How the U.S. Saved the World from Financial Ruin
barrons.com
barrons.com
Here's what happened: - The international market, particularly the Asian market, burst.
- Investment went into the tech industry, which also burst.
- To keep investment rates high, the Fed coordinated changes to regulations so that private mortages could be sold as investments.
- The Fed pushed for other countries to adopt the same practices.
- This new regulation regime was inherently designed to push investment earnings as much as possible, and new financial instruments were created to centralize risk from individual risk toward systemic risk.
- It started to become clear that there were inherent structural issues with the investment scheme.
- The Fed continuously lowered regulations to feed the market in an attempt to prevent it from crashing.
- When no more regulations could be cut, the entire global market crashed.
- This was all based on a philosophy that investment is a key indicator of economic health, and that driving up investment would drive up the health of the overall economy.
- Regulators decided to distribute the costs of the mistake, and loan tax payer money to banks that had collapsed.
- With rate exception, people in the financial sector made hand over fist.
- Congress even evaluated making it legal to falsify accounting information in an effort to save the banks.
- The U.S. and European economy is still recovering.
And all of this was foreseen by people who actually understood the math. And they were promptly ignored because listening equated with lost profit, commissions, etc.
That way over-simplifies, and misses a key point: the loans don't "have the best interest rate" because they are assessed to be loans at higher risk of default. The way you say, it sounds like the house buyers just didn't shop around enough for mortgages.
And even when we talk about why the loans defaulted, the issue isn't that the loans were subprime instead of prime and that that was due to a higher risk of default. It's that the loan was given based on falsified data to cover up reasons that should have prevented the loan from being given (almost always due to a debt:income ratio that was much too high), the borrower was advised by fiduciaries to take more than they should have given their income, and the preferred loan type was one where the the necessary payment ballooned massively after a set time period, which meant that when the payment when up the borrower would be unable to pay the higher payment because of how far they were stretched by the base payment, because the borrower was advised that they would be able to refinance at a lower rate due to an expected-by-their-fiduciary rise in equity.
So the already-risky loans were made more risky due to fraud and deceit on the part of loan writers. Fair enough, I have no argument with that as a major contributor, if not root cause.
Uh... like what?
The US may have been the initial trigger, but it by far did not supply all the snow in resulting avalanche.
Yes, it seems that Goldman Sachs was involved in helping cook the books.
There were (and are) lots of problems in the financial sector.
This is what I got by trying to distill down a very complex process into an easily readable list.
This is just factually wrong. Private mortgage securitization has been legal in the U.S. since at least the 1970s. Most of the subprime-mortgage-backed securities that failed in the crisis were not even subject to regulation by the Fed because they were funded and securitized by private funds and investment banks (the Fed only had jurisdiction over commercial banks at that time).
Yes, Glass-Steagall's removal of the separation between depository and investment banks had its own effects.
Welcome to the wonderful world of spin. As a former subscriber, it saddens me to see how much barrons has fallen after being bought by news corp. I guess if you live long enough, you get to see it all.
> The U.S. and European economy is still recovering.
After increasing the national debt from $8 trillion in 2008 to nearly $20 trillion today.
I remember adam smith saying something about how the two ways to enslave a person or a nation is by force or debt. And that debt is the smarter choice.
What ever happened to banks being too big to fail and needing to break them into smaller banks so that they don't pose a systematic risk to the US and the world? Oh, that's right, they got much bigger.
https://money.cnn.com/2017/11/21/investing/banks-too-big-to-...
``` In early October 2008, the Dutch had suggested pooling the collective resources of the European Union’s economies to bail out their banks and guarantee deposits. The French, British, and even the boss of Deutsche Bank all supported the idea of a joint effort. This made sense, since most European banks had significant operations in neighboring countries. Regardless of whether their headquarters were in Paris or Amsterdam or Frankfurt, their exposures were pan-European. National borders should have been irrelevant for deciding who would bear the burden of saving a tightly integrated financial system.
Then the German government and the ECB made one of the greatest policy mistakes since the 1930s. They insisted on national solutions led by national governments. French President Nicolas Sarkozy claimed German Chancellor Angela Merkel had told him, “Chacun sa merde”—she would not clean up others’ messes. This decision led directly to the European sovereign crises and to a lost decade for hundreds of millions of people. ```
"To each their shit" is a bit better. I wonder how you could really get the feel for the statement though. It comes with a bit of "and you bloody well ain't going to change my mind about this !" feeling.
Talk about an incredibly frightening description of events as they unfolded.
He even mentioned how Hank Paulson had been vomiting before having to front the nation/world on TV with the plan to keep the wheels from falling off the global economy.
One thing I recall from the lecture was how the White House and entire government by extension were completely incapable of understanding the types of insanely complex financial instruments that had been created and used.
The world could perhaps be pardoned for not being more grateful.