So let's settle this: What caused the Financial Crisis of 2007-present?
- Thread starter Tahuti
- Start date
Berzerker
Deity
i change my vote 
this failure was the result of not punishing enough (any?) scumbags the last time we had a problem
this failure was the result of not punishing enough (any?) scumbags the last time we had a problem
cegman
Scott Walker Supporter
I disagree. In semantics it may be the same thing but Underregulating sounds like we need to increase the amount of regulation. Adding regulations sometimes won't help the situation.
Adding or subtracting regulations that aren't going to be enforced anyways is just playing games around the subject. They do need to be far stronger. But more to the point, they need to be better designed and better enforced. For all the lines in the books on what the regulations allegedly were in the Aughts, the truth was that there were close to no regulations at all. Since anything that wasn't readily evadable just wasn't being enforced. And some of the most important parts of the crisis simply had no regulations against them in the first place.
cegman
Scott Walker Supporter
That's not true. For those who have the money and power to make sure that the regulations are taken care of there might as well be no regulations. Now if you look at those who also fall under these regulations that don't have the manpower to deal with them they can be a major problem. Just understanding them is difficult much less following them.
cegman
Scott Walker Supporter
Yes in Finance. It was the big banks and the removal of Glass-Steagal from the 1960s on that cause a lot of issues. It wasn't the local banks and Credit unions that also have to deal with these "new" regulations (whenever they are finalized) So if we had bothered to keep the regulations that actually made sense we might not have had this problem. Of course Krugman said we need a housing bubble after the beany baby bubble popped (bad joke)
Unlike this crappy Dodd-Frank which has a couple of good ideas but in a lot of parts doesn't actually regulate anything just say we need more regulation Bureaucrats write it.
Unlike this crappy Dodd-Frank which has a couple of good ideas but in a lot of parts doesn't actually regulate anything just say we need more regulation Bureaucrats write it.
An unregulated derivatives market (thanks Clinton!) and the apparent (but ultimately, not real) elimination of risk of a loan going bad, thanks to the lender's ability to chop the loan up and sell it, that led to a proliferation of bad loans and a huge, huge sinkhole of assets that wound up being totally worthless.
Frontline's "Money, Power and Wall Street" and Ron Susskind's book "Confidence Men" offer great, easily approachable explanations of what happened, easily understandable for non-financial/economist-laymen like myself.
Frontline's "Money, Power and Wall Street" and Ron Susskind's book "Confidence Men" offer great, easily approachable explanations of what happened, easily understandable for non-financial/economist-laymen like myself.
Integral
Can't you hear it?
To those who are answering with some form of "regulation, derivatives, etc": why the persistence? Why did a financial crash in 2008 cause output to be so low in 2012?
cegman
Scott Walker Supporter
Dodd-Frank and other regulations along with even worse Crony Capitalism than the Bush era (which was really bad) causing regular businesses to hold onto cash assets and banks to be less able and willing to loan to riskier businesses that are the ones that grow during recessions.
- Credit crunch - Lending may be reduced because of monetary issues, but it is certainly reduced by uncertainty issues when there is so much debt overhang that cannot be accurately evaluated for quality.
- Demand weakness - there is a global excess of supply in nearly all items of commerce, and there's simply not enough consumer demand restore levels of employment to the point where consumer confidence would increase
- Fiscal contraction - Don't let the stimulus fool you. Government spending is far too low, stagnant, and in many cases declining, for there to be any Keynesian stimulus as a whole.
- Debt, debt, debt, And too much money is going to repay debt instead of investing or consuming.
- Uncertainty about the future based on governments that are more interested in scoring partisan points than in dealing with the problems.
- Too many mortgages and other debts still underwater, leading to fears of further rounds of defaults.
This is ridiculous. Dodd-Frank barely does anything at all. It certainly is not an impediment to the economy as a whole.
History_Buff
Deity
- Joined
- Aug 12, 2001
- Messages
- 6,529
Lack of consumer demand. They've seen their house prices plummet, many lost their jobs, and in many cases still don't have an equivalent position. Since there isn't any promising signs of improvement, nobody wants to spend too much on things.
Since nobody is buying, private sector companies won't hire, and so we're stuck in the cycle. The government could likely turn it around, were it not politically gridlocked.
Peak oil and a collective decision not to deal with it is the simple root cause.
More proximally, the disengagement of the financial industry from reality that began around 1980 (shortly after U.S. domestic peak oil)-- a broad phenomenon that includes the cannibalising of public companies for the benefit of the parasite class, an increasing reliance on credit and fake money to sustain a consumer economy, diminishing returns from globalised wage arbitrage, and a gross abdication of responsibility by the elites of developed nations including, in the U.S., a wholesale abandonment of the rule of law.
More proximally, the disengagement of the financial industry from reality that began around 1980 (shortly after U.S. domestic peak oil)-- a broad phenomenon that includes the cannibalising of public companies for the benefit of the parasite class, an increasing reliance on credit and fake money to sustain a consumer economy, diminishing returns from globalised wage arbitrage, and a gross abdication of responsibility by the elites of developed nations including, in the U.S., a wholesale abandonment of the rule of law.
I've been trying to think of how to expand on this to a more comprehensive narrative. Start with your narrative of the crisis:
Spoiler :
Now I'm not going to dispute you about the monetary facts as presented. You should know. However I can't shake the feeling that you've got such a nice view of the forest that you aren't seeing the trees. Could money being too tight have lead from the bubble bursting to the financial crisis? Honestly, I don't even see that as relevant. The point being that in 2008 V was going to collapse under almost any scenario. And because V was going to collapse, I cannot see how M could have been gotten "right" by any means other than pure blind luck. And probably not even then. Why was V going to collapse no matter what M did? Because the financial system, not individual firms within the system, but the system as an aggregate, was fundamentally on the brink of massive instability regardless of any external factors, up to and including monetary policy.
The issue to focus on here was that the housing bubble in 2007-8 was pretty close to being the least of our problems! What is a bubble? The selling price of a group of assets being bid up past any realistic long term value of those assets. While you can call that a description of the housing bubble, it is not a sufficient one. For while the asset prices were being bid up to unsustainable levels, you cannot discount what else was going on at the time. Most importantly, most of the purchase prices was borrowed, and so in addition to bidding up the prices, it was increasing net debt liabilities. And those liabilities were over and above even what the bubble on the original assets were, because of home equity loans. Keep that in mind, the debt liabilities were growing even faster than the bubble prices. And that's not the worst of it. Because then you had securitization and asset backed securities. These had the effects of eliminating the benefit of evaluating the risks of the loans being made, and went further to actually incentivize the making of loans that could not in any circumstances be repaid.
And that's not the worst of it either. For after that you get the massive fraud of the ratings agencies, and the even more massive fraud of the investment banks, which created derivatives that were so complex the market could not accurately price them. So once the market for these thing began to question their value, and it was inevitable that that would happen eventually, it simply does not matter how much money is in the system or what the costs of capital are. How much money are you going to shell out for assets once you've had your face rubbed in the fact that you cannot even begin to make a wild assed guess at what the real value of those assets are?
And even that is not the worst of it! For now you have credit default swaps. Which allow people to make bets on the future values of assets that they themselves have no stake in. And because of the incompetence of the ratings agencies and other financial companies, the total outstanding liability on CDSs is something that the issuers of these securities simply cannot pay off on in a worst case scenario, which is what they got.
And we haven't even gotten to the worst of it yet. Because the major firms in the financial services sector had gotten in the habit of daily overnight financing of very large parts of their operations and the coverage of their liabilities, there can be no disruption, no matter how brief, in the cash flows of these firms. Because once their is, no matter how transient, then their counterparties cut them off. V collapses.
The money supply and interest rates in aggregate at that point are not even a relevant consideration. Macroeconomics at that point are not even a relevant consideration. You are out of the realm of macro and into the realm of micro. Now you can try to bail out each individual firm as they need it, to the extent that they need it, but it will be a government solution. Remember that in 2008 the Fed and Treasury were telling the private sector to get in a room and don't come out until they solve it, ala JP Morgan. But the private sector was not solving it. And the reason for that was that we were not really dealing with a bubble at that point. But rather we were dealing with no one even knew how many billions or trillions of dollars in liabilities that were over and above any possible real value of the assets backing them. It was just too opaque. There were just too many unknowns. No rational analysis of the system could come up with acceptable answers in the time that they had.
So either the Fed or the Treasury bail them out blind, and take on all the risk immediately with no due diligence at all, or V collapses. I don't see any 3rd option.
Further, you cannot discount the human factor in the crisis. What are the real value of these assets? One CEO rode his company down in flames insisting that he did not have an asset valuation problem, but rather only a liquidity problem. So even after being told repeatedly over time that he had to mark down his values, he refused, and the poo hit the fan. Other people would not act because they were covering their own buts. Treasury and Fed would not move because the fear of moral hazard was greater to them than the fear of the consequences of inaction. And the law wasn't really clear on what they were permitted to do in any case.
Now with all these factors in consideration, what could have been done differently on monetary policy that would have had a real benefit over the longer term? Could they, for example, tried to keep the bubble inflated? In the short run that's a very maybe situation, because remember how rapidly the assets behind all those liabilities was deteriorating. 2005-2008 saw not just a vast explosion of new debt, but in fact also a vast deterioration in the quality of that debt. For the lenders had essentially simply given up on any effort to even pretend that the borrowers could make the payments. There was a big surge in the number of new "home buyers" who never even occupied their houses and never made any payments at all.
The Fed could maybe have targeted a 5-8% CPI, and tried to erode some of that debt away, but you have to keep in mind how much of that debt was variable rate. And how much of that variable rate was already at the borrower's maximum possible payment. Any inflation, rather than erode away the real payments, was going to increase the nominal payments, and so increase, rather than decrease, the real payments. And that in an economy were wages were not going to go up with the CPI due to a really weal labor market. So maybe you could keep the bubble inflated for a time, but the longer you did the more toxic assets and liabilities would be on the books when the wheels finally come off.
So you ask, what was the right monetary policy in 2007-2009, and the answer is that there is no one right answer that fits all of the needs of the economy.
So maybe you are right and the money needed(s) to be cheaper and looser, but that would not have prevented the crisis.
And it would not have prevented the recession either. For the recession was not really a factor of Money being too tight, but rather one of credit being too tight. And while you may be able to interchange those terms under ordinary circumstances, you cannot do so when lenders cannot judge the soundness of their counterparties. It becomes not "I don't have money to lend you what you want", but rather "I won't lend you the money because the risk of doing so is unknowable or apparently too high".
Hygro
soundcloud.com/hygro/
Gay Marriage.
As in, we have a very broken political and media system that found denial of civil rights to be more important that running our country. Obviously we can't not fight for civil rights even when the timing is inconvenient, but the fight to deny civil rights is especially egregious when political resources are scarce.
We had a whole system of financial regulation that was based on companies paying the regulators (eg, Moody). We have a system of highly leveraged finance that we've already learned when it goes down, it doesn't matter how "diversified" your portfolio is--there is no such thing as diversity in a down market. We had a very clear bubble that was called by economists and speculators long in advance. We had new financial instruments that, in a vacuum were largely a good idea, were being used with poor incentives--you could sell the loan to someone who was questionable, then package it, and sell that off to someone else, and then bet against it in the process. This should have been one hell of a tip off.
You have hundreds of years of capitalist history showing that bank failures cause recessions, which means that those on the bottoms lose their ability to pay back credit. Because they lose their jobs. If you're a bank and you're pushing bubble profits then a quick consultation with your economists should tell you that the moment the economy hits a bump in the road (as interest rates were at the bottom, this was bound to happen), it will spiral out of control.
Innomatu is correct: we became a society that traded income for interest-bearing credit. JollyRoger is correct: we have been pursuing supply side policies even though we are a 1st-in-line, importing consumer nation that should be engaging in demand side policies which better our economy and the world economy too.
And we spent our time freaking out about terrorism while has killed very few people compared to so much else. We spent our time freaking out about how gay people were ruining our country and our families. We accept a media environment that, in 2002, lead 20% of Americans to believe they were in the top 1% and another 19% to believe they were getting there. And that hurting the social mobility of the bottom 99% was some magically how the fairy that would allow that to happen. We've been quick to either demonize or disassociate ourselves from anyone pointing out how're we're messing up our country, and we think that the daily political "center" between truth and untruth is the correct path to take.
The worst part is, the richest are the ones pushing the policies that harm themselves the most. Demand-side economic policy was invented to protect the rich's investments and assets. And yet the very thing that made them wealthy--their ability to full blast get their energy into the moment and focus on a perfect set of particulars that gained them great wealth is exactly why they are confident they understand economics and also exactly why they actually don't know economics. So we create policies that favor labor for their own benefit, and they shoot those down for their own, and everyone else's detriment.
We have finance guys in government where economists should be. Traders and bankers are bad economists the way economists are bad political economists. They see the world in a very narrow and misguided way and have about as much expertise of how to run a national and international economy effectively as activist labor organizers, industrialist factory owners, elected politicians, and bloggers. And yet instead of throwing them in the pot with the rest of those who only know a few plants in the forest, we elevated them to top positions higher up than nobel economic laureates (let alone even better economists).
Our national debates are based on rhetoric over logic. On opinions over facts. We debate global warming like there are two sides. We debate gay marriage (or whatever future civil rights battles there are) like civil unions are an OK compromise, and yet one side still spends their mental energy fighting even that.
We think that if there's anything worth discussing, it must include a democratic and a republican representative, and they must disagree because if they don't, they don't get invited back to the discussion.
Even with science. Even with facts.
And now we have an economic situation that is easily and quickly solvable, with the most diplomatic president since Gerald Ford or Eisenhower, and we can't get out of it. Meanwhile the world is melting, the fish are dying, we're losing cures for diseases every day of deforestation, our rate of energy consumption will, by the laws of physics, render mass death in the next 200 (40?) years. and we think jobs and banks are more important than that.
Every day we don't solve our current crisis, every day we spend time fighting against human rights or against environmental protection instead of fighting for it is one more day we risk the civilization we know. But who cares, right? Americans are going to survive anyway.
As in, we have a very broken political and media system that found denial of civil rights to be more important that running our country. Obviously we can't not fight for civil rights even when the timing is inconvenient, but the fight to deny civil rights is especially egregious when political resources are scarce.
We had a whole system of financial regulation that was based on companies paying the regulators (eg, Moody). We have a system of highly leveraged finance that we've already learned when it goes down, it doesn't matter how "diversified" your portfolio is--there is no such thing as diversity in a down market. We had a very clear bubble that was called by economists and speculators long in advance. We had new financial instruments that, in a vacuum were largely a good idea, were being used with poor incentives--you could sell the loan to someone who was questionable, then package it, and sell that off to someone else, and then bet against it in the process. This should have been one hell of a tip off.
You have hundreds of years of capitalist history showing that bank failures cause recessions, which means that those on the bottoms lose their ability to pay back credit. Because they lose their jobs. If you're a bank and you're pushing bubble profits then a quick consultation with your economists should tell you that the moment the economy hits a bump in the road (as interest rates were at the bottom, this was bound to happen), it will spiral out of control.
Innomatu is correct: we became a society that traded income for interest-bearing credit. JollyRoger is correct: we have been pursuing supply side policies even though we are a 1st-in-line, importing consumer nation that should be engaging in demand side policies which better our economy and the world economy too.
And we spent our time freaking out about terrorism while has killed very few people compared to so much else. We spent our time freaking out about how gay people were ruining our country and our families. We accept a media environment that, in 2002, lead 20% of Americans to believe they were in the top 1% and another 19% to believe they were getting there. And that hurting the social mobility of the bottom 99% was some magically how the fairy that would allow that to happen. We've been quick to either demonize or disassociate ourselves from anyone pointing out how're we're messing up our country, and we think that the daily political "center" between truth and untruth is the correct path to take.
The worst part is, the richest are the ones pushing the policies that harm themselves the most. Demand-side economic policy was invented to protect the rich's investments and assets. And yet the very thing that made them wealthy--their ability to full blast get their energy into the moment and focus on a perfect set of particulars that gained them great wealth is exactly why they are confident they understand economics and also exactly why they actually don't know economics. So we create policies that favor labor for their own benefit, and they shoot those down for their own, and everyone else's detriment.
We have finance guys in government where economists should be. Traders and bankers are bad economists the way economists are bad political economists. They see the world in a very narrow and misguided way and have about as much expertise of how to run a national and international economy effectively as activist labor organizers, industrialist factory owners, elected politicians, and bloggers. And yet instead of throwing them in the pot with the rest of those who only know a few plants in the forest, we elevated them to top positions higher up than nobel economic laureates (let alone even better economists).
Our national debates are based on rhetoric over logic. On opinions over facts. We debate global warming like there are two sides. We debate gay marriage (or whatever future civil rights battles there are) like civil unions are an OK compromise, and yet one side still spends their mental energy fighting even that.
We think that if there's anything worth discussing, it must include a democratic and a republican representative, and they must disagree because if they don't, they don't get invited back to the discussion.
Even with science. Even with facts.
And now we have an economic situation that is easily and quickly solvable, with the most diplomatic president since Gerald Ford or Eisenhower, and we can't get out of it. Meanwhile the world is melting, the fish are dying, we're losing cures for diseases every day of deforestation, our rate of energy consumption will, by the laws of physics, render mass death in the next 200 (40?) years. and we think jobs and banks are more important than that.
Every day we don't solve our current crisis, every day we spend time fighting against human rights or against environmental protection instead of fighting for it is one more day we risk the civilization we know. But who cares, right? Americans are going to survive anyway.
Murky
Deity
Certain bankers that let greed get the better of them and no one regulating them to keep them in check.
It is a fallacy to think that the 2008 crash is the sole cause of output to be so low today. Today is more the result of a decade plus of dealing with a demand side problem with supply side solutions.
Bakspatel
Prince
In global its the fault of of those that pursued the thought that a capitalistic market with few regulations would be sustainable and profiting for everyone. People do not think about the long term, if they can reap a reward they immediately go for it. The crisis is the perfect example of that thought. You need strict regulation and a damn good overview to prevent situations like this happening again in the future.
For those who comment that the banks are a victim as well: they've given a huge contribution to the misery we currently are all in.
- In just about every country in the West it is possible to get a mortgage to finance the purchase of a house. In the Netherlands there exists a system at which people can receive financial support from the government depending on how large the mortgage dept is: the higher the dept, the more financial support you can receive. Banks actively promoted to those that wanted a mortgage to keep the dept as high as possible. After all, you would be receiving more financial support and thus be foolish to miss out that money (the option that would allow you to pay off your dept weren't motivated and considered as 'old', some banks might not even have provided that option as a possibility). That combination was a ticking time bomb that created a dept so huge that when it explodes it is going to create a very dangerous and serious crisis over here. The Netherlands currently holds the highest dept in the world in that aspect, a staggering amount of € 630 billion. What will happen if more and more people cannot afford to pay off that dept?
- Banks actively promoted towards people to take a loan: a vacation, new car - perhaps a second car or even a boat. In the past my father received multiple calls from our bank that kept trying such things.
- It was Goldman Sachs that provided Greece the means to hide their real financial status so that they could have the Euro as their currency. We all now know how the situation is in Greece. It is of course mainly to blame the Greek politicians but it is crazy enough that a bank aided a country in deceiving almost a dozen others.
For those who comment that the banks are a victim as well: they've given a huge contribution to the misery we currently are all in.
- In just about every country in the West it is possible to get a mortgage to finance the purchase of a house. In the Netherlands there exists a system at which people can receive financial support from the government depending on how large the mortgage dept is: the higher the dept, the more financial support you can receive. Banks actively promoted to those that wanted a mortgage to keep the dept as high as possible. After all, you would be receiving more financial support and thus be foolish to miss out that money (the option that would allow you to pay off your dept weren't motivated and considered as 'old', some banks might not even have provided that option as a possibility). That combination was a ticking time bomb that created a dept so huge that when it explodes it is going to create a very dangerous and serious crisis over here. The Netherlands currently holds the highest dept in the world in that aspect, a staggering amount of € 630 billion. What will happen if more and more people cannot afford to pay off that dept?
- Banks actively promoted towards people to take a loan: a vacation, new car - perhaps a second car or even a boat. In the past my father received multiple calls from our bank that kept trying such things.
- It was Goldman Sachs that provided Greece the means to hide their real financial status so that they could have the Euro as their currency. We all now know how the situation is in Greece. It is of course mainly to blame the Greek politicians but it is crazy enough that a bank aided a country in deceiving almost a dozen others.
del62
Deity
Interestingly you should mention Greece because part of the problem with Greece was that Germany was happy to sell stuff to Greece that they could not pay for, in much the same way that China was happy to sell stuff to Western Nations they could not pay for without building up debts.
This could not go on for ever.
This could not go on for ever.
Here I had a list of old CFC threads where aspects of the crisis were discussed in some detail.
http://forums.civfanatics.com/showthread.php?t=290211&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=292022&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=295297&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=298878&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=310157&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=311882&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=308337&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=336473&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=420537&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=397586
http://forums.civfanatics.com/showthread.php?t=290211&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=292022&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=295297&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=298878&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=310157&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=311882&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=308337&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=336473&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=420537&highlight=financial+crisis
http://forums.civfanatics.com/showthread.php?t=397586
