Toddsterpatriot
Diamond Member
Todd's answer to the cause of the 2008 recession is "The government did it", ignoring all of the following:
- In its January 2011 report, the Financial Crisis Inquiry Commission (FCIC, a committee of U.S. congressmen) concluded that the financial crisis was avoidable and was caused by:[234][235][236][237][238]
- "widespread failures in financial regulation and supervision", including the Federal Reserve's failure to stem the tide of toxic assets.
- "dramatic failures of corporate governance and risk management at many systemically important financial institutions" including too many financial firms acting recklessly and taking on too much risk.
- "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions and by households that put the financial system on a collision course with crisis.
- ill preparation and inconsistent action by government and key policy makers lacking a full understanding of the financial system they oversaw that "added to the uncertainty and panic".
- a "systemic breakdown in accountability and ethics" at all levels.
- "collapsing mortgage-lending standards and the mortgage securitization pipeline".
- deregulation of 'over-the-counter' derivatives, especially credit default swaps.
- "the failures of credit rating agencies" to correctly price risk.
- "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" (known as the Levin–Coburn Report) by the United States Senate concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street".[239]
- The high delinquency and default rates by homeowners, particularly those with subprime credit, led to a rapid devaluation of mortgage-backed securities including bundled loan portfolios, derivatives and credit default swaps. As the value of these assets plummeted, buyers for these securities evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis.
- Securitization, a process in which many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities, allowed for shifting of risk and lax underwriting standards. These bundles could be sold as (ostensibly) low-risk securities partly because they were often backed by credit default swap insurance.[240] Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria.
- Lax regulation allowed predatory lending in the private sector,[241][242] especially after the federal government overrode anti-predatory state laws in 2004.[243]
- The Community Reinvestment Act (CRA),[244] a 1977 U.S. federal law designed to help low- and moderate-income Americans get mortgage loans required banks to grant mortgages to higher risk families.[245][246][247][248] Granted, in 2009, Federal Reserve economists found that, "only a small portion of subprime mortgage originations [related] to the CRA", and that "CRA-related loans appear[ed] to perform comparably to other types of subprime loans". These findings "run counter to the contention that the CRA contributed in any substantive way to the [mortgage crisis]."[249]
- Reckless lending by lenders such as Bank of America's Countrywide Financial unit was increasingly incentivized and even mandated by government regulation.[250][251][252] This may have caused Fannie Mae and Freddie Mac to lose market share and to respond by lowering their own standards.[253]
- Mortgage guarantees by Fannie Mae and Freddie Mac, quasi-government agencies, which purchased many subprime loan securitizations.[254] The implicit guarantee by the U.S. federal government created a moral hazard and contributed to a glut of risky lending.
- Government policies that encouraged home ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate; questionable trading practices on behalf of both buyers and sellers; compensation structures by banks and mortgage originators that prioritize short-term deal flow over long-term value creation; and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.[255][256]
- The 1999 Gramm-Leach-Bliley Act, which partially repealed the Glass-Steagall Act, effectively removed the separation between investment banks and depository banks in the United States and increased speculation on the part of depository banks.[257]
- Credit rating agencies and investors failed to accurately price the financial risk involved with mortgage loan-related financial products, and governments did not adjust their regulatory practices to address changes in financial markets.[258][259][260]
- Variations in the cost of borrowing.[261]
- Fair value accounting was issued as U.S. accounting standard SFAS 157 in 2006 by the privately run Financial Accounting Standards Board (FASB)—delegated by the SEC with the task of establishing financial reporting standards.[262] This required that tradable assets such as mortgage securities be valued according to their current market value rather than their historic cost or some future expected value. When the market for such securities became volatile and collapsed, the resulting loss of value had a major financial effect upon the institutions holding them even if they had no immediate plans to sell them.[263]
- Easy availability of credit in the US, fueled by large inflows of foreign funds after the 1998 Russian financial crisis and 1997 Asian financial crisis of the 1997–1998 period, led to a housing construction boom and facilitated debt-financed consumer spending. As banks began to give out more loans to potential home owners, housing prices began to rise. Lax lending standards and rising real estate prices also contributed to the real estate bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.[264][233][265]
- As part of the housing and credit booms, the number of mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors to invest in the U.S. housing market. As housing prices declined, these investors reported significant losses.[266]
- Falling prices also resulted in homes worth less than the mortgage loans, providing borrowers with a financial incentive to enter foreclosure. Foreclosure levels were elevated until early 2014.[267] drained significant wealth from consumers, losing up to $4.2 trillion[268] Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally.[266]
- Financialization – the increased use of leverage in the financial system.
- Financial institutions such as investment banks and hedge funds, as well as certain, differently regulated banks, assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or losses.[269] These losses affected the ability of financial institutions to lend, slowing economic activity.
- Some critics contend that government mandates forced banks to extend loans to borrowers previously considered uncreditworthy, leading to increasingly lax underwriting standards and high mortgage approval rates.[270][250][271][251] These, in turn, led to an increase in the number of homebuyers, which drove up housing prices. This appreciation in value led many homeowners to borrow against the equity in their homes as an apparent windfall, leading to over-leveraging.
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2007–2008 financial crisis - Wikipedia
en.wikipedia.org
Anyone with half a brain can see the situation is a bit more complex than Todd's version.
Todd's answer to the cause of the 2008 recession is "The government did it", ignoring all of the following:
I didn't ignore any of that. I've said it before and I'll say it again, there is plenty of blame to go around. Only idiots blame it all on capitalist greed while ignoring governmental idiocy and incompetence.
"widespread failures in financial regulation and supervision", including the Federal Reserve's failure
ill preparation and inconsistent action by government and key policy makers
the failure of regulators
Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria.
The Community Reinvestment Act (CRA),[244] a 1977 U.S. federal law designed to help low- and moderate-income Americans get mortgage loans required banks to grant mortgages to higher risk families.
Reckless lending by lenders such as Bank of America's Countrywide Financial unit was increasingly incentivized and even mandated by government regulation.
This may have caused Fannie Mae and Freddie Mac to lose market share and to respond by lowering their own standards.[253]
Mortgage guarantees by Fannie Mae and Freddie Mac, quasi-government agencies, which purchased many subprime loan securitizations.[254] The implicit guarantee by the U.S. federal government created a moral hazard and contributed to a glut of risky lending.
Government policies that encouraged home ownership, providing easier access to loans for subprime borrowers;
Easy availability of credit in the US, fueled by large inflows of foreign funds
Some critics contend that government mandates forced banks to extend loans to borrowers previously considered uncreditworthy,
Those are some excellent points in your link.
Private greed, fear of missing out, crowd following, easy money from the Fed, investors looking for higher yields by buying "safe" MBS.
By themselves, was that enough to cause a big bubble? Maybe.
Add to that all the government incentives, mandates, failures etc.
and we all see what happened.