posted by dsk on October 7th, 2008 at 8:30AM
>And it was wrong for consumers to live beyond their means and take on debt they can't afford.
I can see this happening.
>So it was wrong for the lenders to give out risky loans.
But why did they do it? Lenders were giving out 20, 30, 40 year mortgages to 'subprime' (i.e. high-risk borrowers). The only way you can rationally justify those loans, under a free-market, is if house price would continue to rise at the level that they did forever. Nobody was that stupid, not the internet peanut gallery who saw this as a bubble years ago, and certainly not the financial guys making millions forecasting markets, nor the banks who put up their own money. Rick, you can not convince me people were that stupid. When it comes to their own money, people are smart. When it comes to billions of dollars of their own money they are very very smart.
Everyone knew that the incredible rise of house-prices was going to drop dramatically within a few years. Even without this, real-estate is cyclical, it goes up and it goes down. So why would a bank issue a 40 year mortgage to a person who has little chance of paying it back, and with the knowledge that house price will stop rising at the level that they did (and even fall). There had to have bee a massive market distortion for this to happen. Banks which operate billions of dollars are not that stupid - and you're trying to tell me that they are.
This market distortion could only have been caused by government.
I've read a few articles on this. Here's two of them:
http://www.investors.com/...=306370789279709
http://www.bloomberg.com/...sid=aSKSoiNbnQY0
The articles may or may not have gotten the whole story. They may or may not be right. But what they say makes infinitely more sense to me, than what you're trying to convince me of (that is, entities with billions of dollars whose sole reason for existing is to lend money, in fact don't know how to do it. That the right market strategy for them to make money is in the hands of a random software developer from Seattle).
I can see this happening.
>So it was wrong for the lenders to give out risky loans.
But why did they do it? Lenders were giving out 20, 30, 40 year mortgages to 'subprime' (i.e. high-risk borrowers). The only way you can rationally justify those loans, under a free-market, is if house price would continue to rise at the level that they did forever. Nobody was that stupid, not the internet peanut gallery who saw this as a bubble years ago, and certainly not the financial guys making millions forecasting markets, nor the banks who put up their own money. Rick, you can not convince me people were that stupid. When it comes to their own money, people are smart. When it comes to billions of dollars of their own money they are very very smart.
Everyone knew that the incredible rise of house-prices was going to drop dramatically within a few years. Even without this, real-estate is cyclical, it goes up and it goes down. So why would a bank issue a 40 year mortgage to a person who has little chance of paying it back, and with the knowledge that house price will stop rising at the level that they did (and even fall). There had to have bee a massive market distortion for this to happen. Banks which operate billions of dollars are not that stupid - and you're trying to tell me that they are.
This market distortion could only have been caused by government.
I've read a few articles on this. Here's two of them:
http://www.investors.com/...=306370789279709
http://www.bloomberg.com/...sid=aSKSoiNbnQY0
The articles may or may not have gotten the whole story. They may or may not be right. But what they say makes infinitely more sense to me, than what you're trying to convince me of (that is, entities with billions of dollars whose sole reason for existing is to lend money, in fact don't know how to do it. That the right market strategy for them to make money is in the hands of a random software developer from Seattle).
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posted by rick on October 9th, 2008 at 5:09AM
Some random researching led me to http://www.letxa.com/articles/25 this article.
What are financial derivatives? What are Credit Default Swaps (CDS)? They are sort of like insurance against loans, except they are not regulated as insurance, so they are more like bets against the borrower being able to repay the loans. But since they are simply contracts between entities, there is no regulation to ensure that the sellers of CDSs actually have a capital reserve in case the borrower defaults on a loan. Also, as the article points out, they can sell multiple CDSs on a single loan, even to entities that aren't lending any money. Knowing this, a series of mortgage defaults can trigger an avalanche of claims that can overwhelm banks that sell these derivatives. |
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posted by rick on October 7th, 2008 at 8:09PM
No argument here. That's consistent with some articles I've come across. Specifically, http://query.nytimes.com/...on=&pagewanted=1 this one about Fannie Mae responding to pressure from the Clinton Administration to lend to low-income borrowers.
I'll bring up another http://www.nytimes.com/20...n01NhrLJAjQLHx5V w&oref=slogin article though. The investment banks successfully pushed to remove regulation that dictated how much money they had to keep in reserve to buffer against losses from failed investments. So the banks have to accept some of the blame as well.
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