What Caused The 2008 GFC?

The following is an answer that I just put out on Reddit regarding a question of what caused the 2008 Global Financial Crisis..  I wanted to share this because I think I’m fairly detailed about it.

Coming out of the 9/11 attacks on the WTC, a huge fear gripped the US.  When fear happens, the economy slows down.  Bernanke and others lowered the FOMC rates down to 1% or so.  This drive home building, home buying, etc.  some of this home buying was done by people that didn’t have the financial resources to actually buy a home.  This was driven by subprime home buyers who were pushed into adjustable rate mortgages.  The poster child for this was New Century financial.  https://en.wikipedia.org/wiki/New_Century_Financial

There was a general push starting under the Clinton administration to push home ownership.  Bush43 continued that push.  Late night ads for mortgages that appealed to low end buyers were rampant.

There was a general assumption that housing prices always go up.  They don’t, but no one knew this at the time.  Housing prices topped out in mid 2006, but no one knew that until it was too late.  That’s an important point because interest rates were going up.  People that got into new homes assuming that they could refinance their mortgages actually couldn’t.  Their rates were resetting and they couldn’t get out.

Coming out of the dotcom bubble, Fannie Mae and Freddie Mac were awash in accounting scandal as as they tried to keep up with and beat the markets, so they were in the sidelines.  That’s important.  They tended to set the market for what were acceptable mortgage loans. Without them to set the market, Wall Street jumped in with no experience and pushed for lower subprime mortgage payers since the people with good credit already had mortgages.

I’m about to be really hard on some groups when a lot of groups should carry a lot of blame in this.

Starting in about 2006, loans and mortgage rates started to reset and these low end mortgages couldn’t pay.  The problem was that no one knew were the bottom was, so it was assumed that everything was bad.  A tidal wave of fear splashed over everything.  See, the problem was that mortgage lenders didn’t lend out their own money.  They lended out money from others.  They sold mortgages packaged together to others.  Not one story tells the complete picture.  It was a real sh@tshow.  The people that were the real instigators of this, the New Century Financials and similar companies were the real villains and they got off scott free.  They never once stopped and asked if someone making $50k a year could afford something, no, they just grabbed their fees and sold to the next set of people.  The next set of people didn’t do the due diligence necessary to know what they were buying and didn’t have the time and skills to know what they were buying.  I believe in accountability at the scene and the New Centuries of the world were the main cause of the problem.

CNBC did a special report called “House of Cards” in 2009 that had a really in depth analysis of this that was excellent.

HBO had a pseudo documentary called “too Big To Fail” following the government and Hank Paulson in his efforts to keep,the US economy from going into another Great Depression.

Margin Call tells the story from inside an investment bank.

“The Big Short” is a movie about this told from the standpoint of people that bet against the housing market, like Michael Blurry.

My father saw this problem in 2004 and was aghast at some of the people that were able to get mortgages.  He often said there were major problems and he talked about it at the time.  Why did he know this?  He was a real estate developer so he saw the people coming thru to look.  He also sat on the loan committee and the board of a regional bank, so he saw the aggregate numbers of loan applications.  There is a great line in “too big to fail” where people are sitting in Hank paulson’s office and someone asked the question “why did no one stop this?” And one guy responds “because they were all making too much money.”

Home buyers were at fault for not understanding what they could afford.  Heck, there were “stated income loans” where the applicant only had to state what their income was, no checking on this, no validation, no nothing.  There were NINJA loans, no income, no job loans.  Income was left blank on mortgage applications.  Why?  Because  the loan would be sold off to someone else within a few weeks so it doesn’t sit on anyone’s books for too long.

Tens or hundreds of thousands of people were guilty of something and should have gone to jail.  The problem there is if you do that, you would destroy the American and world economies.  The juice wouldn’t have been worth the squeeze and that would have left us in a worse place.  Dick Fuld, the last ceo of Lehman brothers is probably the guy that was the most guilty of anything, but what laws did he break?  He was guilty of stupidity and arrogance.  As much as we hate him, stupidity and arrogance are not crimes.  https://en.wikipedia.org/wiki/Richard_S._Fuld_Jr.

Hopefully, some of that is helpful.  There is a 1000x more to the story than this.  I’ve just tried to distill this down to some basic thoughts.

The solution to a business problem is not “more code.”

I spend a lot of time reading what people are doing with regards to startups.  One of the continual issues I see is that people will start an idea, build something, never talk to the first potential user, and then quit because they got burned out, or no one would use their product.  They didn’t spend time on talking to users.  They didn’t ask them what would bring them value.  They didn’t ask users what they would pay for.  They tend to think “I need a new feature.”  No you don’t need more code.  You need to go talk to some users.  Go interview 10-100 users.  Talk to as many face to face as you can. See what themes come out of the discussion.  Build the first theme that comes out, that can be your mvp1.  Then build your second theme, that can be mvp2.  Keep building, keep talking to users, keep iterating. At some point in there, you need to have a hard conversation about money, both with yourself and with the users.  Should this be a subscription service, or should it be an advertising supported service.  Users tend to say ad service because it is cheap for them, but you need to run some numbers and see what works.

The point I am getting at in this, don’t just run to writing more code.  The solution to a talking to the user problem isn’t to just write more code, but to have a conversation with users to see what adds value to them, and how you can capture a fraction of that value.

The Hypocrisy of Reddit

I used to hang out in Reddit and try to help people in startups and investing area.  I tried to help in the .Net, c#, Maui areas, but I find that people don’t want to talk about these things, they want to argue the points, but moving on.

I’ve found that Reddit is full of hypocrisy at the level of the system itself.  I was recently banned for a “history of flagrant abuse.”  What?  Yeah, that’s what I said.  One of the questions asked was “what would you do if you were President of the US?”  In my smartass kind of way, I said “I would lockup all socialists in concentration camps and blare Adam Smith over the loud speakers until they repented.”  Clearly a joke.  I was reported for threatening people, challenged it, and I was denied.  Ugh.  When that ban was lifted, I responded to a question about Jay Powell not leaving the Fed board of governors with “there is about to be a cranial explosion at 1600 Pennsylvania Avenue.”  I was permanently banned after that joke.  I eventually received an email saying my ban was lifted, and it has not been.

I do go into Reddit to look at what people are talking about.  I saw a statement of “I would put all Trump supporters in concentration camps and murder them.”  It had many upvotes and had not been deleted, so that poster had not been banned.

Reddit, the home of the militant left and hypocrites.

Stepping Up To The Plate

step up to the plate

phrase

You are willingly accepting an opportunity.

tactical

adjective

tac·​ti·​cal ˈtak-ti-kəl 

A tactical solution means that it solves a problem today, but everyone is meh about the solution.  They could be meh for any number of reasons, but most likely fear of career failure by liking it.  When I was at coca-cola, tactical solutions were solutions that solved problems today, but that went against strategic solutions that were at least a year away.  Tactical solutions were also solutions that someone important hated and were against their pet ideas.

What I Expect From Engineers

Everyone doesn’t need to be an engineer.  But, if you are an engineer, you need some feel for the basics across all disciplines.  I saw a post where engineers weren’t expected to know what I would consider to be basic engineering.  Wrong, boy is that wrong.  That means, you better know not only your own field of engineering, but you need to know some amount of the basics in

Accounting.  You aren’t an accountant, but you need to know some basics.  What is income?  What is an expense?  What is an investment?  Understand the basics.

Sales and Marketing.  You better understand the basics of putting together concepts that will reasonate with the people you need to sell to.  This includes colleagues, management, and external customers.

Software.  No one is going to to expect you to write complex applications, but you had best understand the basic process of business rules, discovery, and putting that into code that solves problems.

Math.  Going along with software are databases.  Databases are complex math set theory.  You had best understand the basics.  We aren’t implementing multi-dimensional differential equations, but the basics of math, calculus, and set theory are actually important in life and business.

Mechaninical engineering.  Hopefully, you understand the basics of statics and dynamics.  If you don’t, well, I don’t want to be in a building you were involved in.

Electrical engineering.  Once again, I don’t need you to understand quantum effects of sub 5 nm vlsi design and how they effect design rules, but knowing what resistance, capacitance, and the basics of power are is a good thing.

Thermodynamics.  You aren’t designing an hvac system for a datacenter, but it would be great if you understood some basics.

Material science engineering.  You aren’t being asked to create new compounds or a new material design for a space craft.  I do expect you to know that the more you use a material, it will eventually wear out.

I also expect you to know your field of engineering.

We seem to live in a world we’re vibe coding is now somehow mistaken for software development and a professional service.  No, vibe coding is a quick solution to an immediate problem today, not a permanent solution to a serious problem.  I don’t want vibe coding doing product design, building in security for a user portal designed to process financial transactions, the electronic version of a a real estate mls listing form, the fuselage of a plane, the systems management of a 32 engine based rocket, or anything else that is serious.  

You need to bring some level of expertise to a job or project if you want to be taken seriously.

strategic

adjective

stra·​te·​gic strə-ˈtē-jik 

A product is considered to be strategic if it gets someone important excited.  That excitement can be either positive or negative.  For example, when I worked at The Coca-Cola Company, the former CIO hated lotus notes.  Whenever the subject of lotus notes came up, he would run around and tell the business unit that this was a strategic product and was 100% under his control.  Since he hated lotus notes due to one comment that a lotus salesperson made, he was going to kill any discussion of lotus notes.  Lotus notes was a strategic issue that only he was able to answer.  His name was Ira and he was moved to “special projects,” and Coca-Cola eventually had lotus notes.