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 what caused the financial crisis?

Discussion in 'Off-Topic' started by Terxpahseyton, Apr 27, 2011.

  1. BuckeyeJim

    BuckeyeJim King

    Joined:
    Mar 3, 2011
    Messages:
    623
    Location:
    Buckeye Land!
    Well, no. It's not a cause at all. If you make X dollars, and have an infinite amount of choices to spend that money on, and you end up speculating, then your speculating is the contributing cause to the financial crisis. Not the simple presence of money or additional money in your pocket which is completely independent of the tax cut itself. I agree with your premise that tax cuts do not necessarily lead to business investment, but you're going to struggle for 25 years yourself trying to prove tax cuts helped lead to the financial crisis. Even if the rich had 3% extra on top of what they would have already had it doesn't mean that they wouldn't have participated in the same shenanigans, or even at the same level. I don't think you could prove that tax cut money was involved in any more than a fraction of a percentage point in the overall sum total of the financial crisis. Which again, is a product of greed and corporatism, not a function of tax cuts. All you really are doing is here is getting in your stereotypical "Bush Bad" comment that you make in every thread you participate in, and it's simply a dishonest position to take.
     
  2. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    45,334
    Location:
    US of A


    It has nothing to do with statists. So the rest of what you wrote isn't worth reading. :rolleyes:
     
  3. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    45,334
    Location:
    US of A

    The point is that the tax cuts had multiple harmful effects. But no positive effects. One of the negative effects was to make the bubble much larger. So yes, it is definitely a partial cause of the whole crisis. Or at least an aggravating factor.
     
  4. El_Machinae

    El_Machinae Colour vision since 2018 Retired Moderator

    Joined:
    Nov 24, 2005
    Messages:
    43,360
    Location:
    Pale Blue Dot youtube=wupToqz1e2g
    A major portion of how the tax break caused the bubble is that a tax break on the mortgage allows the mortgage to be effectively cheaper.

    and Mise: :salute:

    Personally, I put a lot of blame on 5 & 6 of Mise's list. They were selling the debt paper as AAA, basically fooling a ton of people into taking bad debt paper. We all knew we were in a bubble. We were playing hot potato with houses (I personally was doing so!).

    One thing that's missing is that banks were suddenly forced to re-evaluate their lending sheets. A bank has to keep a certain level of secured assets in order to justify all the money that they have lent out. When the AAA securities weren't AAA any more, banks suddenly had a hard time qualifying as being allowed to lend.
     
  5. timtofly

    timtofly One Day

    Joined:
    Sep 28, 2009
    Messages:
    9,429
    People thinking credit is money.

    Americans who think the government has credit.
     
  6. BuckeyeJim

    BuckeyeJim King

    Joined:
    Mar 3, 2011
    Messages:
    623
    Location:
    Buckeye Land!
    This is an exceptionally hyperbolic false dichotomy here.

    As totally unprovable, if not more-so, than the idea that tax cuts lead to business investment. But I mean, at least the business investment premise actually makes sense.

    You do realize that many, many, many people who were not involved in the financial crisis at all surely benefited from those tax cuts and invested in their small businesses right?
     
  7. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    45,334
    Location:
    US of A

    Net business investment in the nation did not go up with the tax cuts. Net speculation fueled bubbles did go up.
     
  8. BuckeyeJim

    BuckeyeJim King

    Joined:
    Mar 3, 2011
    Messages:
    623
    Location:
    Buckeye Land!
    Yes, but how can I speculate on a new house if I'm not investing in the construction of a new house? How can the construction firm construct newly in demand houses without making tangible business investments? You have said that the tax resulted in more spending, which I don't think anybody can disagree with. If society is consuming more, then doesn't there have to be a corresponding investment to meet that new demand? Especially when you look at the sharp increases in the sale of durable goods right after the first tax bonus.

    Anyhow, I would like to see a few things. Of course, this doesn't you actually have to provide me with any actual info. But you may win a convert if you do. So here is what I would like to see.

    1. A clear definition about what "business investment," is.
    2. Statistics or graphs showing that this definition of "Business Investment" didn't go up.

    I mean, the economy was growing pretty good for years after the tax investments. As in - The GDP. How do you possibly increase the GDP without investment? There's little evidence to think that what happened resulted in the complete in total loss of six or seven years of sustained economic growth. This leads me to assume that while there was clearly speculation going on, there was also increases in business investment.
     
  9. innonimatu

    innonimatu Deity

    Joined:
    Dec 4, 2006
    Messages:
    11,377
    Profiteering from debt cannot increase endlessly. A financial system predicated on constantly growing its share of total wealth produced was bound to collapse, it's an inevitability. Because it doesn't produce anything real, its profits must come out from the rest of the economy. And if it is constantly "growing", it's perceived as offering the best returns and the profits get used to feed the beast (price speculation), instead of being directed to productive investment.

    For every creditor there must be a debtor, and the debtor must be able to service the debt. The overall ability to do so decreases as credit increases. And securitization was used as an excuse ("it reduces risk!") to continue the process way past any possible equilibrium. Damn the governments that keep intervening to preserve the banks, they should all have gone bust by now.
     
  10. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    45,334
    Location:
    US of A
    Considering that the tax cuts created essentially no private sector jobs, then there's certainly no reason to think that it helped investment.

     
  11. Disgustipated

    Disgustipated Deity

    Joined:
    Nov 14, 2006
    Messages:
    11,151
    Location:
    Las Vegas
    http://en.wikipedia.org/wiki/Flipping


    Any thoughts on flipping? An article I was reading on wiki (not scientific by any means) seems to indicate this as a leading cause of the housing collapse (which lead to the financial collapse).

    So the question is: who do you blame for this behaviour? The banks, or the flippers?
     
  12. Hygro

    Hygro soundcloud.com/hygro/

    Joined:
    Dec 1, 2002
    Messages:
    22,751
    Location:
    Nicaragua
    The following book doesn't hold back at all. It goes through exhaustive but readable detail about what lead to the crisis. I haven't finished it (at all) so I will not summarize its points. I'm not sure it takes into account Eckel's/Reich's income inequality theory (a very convincing theory).

    http://www.amazon.com/All-Devils-Are-Here-Financial/dp/1591843634

     
  13. Cutlass

    Cutlass The Man Who Wasn't There.

    Joined:
    Jan 13, 2008
    Messages:
    45,334
    Location:
    US of A
    That's just another subset of speculation. It did contribute to driving up the bubble prices and too much outstanding debt. But it was a contributor, not a root cause, of the whole crisis.
     
  14. SpiritWolf

    SpiritWolf Warlord

    Joined:
    Mar 14, 2006
    Messages:
    255
  15. Mise

    Mise isle of lucy

    Joined:
    Apr 13, 2004
    Messages:
    28,601
    Location:
    London, UK
    Ahh, yeah, that was a pretty important mechanism!

    I also didn't mention the mismatch in maturities of the loans the lenders were making (long) to the wholesale credit many lenders were using to pay for them (short), and how this wholesale credit disappeared up after Lehman Bros collapsed. This was the big problem in the UK - 2 of the 3 bailouts were entirely down to this problem (Northern Rock and HBOS). The other bailout, of RBS, was largely due to its ill-concieved, mis-timed, and over-priced purchase of ABN Amro, who were heavily exposed to subprime mortgages in the US. But the biggest problems in the UK occurred when wholesale credit completely disappeared after Lehman Bros collapsed, because a good chunk of our lenders had become dangerously dependent on this channel.

    And yeah, 5 and 6 is where I lay most of the blame too.
     
  16. Mercenary82

    Mercenary82 King

    Joined:
    Dec 16, 2006
    Messages:
    842
    Location:
    Nevada
    I also believe the documentary "Inside Job" sums it up best, it is must watch.

    Basically the banksters own so many politicians in both parties they get away with everything. There is little regulation of their schemes like derivatives so when they make huge bets and lose, they get bailouts and stick us with the loss. This further incentivises them to make more risky bets. Nobody ever goes to jail, sometimes they get prosecuted and pay fines for pennies on the dollar compared to all the money they stole in the form of outrageous salaries and bonuses.

    The Federal Reserve is also to blame. Practices like theGreenspan Put basically they also encourage risky investing since the market believes the Fed will always step in to provide more liquidity until things get better. This just makes things even more worse for the rest of us because of the bubble it causes and all the inflation.
     
  17. Yeekim

    Yeekim Deity

    Joined:
    Sep 13, 2006
    Messages:
    10,078
    Location:
    Estonia
    I agree that consumption, direct investment and speculation are three basic ways to spend that money... but based on what are you saying that it all went to 1 and 3 and nothing went to 2? ~2% drop of private sector employment over last 10 years?
     
  18. Monsterzuma

    Monsterzuma the sly one

    Joined:
    Jun 1, 2008
    Messages:
    2,972
    http://www.debtdeflation.com/blogs/2009/07/15/no-one-saw-this-coming-balderdash/

     
  19. Tahuti

    Tahuti Writing Deity

    Joined:
    Nov 17, 2005
    Messages:
    9,492
    Gender:
    Male
    The phenomenon of being "Too big to fail". With banks having a relative size like seen in the US, a problem what should have limited to the bank itself easily spills over to the entire economy.
     
  20. BuckeyeJim

    BuckeyeJim King

    Joined:
    Mar 3, 2011
    Messages:
    623
    Location:
    Buckeye Land!
    Well that's not true at all. Jobs and investment aren't necessarily tied together at all. My father works at a large manufacturing facility and has for a number of decades. He watched the company grow from a small outfit with a few dozen employees to a company that now has 900 full time and 300 temporary workers. In the 90s this company, which is essentially the largest machine shop in Ohio, began automating angd computerizing their systems to accommodate rapid demand for the products they sold. They invested hundreds of millions of dollars in automated equipment, automated systems, software, etc. And while their job force may not have grown to the level that it would have been if they didn't automate, they still invested an immense amount of money into the company.

    So no, investment does not mean employment. It means investment. If I purchase a new 10 million dollar SKF CNC machine instead of hiring ten people to do the same job, I'm still investing.

    If you're argument is that investment is only employment then you are not winning a convert. Economic growth requires investment. It must happen. Especially if you have 3% year over year growth. So making a statement that there was no business investment because there was no private sector job growth seems to be, well... a strawman, a red-herring, a bad argument.
     

Share This Page