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Comment by nuguy | Hacker News Reader

What an over-simplification. The crisis depended on so many things. Ratings agencies. Insurance companies. Stupid people getting loans they couldn’t afford. And Goldman Sachs who were very clever in compounding the entire crisis in order to profit from it (good for them in my opinion). The creditors who provided the loans were giving loans to stupid people, those loans were then rated highly as a source of debt by the ratings agencies, all of it being insured by short sighted insurance companies and then Goldman came in and made it all worse by adding more money to the fire. Take away any of those components and you no longer have Great Depression 2.

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> Stupid people getting loans they couldn’t afford.

> loans to stupid people,

Ah so it's (partly) the people's fault now? So when a banker shows up and offers a mortgage to a struggling family (which they can't afford), it's their fault for accepting it! I mean how could the banker ever have known? It's not like his job involves assessing these risks or anything.

Yes, people do have responsibility for their own finances. We blame people for mindlessly speculating in cryptocurrencies, there is no reason to not do the same when they take on an adjustable rate mortgage that takes 3/4 of the family income to pay.

Nobody struggling needs to buy a house. That's what renting is for.

It's literally one of the main jobs of the bank to make sure that it can get back the money that it lends!

A family borrowing too much is their problem, banks not doing their jobs is a national problem which should not be rewarded by bailouts, but by jail time and bankruptcies.

Whether the bank can get its money back and whether you can pay for the mortgage are different things.

It's not credit card debt, even if you go bankrupt the bank can still collect the debt by evicting you. So it's not the same as loaning someone money for consumables.

Banks price foreclosure and delinquency rates into their interest rates. In 2007/2008 this didn't work because the banks themselves were over-leveraged.

But it doesn't change the fundamental aspect of this that a bank can be quite happy to give you a loan you don't have a high chance of paying back. If they charge you high enough interest rates it's free money for them.

> a bank can be quite happy to give you a loan you don't have a high chance of paying back

This is only true under assumption that house prices won't decline.

They sell the loan much earlier, so they do not care as long as all check boxes can be checked.

Or if they can offload the risk. As they did.

Actually, the banks packed those loans and sold it. They got the money. They got the bonuses and money after contracts. More contract, more money. They were no longer interested if the client can pay or not...

It doesn't change the argument that it's not just the banks that are responsible. People who took these loans also share the responsibility. I don't like the knee jerk reaction of assuming it's not those peoples' fault at least partially. There are many fiscally responsible people who didn't take out those loans and instead were renting the whole time and saving diligently, planning for their financial future. Nobody cares about these responsible people apparently.

> Nobody cares about these responsible people apparently.

That's because they aren't. It's not their responsibility to figure out their own credit risk in relation to other loans that are packaged up in CDSes by banks and given triple A ratings by rating firms and sold on the market.

It started with the banker that sold a mortgage while knowing the people couldn't afford it, and continued with other firms packaging it up all nice and shiny until the whole financial system collapsed. There is no way consumers (normal every day people) are responsible for this mess.

It is their responsibility to be fiscally responsible and plan their spending in a way to have sound finances. Taking out a mortgage with near zero deposit with monthly repayment that takes 3/4 of your family income is irresponsible and I disagree with stripping such people of any responsibility. Just because it's easy to get a loan doesn't mean consumer is not responsible for judging feasibility of the loan.

What if interest rates go up and my monthly repayment goes up by 10-15%? What if I lose my job tomorrow and it will take me 6 months to find a new role? These and similar are common sense questions a consumer should ask himself/herself before taking out a loan. I am not going to put 100% of the blame on the bankers. You don't need a degree in economics to be able to ask these simple common sense questions and make a judgement on whether it's a good idea to take out that loan.

> You don't need a degree in economics to be able to ask these simple common sense questions and make a judgement on whether it's a good idea to take out that loan.

That's personal responsibility, different from being responsible for the global economy. A dangerous game based on credit and loans was being played by banks and financial firms, but the people getting a mortgage where the poker chips not the poker players.

I'm not from the US, the crisis in 2008 hit my hometown (in Europe) hard. Do you expect me to (partly) blame US homeowners for this?

> It started with the banker that sold a mortgage while knowing the people couldn't afford it

Why wasn't it up to the people to know they couldn't afford it? Have we really absolved personal responsibility this much?

Indeed. You have to sit down and sign an enormous stack of paperwork to get a mortgage in the U.S., and a large fraction of it is government mandated forms that explain the risks, which you sign acknowledging you read and understood them.

If you're getting a mortgage it's time to start acting like an adult already.

Responsible for their own finances, or responsible for the crisis? The latter claim is what seems to have started this conversation, and the individual getting a loan had very limited insight into the general mechanisms that led to trouble, and it's not their responsibility to ensure that whoever they get the loan from (and whoever its sold to downstream, without their input) is capable of handling it if many of the people they gave loans to default.

Huh?! AFAIK the majority of the mortgages just before the GFC were literally "no risk zero deposit" - if you couldn't repay, you could just move away and mail the keys to the bank, and you had no other obligations. Perfect (for the loan-taker) in case the housing market started crashing or just declining. You'd be stupid not to take such a loan!

Could you please share some sources about this?

Ah, took me a while to find the right Google term: "nonrecourse loan".

I'm not sure anymore how big a cause for the crisis they were - there are articles arguing both directions.

https://ftalphaville.ft.com/2017/03/03/2185420/fed-vs-fed-on...

http://webcache.googleusercontent.com/search?q=cache:Hsi8ZX8...

Chapter Economic Incentives in the Housing and Mortgage Origination Markets in https://www.brookings.edu/wp-content/uploads/2016/06/11_orig...

Refinancing your house when money is tight vs. spending some free couch change in crypto ain't the same thing.

There are similarities though. Cheap credit can allow giving huge loans to people who drive prices of property up and fuel the buying frenzy. This aspect is similar to the ever rising price of cryptocurrency bringing in more and more buyers.

You are right, of course, but in our society we (correctly) punish illicit drug suppliers, dealers and buyers, because they are all knowingly engaged in activities that they know they shouldn't be engaged in. Punishing only one of those parties would be... classist? Maybe even racist?

OP was talking about casual or moral responsibility, not about criminal. Unless it was fraudulent neither party is to criminally blame, even if both hurried the economy toward the cliff. Even if "the banks" did so knowlingly. It was not their job to care about that.

And while it's sad, that banks were this short-sighted, it's important to note, the less ruthless ones were already priced out of the market.

OP was blaming them for bringing the global economy to its knees.

Regardless: yes there is culturally a big difference in buying bitcoin and getting a mortgage: the latter is not considered a risky investment precisely because everyone isn't expecting you'll get one if you can't pay it off. Bitcoin on the other hand is not a loan, but putting money you already have into a risky investment (note: I'm making a living of cryptocurrencies) .

"OP was blaming them"

No, only partly blaming them, and they are definitely partly to blame.

"Ah so it's (partly) the people's fault now?"

Yes, it's absolutely partly the people's fault. There were tons of people taking massive loans they should not have. People cannot abnegate personal responsibility there.

A lot of things had to go wrong in the banking system for the crash to happen, but that was one of them.

You know, if you really think about it, the banks were victimized by these cunning idiots.

No, that's not what anyone, even the OP is saying. People were taking massive mortgages, far beyond their means, they were buying several houses renting them out. They were knowingly falsifying information they provided to the banks etc. etc..

Not all banks were doing dirty things, and not all people were doing things, but many banks were and so were many individuals, and so the rest of us pay the price.

This crisis is truly an American style crises - people in most other countries are hugely risk averse when it comes to this kind of stuff. Even buying cars on payments is a newer thing in some advanced countries ie Spain.

Not just attitudes though ... 'bankruptcy' is a survivable event for companies and individuals in America. Less so elsewhere.

You're taking the exception (people buying several houses and renting them out) and just declaring that it applies across the board. In many cases it wasn't like this at all - just families who had been duped into thinking they could afford something they couldn't. Sure you could point the finger and say they could have pored over every clause in their mortgage contract and produced their own models for what could happen to their repayments under various circumstances, but why would they? They had no idea whoever "sold" them the mortgage was acting in bad faith. It's only now we know that it was all a sham and that you shouldn't trust these guys as far as you can throw them.

The idea that the financial crisis was brought on by some greedy underclass with ideas above their station is a myth that the banks have been pushing ... and it seems a few HNers have just bought it hook, line and sinker.

You're simplifying the already situation well outlined in the parent comment. Maybe your argument is that people aren't responsible for their own decisions? Ie when they go to casino and blow their salary on gambling, it was not their fault, it was evil casinos. If they sell their used car too cheaply, it's fault of that sneaky dealer.

From what I heard many people in US were (maybe still are) taking all kinds of non-necessary loans. Well that's really not the healthy mentality, nor is it standard anywhere else across the globe. People that can't do simple 2nd grade math on paper take those here in Europe, and often they suffer, together with their families.

Seriously, there is something called financial literacy, and 101 of that is - don't buy shit you can't afford with a HUGE comfortable margin. 102 would be don't take loan on anything but your housing, unless you're starting a company. Any other loan, you're entering needless risk for not good enough reason. My personal opinion this is one of the failures of modern schooling - these things should be taught to every child, over and over. How to do taxes, how government works, how to become a better member of society and contribute to it, and how to effin' be financially smart whatever your circumstances are.

> just families who had been duped into thinking they could afford something they couldn't.

Duped? You don't need to pour over financial models to know that spending 3/4 of your pay on a mortgage is going to cause problems. One thing I will say is that in the US, personal finance education is woefully inadequate. Just look at the number of people and the amount of balances that get carried on CCs. That alone is a sign how poorly people think about money.

The sad part is that a budget is not hard. It does require some self discipline, which is also sorely lacking.

"You're taking the exception (people buying several houses and renting them out) and just declaring that it applies across the board."

No. Like I said there's a lot of people who could afford their homes, maybe even many.

I'm saying there's many people who were buying multiple homes, who shouldn't have been and that was part of the problem.

In the land of zero privacy the banks weren't able to figure out if an individual would be able to pay back a loan? Or they didn't want to?

They didn't care. They were selling the loans on to other institutions which in turn were repackaging them and selling them on and so on and so forth. In the end, it was often unclear who was left holding the bag.

The banks, for the most part, were being rewarded for originating loans that they weren't going to hold, so they had perverse incentives to loan as much money as they could. There was massive fraud throughout the system from the the borrowers to the mortgage agents to the banks to the re-packagers (other bigger financial institutions, usually) to the credit agencies. It was a total shit show all around.

A person cannot go bankrupt in some EU countries. You will be placed under supervision and your income will be managed by a third party (usually government). This is also the reason why there are agencies which (by law) monitor debt so you cannot acquire more than you can afford. This includes everything from mortgages to pay-day loans.

No one said that at all. The point is that there was plenty of greed to go around. I watched multiple friends get caught up in the hype. They called me stupid for not taking on a huge loan because "housing only goes up" or "you'll never be able to afford a house if you don't buy it right now" or "I'm going to sell this in a year for 100k profit".

My thought was always I have a good job in software making way above the median income, and I can't comfortably afford a house. There is no way this can continue. It lasted much much longer than I would have guessed though.

Yes it is partly their fault. Contrast people without sufficient income, who took huge mortgages with almost zero deposit and repayment amount too high for their income, to fiscally responsible people who didn't participate in the mortgage frenzy, instead trying to save more to afford bigger deposit / smaller mortgage in the future. The first group of people was bailed out by the second group partially. This is quite unjust.

Your comment is simply saying: contrast people who participated in the real estate bubble with responsible people who did not. I agree that the second group suffered because of the first and that this is unjust. Whether we can expect people generally to not participate in market manias to avoid such a predicament, is another question.

If we keep making the maniacs whole after every crisis they cause, they'll never need to learn to avoid these predicaments.

I took a reasonable mortgage that my wife and I could afford, paid a standard 20% down payment and saw the "value" of my first home drop 50% post 2008. Am I stupid? Was that my fault?

The "boogeyman" borrower who borrowed millions, made no down payment and had 0 income rarely exists.

Personally I think 20% is a small deposit but better than what a lot of people are getting away with these days. You’re still taking a massive loan that you will be paying off for decades. You should only do such risk if you are ok with the property losing value. E.g. Only people buying their first house for family should ever take a mortgage if they have decided to live in that place for next 20-30 years. People buying second or third homes or flipping houses should be burned in mortgage crises, not bailed out, that’s immoral.

> saw the "value" of my first home drop 50% post 2008.

So what? Not every investment goes up, and even those that do go up rarely do so linearly. As far as your situation is concerned, who cares if the value dropped 50%. You were smart, bought something you could afford (presumably on a fixed rate), and just kept making the payments. Over the long term prices would come back.

The problem came in with people buying houses they could clearly not afford, and with no cushion for any downturn. They were not boogeyman borrowers, and were very common in places like Florida and Las Vegas. People who could only afford the teaser rate payment on a 3/1 ARM when fixed rates were at historic lows. Not a smart financial move on their part.

You took a risk. Taking a mortgage is not risk free. Prices of properties are not guaranteed to go up forever. We are in fact in huge housing bubble. Some people just rent. It’s not right to force renters to bail out people who took mortgages. Once this bubble bursts I hope we are not going to be bailing out mortgages again.

It is not NOT their fault. It is mostly the industry's fault, I agree with you. But people borrowing beyond their means is not 0% their fault.

The problem wasn't so much that people took/were given loans they couldn't afford. Default rates fell for many years along with lending standards (not requiring a job, assets, or income for a loan became common). Continuous rapidly rising home prices kept defaults low. Believing home prices would always rise (at some minimum rate) made it rational for borrowers and lenders engage in this behavior.

To argue they were being irrational, you'd have to show that it was irrational for them to believe in the myth that this trend would never end, which is tantamount to expecting markets to not experience manias or bubbles.

> The creditors who provided the loans were giving loans to stupid people

Anybody can seek to obtain loan. Creditors are professionals.

Never forget that.

Exactly: The question is not "who was stupid", the question is "who failed at their FULL TIME JOB of preventing that kind of stupidity from mattering."

Humans are all stupid and fallible in some ways or situations, and we create organizations in order to direct our strengths in a way that shores up the weaknesses.

An ignorant student is regretful-but-expected, while an ignorant teacher is a problem.

Yes. But people are responsible for their actions. Taking out a loan has consequences and people should not be striped of those. Somebody who takes a payday loan and goes to casino is responsible for his/her action, it's not just the loan shark's fault.

Sure, but unless we spend some effort (money) on curing or shooting the unlucky addict it won't lead to pretty things. Responsibility or not. And usually in civilized countries we don't like to shoot mentally ill people. But for some reason just watching as they tear apart their and their loved one's lives is a-ok, because responsibility. :(

Because responsible people then have to bail these people out with their savings / taxes going up. It's a moral hazard. If there are no consequences for your actions / financial decisions, people will never learn and will continue making bad choices because why not.

Agreed. But simply letting responsibility run its course does not make the world a magically better place. Processes that lead to better global state often require catalysts, such as gov intervention (regulation, Fed actions, addiction treatment, etc).

The taxpayers are the responsible ones, while the bankers are not. I agree with you.

Losing your money when you lend it stupidly is only fair and responsible, too.

> Take away any of those components and you no longer have Great Depression 2.

The 2008 collapse was caused by parties unscrupulously seeking profit while blindly trusting the word of their dependencies... willful ignorance in a system of unsustainable but mutually beneficial arrangements.

That's a cultural problem. If we had outlawed anything you point out, the end result would be a different house of cards built out of the same unwarranted trust in abstraction layers.

"If only they'd built it with 6001 hulls!"

And don't forget government policy and meddling politicians. If anything, that played one of the largest roles. Legislation meant to make "everyone" a homeowner by removing barriers to home ownership played a large role. Fannie Mae and Freddie Mac policies drove bank lending in large part. Originators were writing crap and Fannie and Freddie were buying it from them at a feverish rate without a second thought.

This interview with Thomas Sowell covers a few specifics. https://m.youtube.com/watch?v=E1KwkScA540

Even assuming you're right (and you're not) that "stupid" borrowers somehow contributed to this problem, a system which depends on everybody being smart and acting logically is about as robust as a castle made of playing cards and as useful as a car engine which explodes as soon as your mileage goes 1km past the scheduled oil exchange mileage.

I stated a simple and correct fact. In order for bad loans to exist there must be two parties involved: Irresponsible creditors and irresponsible (or stupid) borrowers. This is assuming that the terms of the loans are known by everyone. People lied to get loans but the banks, as many have pointed out, knew exactly who they were loaning to. And the borrowers knew very well that they couldn’t afford these loans. The only way they might not have is if they were not very smart.

I am completely surprised at how divisive this one simple fact has been. It is literally impossible to refute this.

And your comment on how society would be super fragile if I were right — it is.

> The only way they might not have is if they were not very smart.

There is another option. They may have been very smart and operating in the environment they saw around them. This is basically what the big flippers were doing. It's a dangerous game though because when the music stops you do not want to be the one without a chair.

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