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Who used price control mechanisms to hold interest rates low while the housing boom spiraled out of control? (The Fed.) Who provided a loan buyback program ince

Who used price control mechanisms to hold interest rates low while the housing boom spiraled out of control? (The Fed.) Who provided a loan buyback program incentivizing bad loans? (Fannie and Freddie, pseudo government agencies.) The 'popular wisdom' that the banks all simultaneously started acting differently, and against everyone's best interests, including their own, is foolish at best. This is a nice write-up of the real estate crash, which underlies the recession as a whole: https://admin.fee.org/files/doclib/houseunclesambuiltbooklet.pdf https://admin.fee.org/files/doclib/houseunclesambuiltbooklet...

toomuchtodo 9y ago
Bad loans were not incentivized by GSEs; it was rating agencies who were rating junk at AAA standards.
- cmiles74 9y ago
  At the behest of the banks, who were looking to repackage product.
  - deleted 9y ago
    [deleted]
- magila 9y ago
  The ratings agencies, and their importance in the financial system, have been shaped in large part by government policy. https://en.wikipedia.org/wiki/Nationally_recognized_statistical_rating_organization https://en.wikipedia.org/wiki/Nationally_recognized_statisti...
jbooth 9y ago
We had a housing crash that somehow led to hundreds of trillions of dollars missing. Add up the value of every house in the USA. They're not hundreds of trillions of dollars. The banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out.
- dcgudeman 9y ago
  Hundreds of trillions? The entire wealth of the US is around 88 trillion (https://www.wsj.com/articles/americans-total-wealth-hits-record-according-to-federal-reserve-report-1465488231 https://www.wsj.com/articles/americans-total-wealth-hits-rec...).
- lend000 9y ago
  > The banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out. You will have to be a little more specific to discredit the economic mal-incentives created by the government and to spin that simple narrative. And the amount of paper wealth lost in '07-08 was actually about 10 trillion, not "hundreds of trillions."
  - jbooth 9y ago
    The point stands at 10 trillion, thanks for the correction. I'm not sure what you want with more specificity. You're familiar with the situation, right? You want a book report on what happened? Yes, the government exists, and no, a few extra loans for black people didn't crash the housing market. This was a problem between ratings agencies, salespeople, and financial instrument inventors.
    - lend000 9y ago
      There's no reason a person that does not work in finance should have a deep understanding of the US financial system, but don't try to spin a narrative without knowing what you're talking about. You should read the article I initially posted before replying to it.
      - jbooth 9y ago
        The article you linked is way, way out of the mainstream on the topic. That's fine and all but turning around and accusing the conventional wisdom of 'lacking a deep understanding' is a bit much.
AnimalMuppet 9y ago
Don't forget Barney Frank, who required banks to do mortgages to less-qualified borrowers "to help the poor".
colorint 9y ago
>the banks started acting differently, and against everyone's best interests, including their own But that's the rub: "a bank" is just some paperwork, it doesn't have interests. The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses. When those loans inevitably go into default, the loss isn't on the executive, it's on the corporate account and, by extension, the shareholders. Of course, when it later becomes possible to securitize the loans and foist them off onto institutional investors (who think "mortgages, what could be safer?"), the game becomes about origination.
- lend000 9y ago
  > "a bank" is just some paperwork No, a bank is typically a corporation with the shareholders you mentioned, who have immense interests in the longevity of the company. > The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses. How do they raise short term profits? The bank just gave away X dollars for the loan. The profits are only projected on paper, and they assume a given interest profit on inflation and compared to the nominal interest rate. So don't you see how holding artificially low interest rates would distort this process? And don't you see how government programs to repackage and subsidize parts of this debt would incentivize more of it? What I truly don't understand is how so many people believe that the banking sector all of a sudden got greedier than usual in concert. There is a reason that their actions follow economic incentives, and the negative ones are largely following stimuli introduced by the government in the early 2000's.
  - colorint 9y ago
    A corporation is also paperwork, which also does not have interests. Only people have interests. Shareholders have interests, but they're usually not privy to the actual inner workings of a business. I mean, even ultra-libertarian finance recognizes this, under the name "principal-agent problem." Banks don't give away money when lending; the situation is a lot subtler than that. First, consider that, when you deposit money in your bank account, you're loaning the money to the bank. From the bank's perspective, you've given them cash, which is an asset, and they've given you the right to demand the cash back, which is a liability. This being a loan, they pay you a small amount of interest. Second, consider that you can create liabilities on yourself ex nihilo just by writing "I owe you $5" on a piece of paper and signing it, which creates an asset for the person you give the IOU to. Third, consider that, if you're incredibly trustworthy, these assets that you created are marketable---and if you've got the backing of the Federal Reserve and the FDIC, then those assets will trade at par. With all this in mind, it should now be clear that, when a bank creates a loan, it creates the assets for the loan by creating corresponding liabilities on itself, which is, new deposit account balances. That is, the bank creates "bank money" (deposits) ex nihilo when issuing a loan. The borrower creates a corresponding asset/liability pair, in the form of the loan itself (i.e., similarly to a bond), which is an asset of the bank. In this situation, losses only occur if the loan goes into default and gets written off the bank's balance sheet. As long as the loan is in good standing, the created deposits (liability) are in balance with the created debt instrument (asset). On the other hand, the loan being paid off reduces deposits (reduction of liabilities), of which the principal component is used to write down the loan (reduction of assets) while the interest component is profit (increase in capital). There are more layers to this (what if the deposits are cashed out, or transferred to another bank?), and answers to those questions concern the actual role of the Fed, but suffice it to say, those questions don't refute this discussion. So this is why a bank executive would do this. As long as the loan remains in good standing, it generates profits. Once the loan defaults, those profits are wiped out by the write-down of the remaining debt (reduction in assets), and while the bank can foreclose (take over the house, which increases assets), that usually isn't to the bank's favor. But that window, where profits go up and before the losses are realized, is a gold mine for corrupt executives. This game was played before, which was called the Savings and Loan Crisis. The thing that changed was deregulation: the S&L debacle got people sent to prison, while the latest resurgence of liar's loans came in an era of notoriously ineffective banking oversight.

toomuchtodo 9y ago

Bad loans were not incentivized by GSEs; it was rating agencies who were rating junk at AAA standards.

cmiles74 9y ago
At the behest of the banks, who were looking to repackage product.
- deleted 9y ago
  [deleted]
magila 9y ago
The ratings agencies, and their importance in the financial system, have been shaped in large part by government policy. https://en.wikipedia.org/wiki/Nationally_recognized_statistical_rating_organization https://en.wikipedia.org/wiki/Nationally_recognized_statisti...

jbooth 9y ago

We had a housing crash that somehow led to hundreds of trillions of dollars missing. Add up the value of every house in the USA. They're not hundreds of trillions of dollars. The banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out.

dcgudeman 9y ago
Hundreds of trillions? The entire wealth of the US is around 88 trillion (https://www.wsj.com/articles/americans-total-wealth-hits-record-according-to-federal-reserve-report-1465488231 https://www.wsj.com/articles/americans-total-wealth-hits-rec...).
lend000 9y ago
> The banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out. You will have to be a little more specific to discredit the economic mal-incentives created by the government and to spin that simple narrative. And the amount of paper wealth lost in '07-08 was actually about 10 trillion, not "hundreds of trillions."
- jbooth 9y ago
  The point stands at 10 trillion, thanks for the correction. I'm not sure what you want with more specificity. You're familiar with the situation, right? You want a book report on what happened? Yes, the government exists, and no, a few extra loans for black people didn't crash the housing market. This was a problem between ratings agencies, salespeople, and financial instrument inventors.
  - lend000 9y ago
    There's no reason a person that does not work in finance should have a deep understanding of the US financial system, but don't try to spin a narrative without knowing what you're talking about. You should read the article I initially posted before replying to it.
    - jbooth 9y ago
      The article you linked is way, way out of the mainstream on the topic. That's fine and all but turning around and accusing the conventional wisdom of 'lacking a deep understanding' is a bit much.

AnimalMuppet 9y ago

Don't forget Barney Frank, who required banks to do mortgages to less-qualified borrowers "to help the poor".

colorint 9y ago

>the banks started acting differently, and against everyone's best interests, including their own But that's the rub: "a bank" is just some paperwork, it doesn't have interests. The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses. When those loans inevitably go into default, the loss isn't on the executive, it's on the corporate account and, by extension, the shareholders. Of course, when it later becomes possible to securitize the loans and foist them off onto institutional investors (who think "mortgages, what could be safer?"), the game becomes about origination.

lend000 9y ago
> "a bank" is just some paperwork No, a bank is typically a corporation with the shareholders you mentioned, who have immense interests in the longevity of the company. > The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses. How do they raise short term profits? The bank just gave away X dollars for the loan. The profits are only projected on paper, and they assume a given interest profit on inflation and compared to the nominal interest rate. So don't you see how holding artificially low interest rates would distort this process? And don't you see how government programs to repackage and subsidize parts of this debt would incentivize more of it? What I truly don't understand is how so many people believe that the banking sector all of a sudden got greedier than usual in concert. There is a reason that their actions follow economic incentives, and the negative ones are largely following stimuli introduced by the government in the early 2000's.
- colorint 9y ago
  A corporation is also paperwork, which also does not have interests. Only people have interests. Shareholders have interests, but they're usually not privy to the actual inner workings of a business. I mean, even ultra-libertarian finance recognizes this, under the name "principal-agent problem." Banks don't give away money when lending; the situation is a lot subtler than that. First, consider that, when you deposit money in your bank account, you're loaning the money to the bank. From the bank's perspective, you've given them cash, which is an asset, and they've given you the right to demand the cash back, which is a liability. This being a loan, they pay you a small amount of interest. Second, consider that you can create liabilities on yourself ex nihilo just by writing "I owe you $5" on a piece of paper and signing it, which creates an asset for the person you give the IOU to. Third, consider that, if you're incredibly trustworthy, these assets that you created are marketable---and if you've got the backing of the Federal Reserve and the FDIC, then those assets will trade at par. With all this in mind, it should now be clear that, when a bank creates a loan, it creates the assets for the loan by creating corresponding liabilities on itself, which is, new deposit account balances. That is, the bank creates "bank money" (deposits) ex nihilo when issuing a loan. The borrower creates a corresponding asset/liability pair, in the form of the loan itself (i.e., similarly to a bond), which is an asset of the bank. In this situation, losses only occur if the loan goes into default and gets written off the bank's balance sheet. As long as the loan is in good standing, the created deposits (liability) are in balance with the created debt instrument (asset). On the other hand, the loan being paid off reduces deposits (reduction of liabilities), of which the principal component is used to write down the loan (reduction of assets) while the interest component is profit (increase in capital). There are more layers to this (what if the deposits are cashed out, or transferred to another bank?), and answers to those questions concern the actual role of the Fed, but suffice it to say, those questions don't refute this discussion. So this is why a bank executive would do this. As long as the loan remains in good standing, it generates profits. Once the loan defaults, those profits are wiped out by the write-down of the remaining debt (reduction in assets), and while the bank can foreclose (take over the house, which increases assets), that usually isn't to the bank's favor. But that window, where profits go up and before the losses are realized, is a gold mine for corrupt executives. This game was played before, which was called the Savings and Loan Crisis. The thing that changed was deregulation: the S&L debacle got people sent to prison, while the latest resurgence of liar's loans came in an era of notoriously ineffective banking oversight.