Explain the crisis to me again?

[Lebell]

Last night i was watching a newsitem about the current crisis and the poor state of the economy worldwide.
There is something i don't fully understand about the origins of the crisis.

So in short i understand the crisis went a bit like this:
It started in the USA because former president Bush had a plan that allowed virtually every american to be able to buy a home.

companies/banks provided mortgages to people who actually wouldnt be viable.
banks all over the world chimed in and bought stocks from american banks and obligations in those mortgage constructions.

on the sideline you had those things with virtual money, people buying stuff with creditcards, spending money that didnt exist in a way.

am i right so far?

if i am, then explain me the problem: So the banks provided those mortgages, creditcards etc.
then those same banks wanted to see money, got in serious financial trouble, needed liquid funds, went bankrupt (duh thats what you get if you loan money to people from whom you know cant pay you back), then got billions of government fundings, eventhough they caused the crisis in the first place.

so i was wondering, why couldnt they just maintain the situation, turtles all the way down.
but no, the bankers insisted in blowing it up, people lost their houses, their jobs and now the sector with the fewest joblosses and biggest government financial support are....the bankers!!!



i know there are tons of smart educated people on here and i really like to know how and why it went wrong.
im assuming there's something wrong with my view on the causes because it has to be, otherwise my head will explode.

[Mtripp]

Ummm..... not quite correct.

Long before Bush was in office, Clinton told Fanny Mae and Freddie Mac that the Government would vouch for any and all home loans. Then they insisted that loans be given to people with no ability to pay it back. They actually allowed Welfare Checks to be used as a source of income.

Yes, Bush kept it going, but the "perfect storm" was the default of those loans, and now the Government having to make good on them all.

Home ownership is not a "right." I no longer have one, and never will again. I have been homeless in my life, and know what its like to be poor, really poor.

Frankly, I suspect this is going to get even worse before it gets better.

[Lebell]

ok, but what i was mainly wondering is this: why and who allowed it to be blown up?
wouldnt it be possible to maintain the status quo?
just turtles all the way down.

im probably incredibly naieve here but if the banks and mortgage companies had cut those people some slack this could have been avoided, or posponed long enough so they could work on a transition period.
now they just have been plain greedy and blew up the whole system.

[Diesel_tke]

No, the banks couldn't just let it go because there were people that were not paying their house note for months. They had someone on the news around here that didn't make a house payment in 6 months. They literally didn't have any money. When you have people not making payment's on their loans, it causes a cascading effect.

I don't think there is one person to blame here. It has been a culmination of us stupid American's wanting to live beyond our means. Plain and simple. We are spoiled brats that are now being told we can't have something.

[Lebell]

it wasnt just the americans, loads of foreign banks jumped on the bandwagon, over here a lote of banks have a thing called pension (retirement) funds.

during your working life your boss holds back (or you yourself) a certain percentage of your loan and put it in one of those pension funds.
pension funds are nothing more then safe investments in very stabile stocks.

so now everything is blown to shit loads of people see their pension funds decreasing in value and may hasve to work up til 67.

anyway,about your example, this guy didnt pay for 6 months right, but i just wonder if the damage would have been just as high if they let him off the hook and take chances with the cascading effects, instead of being a greedy bunch of pricks and blow up capitalism.

this is the end of the capitalist system as we know it.

[TM]

It's much simpler than all that.
The robber barons didn't take all our money the first time because they are stupid (inbred) and lazy and now the crisis is that they are coming back for the rest of it.

[rw4th]

this is the end of the capitalist system as we know it.

No it isn't, and you're not paying attention to the explanations. What caused the problem isn't capitalism, it's socialism; it's the government's intervention into the banking system forcing banks to give loans to people who clearly would never be able to repay them. It was only a question of time until those people defaulted on the loans and the whole system came crashing down.

[mike321]

Also, massively inflating home prices was treated as a good thing, except for people considered low income. These people were then subsidized with various programs as if that solved the high house price problem. In terms of economic disaster, overpriced houses were a problem across all income brackets.

I also noticed we pretended there was no inflation by looking at "core" inflation only. No houses, no fuel.

[mike321]

Two other notes, we seem to be trying to solve a non-free market created problem (this makes Bush a liberal based on his actions here, but that is a problematic term, as is conservative so I am using free-market) with more non-free market programs. This worries me.

Second note: statistics don't work if you start with bad assumptions. It seems the statistical evaluation of risk was based on incorrect sampling (too short a time frame) and non-independent samples. As an engineer, this shocks me that professional money people engaged in this level of bad statistics for so long. I never looked at the issue until the crisis hit, and it staggers my mind that this happened.

For an example of non-independent samples imagine trying to figure out what percent of apples have been contaminated. If you sample random apples from everywhere the samples are independent. If the apples you sample are all in the same barrel, they are not independent.

[Diesel_tke]

I'll give you a very interesting example here in Pensacola. When I bought my house back in 2001, all of the houses in this area were around 110k. Then Hurcane Ivan came through and destroyed houses all over the place. So people didn't have any where to live. So all of the houses in my area went up to about 210k. Then builders came in and built houses all over the place. Then people started to find houses and the market started to go down.

Next thing you know, there are all these new houses all over the place, that are priced too high. No one could afford houses because our jobs didn't start paying more. But people NEEDED somewhere to live. So they paid the high prices for houses.

So the market went down and house prices are back to where they were when I first moved in. Only a few problems. Now people's houses are worth 100k less than they bought them for. And there are all the empty houses all over the place that didn't get sold. So people can't find people to buy their houses, and they can't afford to pay the mortgage on them.

So banks are foreclosing on them. Now people are out of the house, but still have to pay the difference. And the bank is out the money because they can't get it from people that don't have it.

No the builder's in the area are out of work because there are all these extra houses. Now construction workers are loosing their jobs. And the hardware stores are loosing business. So more people lose their jobs...

That is just in this little city of Pensacola. And it is happening all over the country. Shitty.

[DKJr]

Don't forget to blame the IMF! They bought morgage backed securities, because of the former good returns they used to get, thus deepening the global crisis. Yay crisis!

[BSDaemon]

As a bleeding heart liberal democrat, I'm going to say that it's not entirely bushes fault. Sure he deserves a little blame, but mostly for being totally distracted with his war on terror.

The ones who originated the loans deserve the most blame. They created the exotic loan products like the Adjustable Rate Mortgage. Their loan officers used deception to sell these products, telling people they could just re-finance before the rate adjusted up. The people who were targeted for these unsustainable loans were the ones with the low income poor credit, which means that the loan officers could sell loans with higher interest rates and get bigger commissions. The loan officers told people to lie about their income so they could be approved. The loan officers sold loans to people with No Income, Job, or Assets (NINJA). They sold loans with no down payments, no payment on principle for years. Then when a little bit of equity was acquired, people took out home equity lines of credit (HELOC).

These loans were not sustainable, so the banks "securitized" them, bundling them up into mortgage backed securities (AKA Collateralized Debt Obligations). They knew they were going to take some serious losses on them, so they took out Insurance on them in the form of the credit default swap (CDS). This derivative product would mean that the insurance agency (mostly AIG), would have to pay up if the value of the CDO's fell. What made this worse is that the auditors who assign credit ratings to securities had vested interest in the success of these securities. So they got marked with the very best AAA credit rating. This meant that the insurance fee that the banks needed to pay for the CDS was nowhere near what they should have been to cover a default.

This was a failure of regulation.... Because there was no effective oversight over the CDS / CDO market. The mish-mash of regulatory agencies made it so that companies could select which agency they wanted to regulate them, be it the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC). So of course they select the agency that does the worst job of regulating them. This works great as long as housing prices are going up, but when they start to go down.

So who to blame? For one, you could blame the "American dream of home ownership", because some people don't have the means to buy homes, and should not take on the burden of paying interest on a depreciating asset. You could blame the President, for being distracted with overseas adventures. You could blame the bankers for financing the bad loans, the mortgage brokers for lying and cheating to get the docs signed. You could blame the homeowners for buying into "the dream" and not reading the fine print. You could blame the insurance companies and the credit rating agencies for their collusion. You could blame the regulatory agencies for doing fuck all to prevent this madness. There is plenty of blame to go around, As much as his leadership failed us, putting ALL the blame on W's shoulders isn't right.

[meataxe]

BSD mention Credit Default Swaps... that problem is much bigger than the mortgage issue, if the number I hear are correct ($50 trillion exposure). CDS is like insurance on a bond. If the issuer of the bond fails to pay, you still get your money. However, you don't have to own the bond to buy the CDS, so they were oversold by a factor of 10. (10 CDS to 1 bond.)

I don't think this can be boiled down to be entirely partisan (Bush/Clinton or Dem/Rep). There was some legislation to restrict the derivative market, but it failed to make it anywhere. Alan Greenspan himself assured lawmakers that there was no reason to regulate. I guess he was wrong.

Short attention span version:

Some guys were gambling with someone else's money and lost. Now they want mom to wire some cash.

[Diesel_tke]

So here is my question: How much worse is this going to get? Half the people on the news say it is almost over. The other half are predicting the great depression II.

They said that the unemployment rate in my city is 9.1%. They are expecting it to get to 12% by the end of summer. That is pretty crazy. So if it gets that bad, what are we looking at?

[meataxe]

So here is my question: How much worse is this going to get? Half the people on the news say it is almost over. The other half are predicting the great depression II.

They said that the unemployment rate in my city is 9.1%. They are expecting it to get to 12% by the end of summer. That is pretty crazy. So if it gets that bad, what are we looking at?

What are we looking at?

...Canada. Srsly. We have had some high unemployment figures regionally. Sucks, but people survive mostly.

Stock market wise, I see at least 50% chance of DOW hitting the 4,000's. I'd expect 10 years or better to recover the value that was at the market peak. We may be in a situation similar to Japan in the 90's. The difference is that it is global. Does that make it better or worse? I'd say probably worse.

As far as whether there will be any recovery that will help you... I'd say 2010 is optimistic.