1. We have added a Gift Upgrades feature that allows you to gift an account upgrade to another member, just in time for the holiday season. You can see the gift option when going to the Account Upgrades screen, or on any user profile screen.
    Dismiss Notice

So let's settle this: What caused the Financial Crisis of 2007-present?

Discussion in 'Off-Topic' started by Tahuti, Jul 21, 2012.

?

What caused the Financial crisis?

  1. Too little financial regulation

    55 vote(s)
    74.3%
  2. Too low base interest rates

    8 vote(s)
    10.8%
  3. Sudden increase of interest rates mid-2000s

    5 vote(s)
    6.8%
  4. Climbing pre-crisis oil prices

    6 vote(s)
    8.1%
  5. China's economic growth

    2 vote(s)
    2.7%
  6. China's monetary policy

    4 vote(s)
    5.4%
  7. Government intervention in the housing market

    12 vote(s)
    16.2%
  8. Capitalism

    27 vote(s)
    36.5%
  9. Fractional Reserve Banking

    9 vote(s)
    12.2%
  10. Certain banks in particular

    33 vote(s)
    44.6%
  11. Something else that's not mentioned

    28 vote(s)
    37.8%
Multiple votes are allowed.
  1. Tahuti

    Tahuti Writing Deity

    Joined:
    Nov 17, 2005
    Messages:
    9,492
    Gender:
    Male
    We see some discussion on the topic everyday, but perhaps a poll to answer the questions what people think caused the current crisis is more than overdue.

    Note that while related, this poll is NOT about the Southern European debt crisis.

    My personal opinion on the subject was that the Federal Reserve tried too much to maintain an "oil standard" by suddenly and drastically rising interest rates in order to maintain the USD's de-facto peg with oil. Had the Fed not done this, and kept interest rates low, the banks wouldn't've gone bust and collapsed. While there was room for improvement, I don't think better regulation could have prevented the financial crisis and had in fact little to do with it either.
     
  2. peter grimes

    peter grimes ...

    Joined:
    Jul 18, 2005
    Messages:
    13,314
    Location:
    Queens, New York
    So 40 years of deregulation and self-reporting of SEC violations by financial firms were minor factors?
     
  3. kulade

    kulade Deity

    Joined:
    Dec 12, 2003
    Messages:
    4,545
    Speculators couldn't adequately predict the marketable value of real-estate and mortgage-backed securities and market prices thus grew far greater than the economic value of the assets in question.

    This encouraged short-term speculative buying that shot prices further and further up until myopic housing investments were realized and all similar securities were called into question.

    Then began a pretty typically period of deficient effective demand causing even more deficient demand, a pretty straightforward result of "consumer confidence."

    Or you know just blame it on whatever works for you politically instead.
     
  4. JollyRoger

    JollyRoger Slippin' Jimmy Supporter

    Joined:
    Oct 14, 2001
    Messages:
    42,965
    Location:
    Chicago Sunroofing
    Standard real estate bubble plus abuses all over the mortgage-back securities system plus unregulated gambling by large financial institutions plus supply side policy when demand side should have been called for plus lenders not doing as much due diligence on McMansion loans as they did on CRA loans.
     
  5. Mise

    Mise isle of lucy

    Joined:
    Apr 13, 2004
    Messages:
    28,622
    Location:
    London, UK
    This.

    EDIT: What made the crisis international rather than isolated to the US was CDOs, and what made a crisis originating in a small number of banks one that spread to all banks was CDSs. So add those as factors that caused this particular crisis, rather than factors that lead more generally to conditions likely to engender <a crisis>.
     
  6. Tahuti

    Tahuti Writing Deity

    Joined:
    Nov 17, 2005
    Messages:
    9,492
    Gender:
    Male
    Yes. The goal of financial regulation is to protect consumers, since preventing crises and systemic risks is beyond the ability of any regulation.

    The real estate market bursted around the same time base interest rates went up. I'm sure it's casually related. During 1930s Depression, the Fed similiarly clinged on the Gold Standard and high reserve requirements, resulting in monetary contraction and recession.
     
  7. History_Buff

    History_Buff Knight of Cydonia

    Joined:
    Aug 12, 2001
    Messages:
    6,529
    Location:
    Calgary, Alberta
    Yep.

    I can't really find it in myself to blame the banks either. Their job (as with any public company) is to make as much money as possible, as fast as possible. Bundled securities allowed them to do this. Their inability to price the risk correctly brought them down, but it was a mistake that pretty much all of them made. It was a failure of regulators that they were ever allowed to do this in the first place (since we probably don't want our banks doing such things).

    Which is not to say that there wasn't (and isn't) a massive amount of straight up fraud happening in the finance sector, which we're now beginning to see. But it wasn't a cause of the crash, just a failure in the culture.
     
  8. peter grimes

    peter grimes ...

    Joined:
    Jul 18, 2005
    Messages:
    13,314
    Location:
    Queens, New York
    This implies that the banks and financial actors were innocent bystanders. But this is false. The financial industry had lobbied HARD to reduce, relax, and revoke regulations that would have helped to prevent this.

    It's not like the banks were innocently splattered by blood from a drive-by shooting. Rather, the banks
    1. manufactured guns,
    2. re-wrote local gun laws,
    3. sold them to anyone they could (at a profit!, of course),
    4. financed the local sheriff's election campaign,
    5. lobbied hard to reduce public spending on law enforcement and gun control,
    6. took out insurance policies against gun-related losses,
    7. THEN EXTORTED THE CITIZENRY FOR "ACT OF GOD" COMPENSATION WHEN A GANG SHOOTOUT ERUPTED.

    If any one of the above steps had been interdicted the mess would have been a lot less. Please, anyone correct me if I'm wrong on this. I get most of my stuff from Matt Taibbi.
     
  9. Integral

    Integral Can't you hear it?

    Joined:
    Apr 12, 2007
    Messages:
    4,021
    Location:
    Boston, MA
    To figure out why we're still in a recession today, six years after housing prices declined, I'd have to appeal to a multiple equilibrium story where we've coordinated on a low-growth, low-inflation state. I don't have a good formal theory of it yet though.
     
  10. Glassfan

    Glassfan Mostly harmless

    Joined:
    Sep 17, 2006
    Messages:
    3,952
    Location:
    Kent
    I believe the sub-prime lending crisis was the root cause, which tipped a series of economic dominoes leading to the American Recession of 2008-10.

    Previously, when a buyer took out a home loan, the banks scrutinized the buyer's creditworthiness carefully, since they would hold his mortgage and expect his revenue stream for the next thirty years. When financial institutions created mortgage-bundling as a fiduciary instrument, it wasn't technically illegal - so regulators had no initial reason to stop it. However, the psychological difference is that if a bank no longer intends to hold onto the mortgage, but rather bundle it up with others and sell it off, than there is less pressure to insure the buyer's creditworthiness, since if he fails it will not be the bank's problem, it will be sold and long gone. So buyers with lesser credit scores (sub-prime) were approved and given loans, providing banks with greater short-term profits.

    Gradually these sub-prime loan bundles worked there way up the financial ladder into the larger investment banking firms, notably Lehman Brothers, Goldman Sachs, Morgan Stanley and others. Also gradually, these subprime loans began to fail, since they were not truly creditworthy to begin with. Those investment firms with the greatest holdings were the most vulnerable. Lehman Brothers failed initially, and the Bush administration did not rescue it. The collapse of Lehman Brother's of course affected other investments, retirement accounts, startups - a whole hundred-billion-dollar segment of the economy. So as the other big institutions began to slide, the government stepped in with the bailouts to rescue them - but also the economy at large.

    The collapse created a cascade of companies protecting their economic survival by freezing hiring, laying off, reducing spending and purchases and generally slowing down and reducing commerce - pretty much the definition of a recession. Individuals - wage earners, consumers, investors and so on - also cut back on spending, reducing commerce further.

    "Deregulation" is a popular whipping-boy that really had little to do with anything. The government regulators had nothing illegal (initially) to interfere with, since subprime bundling was perfectly legal. The main-blame can probably be attributed to the decision makers in the investment banking industry who disregarded warnings from their own analysts in favor of the big profits they were accumulating for their investors in the mid-decade. One might add that the Fed issued warnings about the dangers of subprime bundling all through the decade, but the Congressional leadership failed to pass laws making it illegal. The Fed did well and deserves some recognition for controlling inflation during this crisis. As the Carter Recession of 79-81 demonstrated, high unemployment combined with high inflation is massively corrosive and damaging to people's lifestyles.

    In the Hospital (non-profit) Corporation I work for, the Investment Trust of approximately $100,000,000.00 is the central financial operations core - the economic heart of the system. With the investment banking crisis, the value of this instrument declined precipitously, and even though the hospital was "making money" in it's everyday operations (sic), it's total value declined resulting in 300+ layoffs, budget-locking, deferment and delay of equipment purchases and a general hiring freeze. I mention this because it's illustrative of our general American economy in microcosm.

    In the discussion on this thread, everyone should be aware of the difference between "banks" - small local community banks vs the big faceless and largely irresponsible investment firms - as well as the obvious limitations of government regulators (Cutless makes a fine point on another thread that the two major political parties deliberately prevent and obfuscate efficient regulation). More-or-less regulation is irrelevant without intelligent and moral decision making at the top. I myself recognize the limitations of media to comprehend and intelligently communicate the crisis to the public. General media is largely ignorant and unsophisticated, specialist financial reporters on the other hand, worked at cross purposes (often themselves being investors with a portfolio to protect), and partisan bloggers too often simply engage in muckraking.
     
  11. Perfection

    Perfection The Great Head.

    Joined:
    Apr 9, 2002
    Messages:
    49,809
    Location:
    Salisbury Plain
  12. Ayatollah So

    Ayatollah So the spoof'll set you free

    Joined:
    Feb 20, 2002
    Messages:
    4,389
    Location:
    SE Michigan
    I attribute most of the damage to three main failures. Most proximally, failure to enforce existing regulations. Phony AAA ratings for junk were illegally obtained (fraud is a crime). Liar's loans were largely illegal for the same reason. Failure to put failing banks into receivership redirected the losses from shareholders and bondholders to taxpayers, which increased the hit to aggregate demand, not to mention being just wrong.

    Secondly, gutting of regulations. With no guard dogs, the foxes ruled the henhouse. Bill Moyers interviewing William K Black in 2009:
    Allowing financial institutions to pick their own regulating agency was a particularly transparent ploy. Naturally, the fraudsters chose the Office of Thrift Supervision for its weakness and laxity. And if the repeal of Glass-Steagall didn't contribute much, it's only because other failures pre-empted it.

    Thirdly, I blame the Fed for not taking some air out of the housing bubble earlier, when it would be less painful. A tiny token move and a lot of tough talk probably would have sufficed.
     
  13. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    46,667
    Location:
    US of A
    Deregulation + recklessness in the private sector + fraud.
     
  14. innonimatu

    innonimatu Deity

    Joined:
    Dec 4, 2006
    Messages:
    12,677
    I don't think anyone here is following the thread to its origin. Bad loans were, obvious, the proximate cause of the financial problems. Lax legislation and regulation by public powers, together with apparent incompetence by bankers, were the enablers of those bad loans.

    But there was a "good" reason for that lax regulation. And "good" logic to the actions of the bankers. Regulations allowed bad loans because those were required to generate the demand necessary to "keep the economy growing". Bankers took advantage of that because they guessed - correctly, as it turned out - that they could personally reap the profits without having to worry about long-term losses: losses (which bankers privately admitted would happen) were for losers. And the population voted into office legislators and executives who encouraged all this because they were indeed the "losers" seeking a short-term "supplement" to their income and/or business (through loans or through spending by people who had loaned to increase their disposable income).

    The root economic cause... the substitution of loans for wages. With wages stagnated aggregate demand could only be increased by: a) increasing disposable income of consumers through loans; or b) increasing investment by the people who had accumulated capital. And b) would be done only if a) was expected to create more customers. (I'm simplifying and discounting international trade because this applied to the whole world anyway; but different countries experienced it to different degrees).

    Consumers fell for this substitution, politicians basked on the "success" of the thing, bankers profited from the interest until the defaults started, and "investors" (the people who own the businesses paying wages) had customers spending more money in their products without having to spend more in wages for their workers. In aggregate the balance between consumer spending and consumer's sustainable income was broken. The gap was temporarily bridged by finance: it showed up on consumers' balance sheets as debt, in businesses' balance sheets as profits.

    But it couldn't last, unless profits were returned to the very same consumers who were taking the debts. And they weren't, because most of the dividends naturally went to the people who were wealthy enough to own larger shares of the businesses. The greater the gap between rich and poor, the greater the debt gap to be created by this situation.

    But, to make things more intractable, even the countries where this gab is big have a thing called "institutional investors" which was supposed to provide a little of "people's capitalism by encouraging "small investors" to buy stock and put their retirement savings in that market. Most of those people are, on balance, losers from this arrangement: their income from their tiny share of stocks is less that their lost income due to the wage stagnation necessary to enable the higher profits of those businesses in the first place. But to fix the accumulated debt problem and to prevent it in the future (higher wages, lower profits) it will be necessary to wipe mush of those pension and investment funds and to change the logic of "investing for retirement" and demanding high rates of return, for example. It is a future gain for the majority of the population, but a present loss and perceived only that way. And they will resist and decry such a thing.

    Unrealistically high profit expectations, the role of "institutional investors" demanding those, the corporate e shift towards short-term profit goals, the contemporary project (there were others in the past) of "popular capitalism", and the simple logic of politics with its aversion to risking unpopular measures for long-term advantages... they all combined to produce this crisis, and the present deadlock.
    Much has been written about the shortsightedness of greedy of bankers and the corruption of politicians. Bankers are greedy, yes, but in the beginning of the most recent debt bubble they were not all so. The logic of banking, however, made the reckless ones comparatively more successful in the short-term, their institutions more valuable, and enabled them to buy out or co-opt (though the thread of being bough out) the more cautions ones. And politicians took bribes, yes... but they did in in the certainty that what they were doing was not deeply unpopular at the time, quite the opposite: that it could be sold to voters as a good thing.
     
  15. EnglishEdward

    EnglishEdward Deity

    Joined:
    Jul 19, 2008
    Messages:
    4,802
    Location:
    England
    I voted "something else that is not mentioned".


    Radix malorum est cupiditas

    "the love of money is the root of all evil"

    http://en.wikipedia.org/wiki/Radix_malorum_est_cupiditas


    For instance:

    is unfortunately accepted by most as received wisdom, and that is part of the problem.
     
  16. eduhum

    eduhum Aahh the gold old days...

    Joined:
    Dec 26, 2008
    Messages:
    680
    Location:
    All of this was field back in days
    The people of this world act without ethics, and the actions of the powerful in a culture only reflect the state of the mentality of that culture
     
  17. History_Buff

    History_Buff Knight of Cydonia

    Joined:
    Aug 12, 2001
    Messages:
    6,529
    Location:
    Calgary, Alberta
    Oh they certainly were not bystanders. But to the extent that they acted within the law, I don't think there's anything wrong with this at all. It is essentially their job to do so. The regulators should have known better.

    It's my view that capitalism is a fantastic tool, and we really shouldn't be surprised when private sector actors act absolutely ruthlessly (again, as long as they're acting with the law). What we also need to create and maintain is a strong public sector that can legally prevent them from acting on their baser designs.
     
  18. del62

    del62 Deity

    Joined:
    Jun 1, 2008
    Messages:
    2,078
    Location:
    Northern England
    Agree that that is probably most significant cause, must be great when you can sell loans to ppl who can't pay them back, and then sell those loans on to someone else.
     
  19. Mise

    Mise isle of lucy

    Joined:
    Apr 13, 2004
    Messages:
    28,622
    Location:
    London, UK
    And then package them up and sell them to someone else again as near-risk free bonds. And then that someone else can pass on the risk to large reinsurers for tiny premiums, making them even more risk free.
     
  20. cegman

    cegman Scott Walker Supporter

    Joined:
    Jan 13, 2002
    Messages:
    1,482
    Location:
    Wisconsin USA
    I blame Paul Krugman.

    Well that an the repeal of Glass-Stegil and the lack of enforcement of current regulations. Too often we aren't under-regulated. It is more the Regulations are not enforced.
     

Share This Page