What caused the financial crisis?

[bascule]

http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html

 

Very interesting article. They say that if anything, the bipartisan repeal of Glass-Steagall helped soften the crisis (and quote Bill Clinton saying the same thing).

 

They list the real causes of the financial crisis as:

 

• The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
   
  
• Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
   
  
• Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
   
  
• Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
   
  
• The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
   
  
• Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
   
  
• Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
   
  
• Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
   
  
• The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
   
  
• An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
   
  
• Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
  

[SH3RL0CK]

Greed. Greed caused this financial crisis.

[npts2020]

Greed. Greed caused this financial crisis.

 

Not exactly. Greed is the basis of capitalism, does that mean no capitalist system is tenable? The true cause is allowing that greed to be unfettered.

[SH3RL0CK]

Is Greed really the basis of capitalism? I always thought capitalism was really more about free-markets as compared to controlled markets such as happens in communism. Certainly, there is a very considerable amount of greed in a communistic or socialist market as well.

 

One can be ambitous (a capitalistic trait) without being greedy. Or thrifty without being cheap. Or hard-working without becoming a slave driver.

 

But I do agree with you that for far too long the greed that was rampant was not addressed as it should have been. First, people who could not afford the homes (or the large screen TV with a home equity loan) they bought should not have been greedy and "stretched" their budget. Or outright lied about their finances. Bankers should never have loaned money to people who they knew couldn't pay. These subprime mortgages should not have been bought by investment firms looking for high yield returns. And so on...

 

All of these bad choices were because someone wanted just a little bit more. The homeowner wanted the larger house (or big screen TV). The banker wanted the closing fees. The investment firm wanted high yielding, even unrealistic returns. The government and both political parties wanted a good economy. Everyone was greedy and so were blind to the economic hardships that would happen when the homeowner, and therefore the banker, investment firm and perhaps very soon the federal government, would be unable to pay their debts.

[Realitycheck]

I think it is possible to be money-motivated and not greedy. It's a profession for many. There is a certain ethical or moral boundary that you have to cross for it to count as greed, subjective to anyone's individual opinion.

[Pangloss]

I saw that FactCheck and I thought it was interesting as well.

 

In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.

 

The section Bascule quoted above was from the "Blame the Republicans!" side of the debunking, but there was a "Blame the Democrats!" side to it as well.

[D H]

The section Bascule quoted above was from the "Blame the Republicans!" side of the debunking, but there was a "Blame the Democrats!" side to it as well.

The section Bascule quote was from the "The Real Deal" section of the article, which apportioned blame to politicians on both sides of the aisle, but more importantly (I think) apportioned blame to us.

[npts2020]

Exactly how are you defining the term "greed"? I dont see how it can be defined in such a way as to not be a negative (to those not greedy) trait. It has been a couple of decades since reading "Wealth of Nations", "Das Kapital", etc. but it seems to me every book I read seemed to say capitalism is based on greed (what is profit motive?). What is capitalism based upon if not greed?

[ParanoiA]

The term "greed" carries a value judgement in our intimate personal lives and since we are unable to separate that from the purely clinical business environment of capitalism we come up with these weird negative conclusions of profiteering.

 

These "causes" in particular, I'm having trouble with:

 

Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.

 

Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.

 

Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.

 

They are causes, sure, but they are natural forces that will always be present. People will buy houses if they're cheap and credit is flexible enough to allow them. Duh.

 

Of course Real Estate agents will try to sell the more expensive home and essentially always work for the seller. Car salesmen will try to sell the more expensive car, or whatever management has decided will garner bonuses that month. They're chasing the money. Duh.

 

I don't see the correllation between mortgage tax deductions and irresponsible loans. Tax deductions were about incintivizing mortgages, not subprime orgies of irresponsibility.

 

I suppose it's a more realistic take since it seems more sensible that problems like these trace back to many small factors rather than one gaping hole. Sounds reasonable to me. But obviously there are forces at work, that are to be there by design and to implicate them is fruitless.

 

Sure you could say that the reason the package of bologna was eaten was because the dog ate it...or you could say that it was because you left it on the kitchen floor, next to his bowl. I'm inclined to go with the latter.

[ecoli]

I agree with the essence of the article. I also like how it doesn't ignore interest rates and the business cycle, which most politicians seem to do.

[D H]

They are causes, sure, but they are natural forces that will always be present. People will buy houses if they're cheap and credit is flexible enough to allow them. Duh.

Nobody forced people to buy houses for which the payments represented half of their take-home pay (but people did just that, out of greed), or to refinance those houses every time the assessed value went up so they could take their ski trip to the Alps (and people did just that; here for the sake of gluttony and envy rather than greed).

 

Of course Real Estate agents will try to sell the more expensive home and essentially always work for the seller. They're chasing the money. Duh.

Nobody forced those agents to sell those houses to people who did not qualify to do so, or to convince unqualified buyers to lie, or to point unqualified buyers to people who would document the lie, or work with banks that ignored the false documentation. They did just that, once again out of greed.

 

I don't see the correllation between mortgage tax deductions and irresponsible loans.

While this did help fan the flames, I wouldn't have placed this cause nearly so high on list. I suspect a political bias against the home mortgage deduction here.

 

Sure you could say that the reason the package of bologna was eaten was because the dog ate it...or you could say that it was because you left it on the kitchen floor, next to his bowl. I'm inclined to go with the latter.

I'm inclined to go with the former -- because the bologna was not "left on the floor next to his bowl". The government put the bolgna on the counter and left the room. My dogs, at least, know that anything on the counter or the table is strictly off-limits, even if I am not in the room guarding it.

[ecoli]

 

I'm inclined to go with the former -- because the bologna was not "left on the floor next to his bowl". The government put the bolgna on the counter and left the room. My dogs, at least, know that anything on the counter or the table is strictly off-limits, even if I am not in the room guarding it.

 

I disagree with analogy. It's not the government's job to make sure people don't eat rotten bologna. But they did and now have to face the consequences.

 

The government shouldn't be devaluing the dollar because homebuyers and lenders made bad decisions. We should be tightening credit, not cutting interest rates further (an idea which I think is being floated around.)

[ParanoiA]

D H, those are human nature things that will never change. That's why I used the dog analogy - we're essentially blaming a dog for being a dog when we accuse salesmen of chasing the bigger profit.

 

They are definitely part of the cause, no doubt. Just not sure how productive it is to pretend like we couldn't see that coming when designing the system to begin with. Again, I blame the regulatory framework for not having the foresight to see the obvious.

 

My wife was a real estate agent for awhile, and while we had previously always suspected the agent's interests could not possibly compliment the buyer's interests, we were validated once she got into the business. She started out getting people what they actually wanted, and was rewarded with lectures on how she's not going to get anywhere financially until she started "acting like a salesman".

 

She wasn't particularly good at the sales angle, so it didn't hurt her feelings too much and redirected her efforts to house flipping, which she is excellent at.

 

The moral being that what we merely suspected, was exactly the case and it's that way by design. Pay people proportional to their sale price and that's what you're going to get. Sure you can blame them for being assholes, but everybody who gets paid directly proportional to the amount of money their sales add up to can be expected to respond to that very temptation. That's why it's built that way.

 

It just blows my mind that we set things up this way, and then act all surprised about choices and judgements that should have been obvious.

 

The other causes? Not nearly so obvious, and so I guess I give them more credit.