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Did loose money regulations cause the Great Recession

Discussion in 'Off-Topic' started by cegman, Apr 19, 2012.

  1. cegman

    cegman Scott Walker Supporter

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    http://www.freedomworks.org/blog/jborowski/debunking-myths-of-the-great-depression

    There are links on the site used to back up the claims

     
  2. Bootstoots

    Bootstoots Deity Retired Moderator

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    I'm under some impression that the Great Recession would not have happened, or would not have been anywhere near as severe, if either 1) the Fed had raised interest rates to reasonable levels, or 2) banking regulations such as the Glass-Steagall Act had been left intact.

    It seems to me that the combination of inappropriately low interest rates and low levels of regulation were largely to blame for both the Great Depression and the Great Recession, but I'd like to hear from people who know more.
     
  3. Monsterzuma

    Monsterzuma the sly one

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  4. Integral

    Integral Can't you hear it?

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    Tight money caused the Depression and Great Recession, assertions to the contrary notwithstanding.

    I also claim that Fed policy was largely to blame for the depth of the crisis, but with the opposite sign!

    I am rather exhausted but will try to commit some time to addressing the Austrian "malinvestment hypothesis" in the near future.
     
  5. cegman

    cegman Scott Walker Supporter

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    Intergral don't rush yourself on my account I am going to be terribly busy today but I do want to debate you on whether or not it was the loose money policy causing bad investments before the tight policy came into effect. I am a bit of a history person so I always try to look further back to see if there were decisions there that people don't consider. Sometimes I look too far back and that is why I would love to hear your view.

    Something I do want to talk about is the role of regulation. I am of the opinion that regulation is necessary but that we have some areas of over regulation. A lot of the "lack of regulation" issues were not the result of not having regulations against the actions but the lack of enforcement of regulations we currently have. I don't have any of the articles on this saved currently so I am looking for those now.
     
  6. warpus

    warpus In pork I trust

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    I'm really glad our banks and mortgages are regulated properly up here in the great white north - Our banks are fine and are doing very well - no bailouts.. our real estate market is doing pretty good as well, even the bubbly Toronto and Vancouver markets.
     
  7. Tahuti

    Tahuti Writing Deity

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    The sudden increase of interest rates actually - in part - led to the financial crisis as many individuals and corporations became unable to repay their debts, leading the collapse of several major American Banks and firing the opening shots of the Great Recession.
     
  8. Bootstoots

    Bootstoots Deity Retired Moderator

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    But what about the period from 2002-2005? Although I could be wrong, I'm under the impression that the rates were far lower than they should have been during that period, fueling unsustainable growth of the real estate bubble.
     
  9. Cutlass

    Cutlass The Man Who Wasn't There.

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    Monetary policy hasn't got the slightest connection to whether investments are good or bad. Investments are good because investor are smart and careful. Investments are bad because investors are stupid and careless. No monetary policy can change those facts in any way.

    The financial crisis happened because the banks, investment banks, Wall St in general, and investors were stupid and careless. And they lobbied Congress for decades for the right to be stupid and careless. So it wasn't chance that they were stupid and careless, but rather a deliberate decision.
     
  10. Cutlass

    Cutlass The Man Who Wasn't There.

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    Repealing Glass-Steagall was monumentally stupid and destructive. But wasn't the whole of the story. The problems had been building a bit at a time for a long time. A fight for deregulation here. A stupid deregulation there. Reckless business practices everywhere growing worse and worse year by year.

    The problem with monetary policy is that it is a marco tool that doesn't really fit for dealing with many micro problems. Once banks started stupidly and recklessly selling adjustable rate mortgages broadly, rather than just to the most sophisticated customers, and then eliminated the down payments and all owner equity through aggressively pushing refinancing, home equity loans, home upgrading, and other advanced products, the Fed's hands were tied. Any rise in interest rates was certain to cause an avalanche of mortgage defaults.

    Normally monetary policy tightening is only in response to inflationary pressures. And there was none. Monetary policy is an extremely crap response to a bubble economy. It is essentially certain to cause a recession before the bubble is affected. It cannot be targeted at the actual problem.

    So you had no inflation, and monetary policy was certainly the wrong tool to deal with the growing housing bubble, which only a minority of economists believed in before 2006 in any case.

    But that's only part of the story. Then you have Wall St. And Wall St had built a doomsday device, several of them actually, into the economy. At that point nothing could have prevented a financial crisis.

    Now while I think that Integral is right that monetary policy was too tight as the system started coming apart at the seems, I don't agree that any possible monetary policy at that point would have prevented the financial meltdown. Only moderated its effects.

    I'm not entirely following his argument. But it seems to me an argument to prevent the financial crisis by preventing the bubble from bursting. And I don't see that as possible. As I see it, a bubble bursting may be delayed, but can never be prevented.
     
  11. Trev

    Trev Prince

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    Although there were a lot of contributing issues to the crisis in US, a lot comes back to a lack of accountability for bad decisions.
    Banks could write bad loans and then securitize or insure the probable losses away. The people and institutions who make bad decisions in loans/investments etc must in future bear some of the pain when things go wrong with those decisions. The habit of insuring for all losses, or securitizing mortgages so the pain is switched to other people caused lax lending and investment practices.
    A return to basics of people/institutiions suffering the consequences of their decisions is the only way major problems like this can be avoided in future. The ability to insure/securitize away all risks must be ended, or lax practices will quickly return.
    The majority of the worlds economies avoided US and Europes problems because they either did not allow or it had yet permeated throughout their institutions the irresponsible lending that happened in US and Europe, in US the irresponsible lending was largely to individuals, in Europe a lot of it was directed to governments running big deficits.
    If banks etc know they will bear the pain of bad loans, that will help deter that sort of behaviour in teh future
     

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