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This is almost a seperate argument. If they didn't get a bailout, we'd all be paying. Markets would crash, FDIC would be drowning (and we wouldn't get that money back) and the U.S. economy would look 3x worse than it is now.
Quite an oversimplification, obviously.
It was an unholy combination of the banks and mortgage brokers, Fannie and Freddie that gobbled up whatever crap they threw at them, The wall street giants that repackaged the crap for Fannie and freddie as CDO's, and the rating agencies and insurance companies that were all in on the scam.
The stupid belief that all you had to do in real estate to make money was to get your loan closed fooled them all from top to bottom.
This is almost a seperate argument. If they didn't get a bailout, we'd all be paying. Markets would crash, FDIC would be drowning (and we wouldn't get that money back) and the U.S. economy would look 3x worse than it is now.
"minorities and welfare recipients have ruined everything"
and are to be criminalized and discarded as garbage.
Hedge funds have mostly been exonerated in the typical narrative of the financial crisis, which concentrates blame on some combination of mortgage lenders, investment banks and government agencies.
A new paper by Yale professors Gary Gorton and Guillermo Ordonez, however, may indicate that hedge funds and other well-informed, aggressive traders played a much more important role in triggering the crises than is widely understood.The paper, led “Collateral Crises,” examines the important role short-term collateralized debt plays in the financial system. In other papers Gorton has argued that short-term collateralized lending between banks and money market funds is a form of private money within the banking system. It is the medium of exchange within this 'private' system. In order for collateralized debt to perform this function, the debt needs to be “information insensitive.” Which is to say, the ins utions lending the money need to be able to implicitly trust quality of the collateral without investigating to make sure it is sound—largely because a money market fund doesn't have the resources to investigate the quality of every triple-A rated mortgage-backed security that backs up its short-term loan to a bank.
But how can a money market fund avoid being given the worst quality collateral? Here the complexity of the collateral comes in to play. In order to prevent borrowers from engaging in adverse selection—i.e. giving the money market fund junk collateral—the collateral must be complex enough that it isn't profitable for anyone to produce enough information about the debt to carry out any kind of predatory behavior.
In short, predatory trading must be too expensive to work.
“In other words, optimal collateral would resemble a complicated, structured, claim on housing or land, e.g., a mortgage-backed security,” the authors argue.
Mortgage-backed securities were complex and opaque enough that they made ideal collateral. A party on one side of a collateralized loan could count on the fact that the other side was just as ignorant about the collateral as he was.
Although Gorton and Ordonez do not go into the collateralized debt obligation market, it is easy to extend the argument to CDOs. The higher the level of complexity, the more expensive it would be to engage in predatory collateralization. A CDO would be even more “information insensitive” than a MBS. And a CDO-squared would be even more so.http://www.cnbc.com/id/46191784The trouble is that the lack of information means that borrowing occurs against good and bad collateral. This leads to a credit boom, with “blissful ignorance” leading to increased consumption and more lending. Over time, ignorance about the quality of collateral and the financial health of the lenders and borrowers becomes more and more pronounced.
It would stand to reason that a type of Gresham’s law would develop in this kind of situation. Bad collateral would drive out good collateral. Once someone starts to figure out how to affordably detect collateral quality, he would begin to hoard high quality collateral and trade with only low quality collateral. Or, even more aggressively, he might begin to explore ways to short the low quality collateral.
Gorton and Ordonez talk about “aggregate shocks” inducing the production of information about credit quality. But I’m not sure we need any shock at all. All we need is a few guys to see an opportunity to decide to trade on the decay of information about the collateral.
In other words, you just need a few guys at hedge funds or on trading desks at investment banks to find a way to acquire or produce information about credit quality. They might not even need accurate information—just a hunch will do.
The housing market had to burst at some time. I blame the people who drove the prices of houses artificially high... the consumers...
who gave them the money to do so and failed to tally the risk?
That should have been their loss. They shouldn't have been bailed out.
consumers couldn't buy too many houses without banks lending to builders and buyers basically blindfolded. just sayin. bubbles are overdetermined in more than one direction usually.
The myth live on
"I blame the people who drove the prices of houses artificially high... the consumers..."
You Lie
The Fed/Greenspan extremely low interest rates after the dot-com bubble popped were an attempt to lessen the post-bubble dip, but were continued too long, and enabled the low-interest rate mortgages. Greenspan himself admits he ed up by trusting the financial sector to Do The Right Thing.
The other factor was that the Repugs' conciliation-rammed-through 2001 tax cuts, and the estate tax cuts, etc of 2003 freed up $100Bs in private, non-bank/shadow-bank lending capital that went looking for high returns (sub-prime mortgage rates). Those lenders like Indy Mac and Nationwide wrote millions of stated-income/liars loans in contravention of FHA lending regulations.
Just applying those regulations would have prevented the bubble.
As always with WC, it's Human-Americans that up, not the ins utions.
The myth that it's simple rather than complex? Agree 100%
not either/or, but both/and...
and...
etc..
good thing everyone else here is an expert
well, we can at least try to follow the news. this place is still called SpursTALK, isn't it?
it's hard for me to see why any particular disdain should be reserved for trying to understand things we probably can't understand, when basically all time spent in this subforum is time presumptively wasted.
I can understand why it would bother a doctor of economics, but very few of us are that. Are we all to hold our tongues on that account?
not at all. proceed.
lol disdaining idle talk on a discussion board
never in my life!
So they were suppose to be our nanny's?
not at all.
due diligence in evaluating risk is a normal fiduciary/professional responsibility. banks do it to cover their own asses, not ours. in this case they not only failed to, they threw caution to the wind.
Last edited by Winehole23; 02-01-2012 at 10:03 AM.
"So they were suppose to be our nanny's"
they were/are supposed to qualify the borrower as able to pay the mortgage, like two years of tax returns, bank statements, property tax stubs, etc, etc. The banks and lenders know perfectly, exhaustively how to weed out liars and unqualifieds, they just didn't do it.
btw, CRA borrowers weren't sup-prime and had/have no more defaults than non-CRA borrowers, killing another Yoni,etc lie.
Last edited by boutons_deux; 02-01-2012 at 11:43 AM.
I'm not saying the banks didn't have fault in their own financial problems. I'm saying it's the buyers who drove prices up unreasonable. The banks were stupid in thinking these houses would also retain value, not having a problem with foreclosing on stupid people. The banks should have seen the bubble would burst, but somehow didn't.
"buyers who drove prices up unreasonable"
the background was the historically low Greenspan interest rates and many $100Bs in investor funds looking for high returns. That created the feeding frenzy, not the borrowers.
If Greenspan had raised interest rates, no frenzy.
If dubya hadn't handed $100Bs in tax cuts to the wealthy, no so much greedy money in investors' pockets as chum.
http://www.bloomberg.com/news/2012-0...-defeated.htmlMoney-market mutual funds, an alternative to bank accounts for individuals and companies, will test the resolve of the U.S. Federal Reserve and Treasury Department to prevent another financial crisis after the $2.6 trillion industry successfully lobbied against more regulation by the Securities and Exchange Commission.
Fed Governor Daniel Tarullo has said the central bank could tighten rules on banks’ borrowing from money-market funds, and Boston Fed President Eric Rosengren has said officials have the option to force banks to back their money funds with capital. The Fed and the Treasury could also work through the Financial Stability Oversight Council, a new regulatory panel formed under the Dodd-Frank Act, to seize oversight of money funds from the SEC and grant that power to the Fed.
“There’s real unanimity in the bank regulatory arena about the need to do something about money-market funds,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an interview. “What the Fed can do, and I think will try to, is put the funds back in a much more limited corner, by isolating them from integration with the banking sector.”
SEC Chairman Mary Schapiro this week abandoned a four-year effort to adopt tougher rules for money funds as three fellow commissioners said they wouldn’t support her proposal. The announcement marks a victory for the fund industry, which had lobbied against the plan.
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