixing the tax problem is actually really easy. But even if we do fix it without tariffs all the jobs will still be exported overseas.

This isn't true.

[ToroidalZeus]

This isn't true.
Tariffs may increase the price of goods but at the same time they keep they keep money circulating within a nation as opposed to going all overseas. This keeps the buying power of your dollar strong. Now I am not saying you need to tariff everything but the proper use of tariffs is good economics.

[opinioncircle]

Tariffs may increase the price of goods but at the same time they keep they keep money circulating within a nation as opposed to going all overseas. This keeps the buying power of your dollar strong. Now I am not saying you need to tariff everything but the proper use of tariffs is good economics.

True in the case of a balanced trade account. Which is not the case in the US. Imposing tarrifs, in the US, would have a terrible effect, considering the massive imports to the US.

[ToroidalZeus]

True in the case of a balanced trade account. Which is not the case in the US. Imposing tarrifs, in the US, would have a terrible effect, considering the massive imports to the US.
I agree which is why before I mentioned tariffs I said we need to fix the tax system. Which equals the monetary system.