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.
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