The Root Causes of the Credit Crisis

The laws were that they should, they have to follow the law.

 

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It was not the LAW. It WAS LEGAL, yes. It was a result of some regulations the U.S got rid of in 2000, regarding the banking system(oddly regulations made in the aftermath - in 1933).

 

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The hell it is. A very small percentage of the American public took out automatic default loans, and many of them because they were deceived or desperate. If the only problem were those bad loans, there would be no problem - just a downtick in the banking business.

The housing bubble was a creation of the mortgage banking and financial industries. The borrowers did not create the bubble, nor did they conceal the nature of their loans on the derivative market, nor did they ask to be used in such schemes.

When I borrowed - not a house loan - I asked if there were any way I could prevent my loan from being sold. I wanted to have my creditor handy, for settling disputes and fair treatment, and more convenient repayment. I was told that was impossible. It would not have been my fault if extraordinary risks and fat-headed schemes had been launched on the basis of my loan.

The entire bubbled up derivatives market that just blew up in everyone's face was a creation of the banks and financiers. It had almost nothing to do with irresponsible borrowing, and everything to do with irresponsible wheeling and dealing with the loans.

 

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There you go. If its legal, they can do it. Its the job of speculators to take risks, it would have worked if there had been less tax cuts for corporations and they had not lost trillions in the war.

 

It is not supposed to be the job of mortgage bankers to be speculators. It used to be illegal, because of what happened last time it was legal, and the laws used to be enforced, becuase of what happened when they weren't.

And no, nothing stops a bubble from popping - the war or something might have hurried it, or postponed it, but the housing bubble was doomed. All bubbles are doomed. They have to be prevented.

 

So if the government had enough money to pay its bills, you'd still have seen an economic slump?

 

This housing derivative bubble would have blown up and crashed the banking and finance industries, war or no war, government debt or no government debt.

 

so they should have seen it coming. why didn't they?

 

A lot of them did. Fortunes were made, meantime.

Besides, seeing it coming, and knowing when and how it will hit, are not the same.

 

Okay...no offense, it's painfully clear that many people here still don't understand how all this happened. I will give explaining it one more attempt, and hopefully some people will understand why it's not simply the fault of the people who got mortgages that they couldn't afford. Yes, the irresponsible borrowers are to be blamed for taking out mortgages that they can't afford. But the banking industry is responsible for getting us into a situation where a bunch of irresponsible borrowers are able to completely freeze up the system when they can't pay back their loans.

The situation is complicated, but basically the problem is that for a long time small banks that specialized in mortgage loans were giving mortgages to people who they knew damn well probably wouldn't be able to pay the mortgages back. Why would they do that? Because they immediately repackaged the mortgages into mortgage-backed securities and sold them to someone else, making all the bad loans someone else's problem. But why would anyone buy mortgage-backed securities that were likely to have a huge default rate? Because the housing bubble had made the securities seem safer than they were. For a long time mortgage companies were able to get away with giving people ridiculous loans without having people default because housing values kept going up, so when people realized they had stupidly purchased a house that they couldn't afford and were unable to make the payments, they simply sold the house for more than their mortgage amount and were able to immediately pay off the mortgage in full (and often make a few thousand or tens of thousands of dollar in the process). Housing prices kept going up for so long that it appeared that these mortgage-backed securities had a low default rate, so they appeared safe and mortgage companies were able to foist their bullshit mortgages onto unsuspecting investors. Eventually the bubble started to burst; when housing prices started actually going down, suddenly many people who were unable to afford their mortgage went into default and it became clear that these mortgage-backed securities were terrible investments.

That's all pretty bad, but it wouldn't have been such a problem if so many financial institutions hadn't been playing ridiculous games with Credit Default Swap agreements. A CDS agreement is basically insurance that against the possibility that a security might fail. You pay someone a few percent of the value of the security per year, and in exchange they agree to pay you the full value of your security if the issuing company defaults on it. That's all fine, but CDSs quickly got completely out of control. People were buying and selling CDSs on securities that they don't even own, basically just betting on whether or not certain securities would default. It's almost exactly analogous to taking out a an insurance policy on someone else's house, in the hopes that their house will get destroyed by a hurricane or something. To make things even worse, because CDSs weren't technically insurance, they weren't regulated like insurance. This resulted in companies selling CDSs that they could never afford to cover in the event that the covered security defaulted. It would be like me issuing a $1 million insurance police on a house and charging $5000/year, when I don't actually have $1 million to pay out. And to make things worse still, companies would chain CDSs together, buying a CDS from someone and then immediately reselling it at a higher price to someone else.

If anyone had the attention span to get through all that, hopefully I've made it clear that financial institutions were playing dangerous, irresponsible games that made what should have been a minor problem (people not being able to pay their mortgages) into a huge problem that threatened to freeze up the banking industry. So yes, by all means blame the idiots who got mortgages that they couldn't afford - but you should also blame the people who set up a system that allowed a few idiots not being able to pay their mortgages to freeze up the entire banking industry. To put it even more simply, the banking industry needs to run itself in a way that accounts for the possibility that people will be unable to pay back their loans.

 

Oh, right. Islamic banks don't charge interest. Rather than give you a loan to buy something and charging interest on it, they simply purchase the expensive item outright and then sell it to you at an inflated price - which you can pay in installments.

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Islamic "interest free" banking is a farce. It still results in people buying things that they don't have the money to pay for by making a lot of small payments over time that add up to more than the original price of the item.

 

As compared to mortgages that leave you bankrupt, homeless with credit that has you living beyond your means and borrowing from your great grandchildren?

 

Joe tax payer needs to borrow so he lends to the banks interest free some of his (and his grandchildren's) money via the government. This enables the banks to lend it back to him, charging interest so as to be sure of bank's profit and CEO's bonuses.

Seem fair, don't you think?

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Are you anti-US style capitalism (private profits, public losses)?

 

Try buying a house in Iran and see what happens when you stop making your monthly payment to the bank. You will end up homeless just as quickly.

Edit: Don't get me wrong, I'm not saying that I like the system, I'm just saying that there isn't as much difference between Islamic "interest free" banking and western banking as some people like to believe. They go to great lengths to avoid calling it a "loan" or "interest," but the practical effect is the same; you buy something that you can't actually afford and pay it off with periodic payments that will add up to much more than the value of the purchased item by the time you're done.

 

Is that what happens?

 

Your post 90 is well done. I hope some of the ingnorate here can learn but doubt it.

That is only one form of the Islamic bond. Used for someone buying a car etc. (It is much like "leasing" the car with options to buy after X years.) Another form for loans to a business is to put up the money and have it paid back over time like any loan but only the princal (no interest charged) is paid back. Instead of interest the loan provider gets "a piece of the action" for no payment (Say 5% of the business the loan will start up.)

 

Yeah, but in most relevant ways that's still basically an interest-bearing loan. The effect is still that the bank gives you a big pile of money, and you pay them back over time with many small payments that add up to more than the value of the initial loan (unless your business fails and you go bankrupt, in which case the loan won't be paid back). The only difference is that your interest rate will depend on how much money you make, rather than some externally-set rate.

If you'll forgive me for copying and pasting from my own post, any transaction between a bank and a customer that can be described as "The bank gives you a big pile of money, and you pay them back over time with many small payments that add up to more than the value of the initial loan" is basically a loan transaction with interest.

In Iran they like to try to pass it off as the bank investing in the business rather than the bank making a loan, but if it was truly an investment that bank wouldn't expect the loan recipient to pay back the principle, would they?

 

Getting back to main topic for a minute, I want to make it clear that although I certainly do think that people should be held responsible for getting mortgages that they should have known that they couldn't afford, the banking industry should also be held responsible for getting itself into a situation where people not being able to pay off their mortgages can cause the entire system to crash.

It's like building an entire neighborhood of apartment buildings that are dangerously below fire code with no sprinkler systems, highly flammable building materials, not enough exists, no fire escapes, barrels of heating oil stored unsafely in the basement, etc. Then when some idiots who can't control their candles and hot plates burn the place down and lots of people die, trying to say that it's all the fault of the person who lit the initial fire. Yeah, that guy shouldn't have set his apartment on fire - but the landlord also shouldn't have built a building that was a dangerous fire trap. Whose fault is it that the fire started? The tenant, of course. Whose fault is it that the entire building burnt down and many people died? That's the fault of both the tenant who lit the fire and the landlord.

Edit:
Although if you really want to make the analogy complete, you have to include all the building being connected with trails of gunpowder and the landlords all aggressively lobbying against there being any sort of fire codes.

 

No, once again you're just trying to make it complex for no reason ...except perhaps in some misguided attempt to excuse the stupid freakin' borrowers.

If ....IF... those stupid borrowers had not taken out loans that they couldn't pay back, then those banks would NOT have had any bad loans to sell to any bank, regardless of the banking rules!

And just so you know and understand, all those banks that bought up those bad loans were ...get this now ....were borrowers in the strick sense of the term. Thus, once again we're dealing with stupid borrowers!!

No! And NO!! Those financial institution would not have had any "game pieces" if all those idiot borrowers hadn't taken out loans that they couldn't pay back!

You can sugar-coat it all you want, you can make it as complex as you want, but it all comes back to the idiots who borrowed money when they couldn't pay it back. In the real world of loan sharks, those people would have had their knees crushed with pipes! Yet, here, you and most everyone else, are trying to make excuses for them ....when they really should have their knees crushed with pipes and baseball bats.

Baron Max

 

So, a bunch of poor people ruined our economy? Nonsense. Banks are equipped to deal with defaulted loans. They are not able to deal with the hallucinated wealth of packaged mortgage securities that suddenly lost their percieved value.