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So what caused the financial crisis?

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

  1. Tahuti

    Tahuti Writing Deity

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    On the other hand, Banks may have lended to people who - at the time to received the loan - were expected to pay back but failed due to unforseen events... like rising oil prices perhaps?
     
  2. Cutlass

    Cutlass The Man Who Wasn't There.

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    Actually, at the time banks were making loans that they didn't give a damn whether they would ever be paid back or not. Because they were selling the loans, and so selling the responsibility for them.
     
  3. El_Machinae

    El_Machinae Colour vision since 2018 Retired Moderator

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    I mostly agree! However, it still makes housing more affordable, and if there's demand for housing, this is going to cause the price to go up. If you were selling your house, you offer to sell it for 'what you could get for it'. People's ability to buy your house rises with the tax break, so there's more demand and so the price rises. You can sell your price for higher then you could before.

    It's nearly the same mechanism by which cheap interest rates cause the housing prices to go up. You're right, people look at their mortgage payment, and then buy what they can. But with a tax credit (or cheap interest) people can afford to spend more.

    Remember, it was a seller's market (I know, because I was involved in the bubble as an investor), so the prices go up as people's ability to pay goes up.
     
  4. Tahuti

    Tahuti Writing Deity

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    The point was to show the possibility that the rising oil prices of the time could have been more the reason behind the 2008 financial crisis than housing bubbles were, and that the housing bubbles may in fact have been triggered by rising oil prices.
    Why would you buy loans when you expect the debtor to default anyway?

    I've digged a WSJ article from 2009 on the subject, but there might be more recent articles on WSJ and elsewhere

    http://blogs.wsj.com/economics/2009/04/03/did-the-oil-price-boom-of-2008-cause-crisis/
     
  5. El_Machinae

    El_Machinae Colour vision since 2018 Retired Moderator

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    Yeah, I agree that an oil bubble creates an economic instability. IMO, it's one of the things that pricked the balloon.
     
  6. kochman

    kochman Deity

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    The quick answer? Bureaucracy.

    The longer answer...
    Government told mortgage companies it would back them up, to lower standards and get more people in homes (in particular minorities). Any opposition to the idea was deemed racist... the banks, hearing that they would be backed by Uncle Sam, didn't hesitate.
    The primary vehicle to get those who didn't meet the standards to get a loan to now get a loan was the "subprime" loans... or balloon rates. It suckers in people who aren't paying attention (their own fault) with really low payments for 5 years, which they get HUGE.

    The bankers/etc then bundled together all these sorts of mortgages, and sold them. When they marketed them, they basically guaranteed high returns, based on the high interest rates after the 5 year mark, as if there was no risk... instead of high risk.

    Mortgage bundles became a commodity. An internationally traded one at that. Any banker/investor worth their salt should have known default was likely... many did and chose to ignore it. These commodities were snowballed, and used as collateral to buy more and more, invest more and more, etc...

    People started defaulting, someone blew the whistle. Balance sheets were looked at, and everyone realized, in 2007, this was just the tip of the iceberg... These subprime loans were basically being pushed for 5-6 years, because until that point, no one was defaulting on the low introductory rates.
     
  7. BuckeyeJim

    BuckeyeJim King

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    I don't think that the tax credits have as much impact as the interest rate does. Consider that when my parents bought a house in Apple Valley in the 80s they had an interest rate on it above 15%. The amortization table on that just makes me nauseous. The value attributed to higher interest rates across the entire breadth of the houses sale price, and set across 15, 20, or 30 years, is a lot more than the up front tax credit. And any smart homebuyer, or anyone without a crooked lawyer, is going to do a comprehensive analysis over the life of the mortgage and should consider all angle.

    I think the main problem was ARMS and irresponsible lenders conning people into homebuying in general, and then, as has already been described, the banks selling off those bad mortgages.

    @ Cutlass. It's alright bro, don't worry about my time. I didn't spend hardly any time on it. I woke up this morning, read it, went to the shower, digested it, thought about it, gave it great consideration, and then wrote my response over the course of consuming half a bowl of exceptionally delicious Cinnamon Toast Crunch. It's fine that I'm not changing your opinion. I know how emotionally attached you are to your opinions and I don't think I, or anybody else who disagrees with you on anything, is going to dislodge you from your roots. Which is totally cool, because you prolly won't do that with me either. It's okay to disagree, right? I just want you to know that I appreciate your approach to this thread and providing with some new insight and information. With that said those questions I asked were genuine. You see, I don't like jumping into a debate or formulating my own opinions unless I feel I have the proper information to make those judgment calls. Those are all serious questions that I have in general, as well as for our little debate here. It's difficult for me to ramrod positions without those facts. So, I'll be better able to at least attempt to uproot your belief if you help answer my questions so that I have a more fleshed out idea of where you are coming from. We need to have a level of focus here and clearly understand one another. No what I mean, bro?

    When it comes to you saying that "some money went into speculation," I'm fine with that. But I just feel that that percentage or portion is really, really small compared to the whole ball of wax. And I still disagree none of the tax breaks went in to business investment for reasons already discussed. I also think that your graph showing rates of change instead net distorts things. Because while the rate of change may have slowed, the net total investment as a percentage was still more than in the 90s. We can discuss this more if you'd like, but if you're comfortable walking away with it that's cool too. I'll just peck away at the dissertation for a while instead of pecking away here.
     
  8. Cutlass

    Cutlass The Man Who Wasn't There.

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    I said on the first page of this thread that I thought oil could have been the straw that broke the camel's back. But there was a lot more depth to the problems before rising oil prices helped to trigger the crisis.
     
  9. SuperJay

    SuperJay Bending Space and Time

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    FWIW, I was really hoping you'd share some more of your thoughts on this topic, JH. It may not be apparent, but some of us who just read the threads - but don't jump into the partisan warfare - do pay attention to the folks with the expertise and are interested in learning from them. (I skim past the bickering walls of text and look for posts like Mise's and yours on the first page or two)

    I guess I should respond to those posts so peeps realize their time is not wasted writing them. I enjoyed reading Mise's explanation, and actually wondered why Jericho wasn't more of a presence here.

    :coffee:
     
  10. Kerozine

    Kerozine Deity

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  11. Ayatollah So

    Ayatollah So the spoof'll set you free

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    Cutlass and Mise nailed it on page 1. But it's much more impressive when people describe the potential disaster before it happens - as Raghuram Rajan did:

    In recognition of this insightfulness, Obama made him Director of the White House National Economic Council. Larry Summers, that is, not Rajan :crazyeye:
     
  12. Bestbank Tiger

    Bestbank Tiger Deity

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    How does Summers ever get a job? He's a buffoon.
     

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