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Financial Crisis

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PostPosted: Sat Feb 20, 2016 6:52 pm    Post subject: Financial Crisis Reply with quote


It may be too late to raise growth and tax revenue through expansionary fiscal policy, because of faster growth with a rising Fed Funds Rate.

The labor market may continue to strengthen, wages may rise faster, commodity prices, including oil, may stay low, and much of the new regulations may have been absorbed.

I think, raising the minimum wage, while reducing regulations and taxes on the middle class and smaller businesses will facilitate growth.


The top economic priority should’ve been to close the output gap, to reduce spending on the unemployed and raise tax revenue. Unfortunately, that wasn’t the top economic priority.

We’ve had a huge inflow of dirt poor immigrants, over the past three decades, and their children are relatively poor. So, subsequent generations may become poorer with greater income inequality. Prices were reduced and profits rose. And, there was more “entitlement” spending and more progressive taxes, particularly on the middle class.


In the 2000s, Congress should’ve tightened lending standards in the housing market, placed some restrictions on student loans, and cut taxes to fund trade deficits. It was poor government economic policies and too little tax relief. Moreover, there was diminished marginal utility in some sectors, e.g. cheap foreign goods.


Why should the government be supporting lenders to loan tens or hundreds of thousands of dollars to marginal borrowers, and force financial institutions to spread the risk on a global scale, which can potentially cause a severe financial crisis?


Baffling, so? Congress can tighten or ease lending standards whenever it wants.

You’re incorrect. The financial sector responded rationally to what a naïve Congress imposed.

And, the politicians/lawyers in Congress didn’t understand taxpayers would ultimately pay.

Dodd and Frank were the two most responsible for creating too easy lending before the crisis and too tight lending after the crisis, causing a boom/bust.


Baffling, it’s not risky when everyone knows the government will bail you out.

It’s risky when the government fails to bail you out (see after Lehman).

You’d say anything to protect a few powerful politicians, like an entire sector or industry was irrational.

I’ve shown you the evidence before like “By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable,”” and stated before, the percentage of “affordable” loans should’ve been gradually reduced starting in 2004 rather than raised.


Baffling, you still believe the effect was the cause.

The government facilitated the growth of mortgage-backed securities, because it accelerated high risk mortgage loans over several years before the economy peaked.

Consequently, that led to a plunge in homeownership and millions of homeowners falling underwater.

Sure, investors made high returns from high risk securities, until the music stopped, which Lehman found out.

It’s ridiculous to blame an entire industry for taking advantage of a naive government policy that was forced upon them, and made people a lot of money, although that’s what politicians did.


Baffling, you’ve been in complete denial and now at the point of creating ridiculous fantasies, just like the politicians, who created the crisis, and shifted blame. I suspect, you’re just trying to fool the new people, who visit this site. I’ve shown you lots of evidence before. Here’s what your own link above says:

“The financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans—half of all mortgages in the United States—which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path—fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high risk residential mortgages—the great financial crisis of 2008 would never have occurred.”


The main report was about the effects, not the root cause, which I generally don’t dispute.

It should be noted, an economic downturn, in itself, would cause loan defaults and delinquencies.

However, the government created, encouraged, supported, or ignored, so many high risk loans, it made the crisis much worse.


Baffling, you’re in fantasy land believing government didn’t promote millions of high risk home loans. From Business Insider:

“The government pushed for greater mortgage securitization in an effort to increase CRA (Community Reinvestment Act) lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of “affordable” mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you can’t blame securitization without coming back around to the CRA.

What’s more, an enormous amount of subprime loans were made to lower-income borrowers target by the CRA. Forty-five percent of subprime loan originations went to lower-income borrowers or borrowers in lowerr-income neighborhoods in 2005 and 2006, where the foreclosures are almost twice as likely. This suggests that the kind of low income borrowers targeted by the CRA are likely to be responsible for the majority of subprime foreclosures.”


Anyway Baffling, I don’t know what you’re complaining about. If you were a low-income minority in the mid-2000s tired of paying rent and you saw a house for $200,000, that you like, you could get a loan and move in.

Maybe, you got ripped off on a CDO.

You could at least acknowledge the government was helping the poor for the “greater good” instead of being in complete denial, while lenders took advantage of taxpayers.


You’re not familiar with government accounting.

“Two-thirds of these (high-risk) mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations.”


Baffling, obviously, you didn’t understand the accounting gimmicks, like the one I posted above. And, you provide smoke screens rather than the actual political objective that led to the housing crisis.

The political objective was to replace the Nasdaq bubble with a housing bubble. And, Congress blew up the bubble after 2004, to create more low income lending, rather than tighten lending standards to prevent the crisis.


Breaking-up large banks is not a solution to a systematic problem created by government, i.e. too-big-to-fail. The market will determine how much a bank, an automaker, or any other public firm is worth.

Banks will find ways to make money, even if it means diversifying risk on a global scale. However, banks don’t make risky loans. An economic downturn makes sound loans risky. So, some regulation is needed.

And, banks don’t need encouragement by government to make risky loans, e.g. in the housing market of the 2000s.


Without a giant government social program, Congress believed it didn’t have to pay for, good luck getting a loan with no job, no income, no down payment, and marginal credit.


Baffling, you remain in denial. I guess, you believe it was a massive right-wing conspiracy “the private market” “made very poor risky decisions without consideration of future consequences.”

Michael Bloomberg, former Mayor of New York City:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.

Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”



peak, you again are speaking from a fantasy land. why not simply acknowledge the obvious, the private market made very, very poor decisions on risk, and it turned out to have devastating consequences. you sound like rubio in the debate, whose robotic canned response is “the government made them do it.” these businesses made very poor decisions without consideration of future consequences. you seem to forget many of these soured loans were private sector originations, not fannie and freddie. “government social program” is simply an excuse for reckless business decisions.



That’s an overrated factor. It exaggerates the role of the principle-agent problem in the financial crisis, and ignores market demand for increasingly aggressive lending by non-depository institutions. The more important questions are why the market demand became so optimistic with respect to housing, and why did that optimism turn so sour?



if American legislation is to blame, why did contagion spread to Europe?



Is America in a bubble?

Why not spread to Europe?

Europeans want easy money too.


Julian Silk:

I agree with all of this, but would put it slightly differently, and would appreciate seeing your opinion. In my versión, it is the banks taking the government guarantee that Fannie Mae and Freddie Mac implicitly provided as a guarantee housing loans could not go bad, because the government wouldn’t default. The notion that housing prices could never come down was an application of this belief. So it’s not size of the Banks, implicitly, so much as what they do.

“The Big Short”, which shows the financial intermediaries not doing the due diligence on the CDOs and the like, because the loans were commoditized into something that was guaranteed, seems an application of this as well. If you take all the assumptions behind the CDOs at face value, there is nothing to prevent a CDO of car loans, or businesws equipment loans. But it has never happened because there is no government guarantee for these.


Menzie Chinn:

Julian Silk: The problem with CDOs as structured is that they were inappropriately rated AAA, and this meant that the capital held against them was too low. This would probably have been true even w/o the government guarantee, as long as the rating system was gamed to attribute overly-low risk to top tranche CDO’s. (What securities lost most value? I think it was private label).

I agree moral hazard was in play due to implicit guarantees given to Fannie and Freddie. Thank goodness there were restrictions on the types of mortgages that the two GSEs could securitize. However, I do not see any proposal by any candidate (please correct me if I am wrong) about privatizing either agency.

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