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The Real Cost of the 2008 Financial Crisis

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Re: The Real Cost of the 2008 Financial Crisis

#311

Post by naravara »

Eliezer wrote: post #284
camelite wrote: post #274

Earlier quoted context omitted.

What government interventions caused the doubling of subprime lending from 2004 to 2006?

FDIC insurance. A private insurance market for bank accounts sends a price signal about reliability. Subsidizing that insurance in a way that doesn't eliminate the price signal and the customer risk, like requiring 20% private insurance for 90% of the account face value and the govt providing the remaining 80% insurance at the same price or at a discount, could make sense if insuring more accounts was a policy goal.…

FDIC only ensures bank deposits, such as checking or savings accounts, not mortgages. It's not at all clear what that has to do with the proliferation of subprime lending.

Re: The Real Cost of the 2008 Financial Crisis

#313

Post by aero142 »

tomcam wrote: post #294

It seems like, relatively speaking, Iceland sailed through this by acting like capitalists: they let the loans fail, consumers took a haircut, and bankers were sent to jail. Is this a worthwhile comparison or were there fundamental differences that I (very likely) don't understand?

I love the idea, but this really doesn't dispute the central point. Iceland is an economy with a $24B GDP that is smaller than Vermont's, the lowest US state. The claim is that letting large US banks fail is a systemic risk that causes cascading failure. Using Iceland as an example doesn't dispute that point.

Re: The Real Cost of the 2008 Financial Crisis

#314

Post by naravara »

tooltalk wrote: post #288
camelite wrote: post #283

Earlier quoted context omitted.

What law did the government pass that forced the banks to ignore their risk assessment processes? Particularly, supposing you can point to some law or intervention, why do you suppose the banks are so childish and naive that when a law forces them to do one thing they don't want to do (make dumb loans to low-income groups), they'll respond by over-generalising and doing a whole other bunch of things they hadn't up to…

I guess the following would be a good starting point of discussion: https://www.forbes.com/sites/norbertmichel/2015/01/26/govern...

It's really not. First of all, the affordable housing market isn't where the housing market was most inflated so the author's entire premise is wrong.

Secondly, the author of that article is pretty clearly shilling to privatize Fannie Mae.

Thirdly, nobody here seems to understand what the community lending standards actually were and just wants to use it as a post to rest their argument on.

This is a much better, though still critical of the CRA article that goes into actual detail on what the problems were: https://www.city-journal.org/html/financial-crisis-and-cra-1...

But it's still an overly reductive and misguided argument. As Noah Smith points out here: https://noahpinionblog.blogspot.com/2012/12/did-risky-mortga...

Re: The Real Cost of the 2008 Financial Crisis

#315

Post by andrewla »

nafey wrote: post #2

But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.

Late to the discussion, but the alternative to the bailouts was to not bailout, and let the problems unwind. As mortgages were sold at firesale prices to attempt to remain solvent, it would be in the interest of the purchasers to lower the effective rates on the mortgages, because they could still book a profit at the lower rates.

The net effect would have been to cripple most of the national banks to the point where they would have to be liquidated and purchased piecemeal by smaller banks and local credit unions that managed to behave responsibly during the crisis.

The FDIC already exists and has a mandate to draw unlimited funds to make customers whole up to the limits. This is already priced in.

As to what would happen as companies failed to make payroll as their banking arrangements failed, it's likely that there would have been problems along the way, but the existing credit markets, especially short-term consumer credit (i.e. credit cards) would have allowed most households to stay solvent while the banks reorganized around the new reality.

I'm far from convinced that there would have been a depression -- for the most part I believe that it would have self-corrected on an individual or company basis except for the finance sector, which created the crisis in the first place.

Re: The Real Cost of the 2008 Financial Crisis

#316

Post by chimeracoder »

andrepd wrote: post #41
nafey wrote: post #2

But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.

The bailouts are controversial, but it's the bailouts AND the complete absence of criminal responsibility that's inexcusable. It is well known and documented that the financial crisis was no accident; everybody who headed the financial services industry to the state it was in did so knowingly , knowing full well the inevitable consequences, but not giving a damn because the arrangement let them to become handsomely w…

> They masked everything with a mixture of stacking the regulators with their ilk, stacking the universities with their ilk (economics as a field has zero credibility to me since I discovered how many theses "greenlighting" CDOs were written in clear conflict of interest), stacking the government with their ilk.

I understand that you're angry, but this is several steps beyond "tinfoil hat" territory.

Re: The Real Cost of the 2008 Financial Crisis

#317

Post by moate »

augustus2010 wrote: post #312

I just wonder why China doesn't have a economic crisis like the EU or the US. Is their system more superior than us?

Based on different economics. Even the more socialist leaning EU nations aren't dealing with straight up Communism.

China's big problem right now is actually that they brought so many people out of poverty that they're focused on controlling inflation.

Also, they have a state controlled media that reports only what the state wants. Helps smooth over the rough edges with praise of their great and successful system.

Re: The Real Cost of the 2008 Financial Crisis

#318

Post by chimeracoder »

koolba wrote: post #197
crispyambulance wrote: post #183

Earlier quoted context omitted.

> I don't agree with that concept. I don't think it's possible to legislate morality... We don't have to "legislate" the morality but we do have a responsibility for doing _something_. "Rule of law" means nothing if one class of people has subverted the law, enforcement and governance to their benefit at the expense of everyone else.

> We don't have to "legislate" the morality but we do have a responsibility for doing _something_. If the government, or specifically the justice system, is going to be involved in that "_something_" then we need laws that can be enforced by prosecutors and interpreted by judges. If you want that to include actions that is currently legal but which you find morally reprehensible (ex: the actions of these finance exec…

> With all the demonizing of wall street in regards to the 2008 crisis, most fail to go back to the true cause of the crisis, i.e. the repeal of the Glass-Stegall Act[2] via the Gramm-Leach-Bliley Act[3] signed by President Clinton in 1999. It took almost a decade but the entire "too big to fail" concept grew from that repeal.

As pointed out elsewhere, the repeal of Glass-Stegall was not the problem. Not only do most other countries not even have an equivalent law, but the crisis was triggered when a standalone investment bank failed.

Re: The Real Cost of the 2008 Financial Crisis

#319

Post by chimeracoder »

sampo wrote: post #11
nafey wrote: post #2

But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.

The Wikipedia article has a list of proposed alternatives. https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati... Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back. https:/…

> Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back.

You are basically describing TARP, which is what happened (and netted over $11 billion in returns).

Re: The Real Cost of the 2008 Financial Crisis

#320

Post by AnimalMuppet »

wonder_er wrote: post #185
rottyguy wrote: post #166

Earlier quoted context omitted.

I hope this doesn't come across as me trying to justify what happened but can anyone be explicitly about what laws were broken and who should have gone to jail? I know there was a bunch of outrage but want to cut through all that and get at exactly the issue.

There was a time when fractional reserve banking [0] was considered simple fraud (it wasn't called "fractional reserve banking" at the time, it was "bankers using for personal gain assets that were owned by another and stored for safe keeping at their bank.") So, as banking gets complex, the laws get complex. Once we decide fraudulent (fractional reserve) banking is legal, most of the rest can be whitewashed with eno…

You seem to be defining fractional reserve banking to be fraudulent (in your second paragraph). That's not a useful perspective for trying to get real answers to your questions.

When banking was "I'll store your money for you in a safe place for a small fee", fractional reserve banking was fraud, because it was not doing what you told people you were doing, and in a way that could cost them their money. Once fractional reserve banking became the normal way banks operated (that is, became both legal and expected), it's no longer fraud. It may still be immoral and/or unwise, but it's not fraud.

Now, there was plenty of fraud in the run-up to the 2008 crisis. ("Liar loans", anyone?) But that's distinct from fractional reserve banking itself being fraud.

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