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The Real Cost of the 2008 Financial Crisis

301 points by okket 8y ago

nafey 8y ago
But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.
- freddie_mercury 8y ago
  This comment reads like a hot-take based solely on the subject without reading the article because you don't really engage substantively with any of the nuances the article talks about. As such, I'm not sure it really contributes as much to the discussion as if you did engage substantively with the details of the article. For example: Even if there was no alternative, that doesn't mean a clear understanding of the costs & downstream consequences is a bad thing. Even if some kind of bailout was necessary, bailouts can take many forms. Do you think the bailout chosen was the best form? There wasn't, actually, one bailout. There were many ad hoc choices made along the way. Why was Lehman allowed to fail? It was purely an ideological choice; the Fed clearly had the ability to save it, they just underestimated the pain it would. Why were swaps extended to some countries but not others? Why didn't the ECB help out Hungary or even Austria? For that matter, why was the Federal Reserve acting as a global lender of last resort without telling anyone, not even Congress. (It required a Freedom of Information lawsuit that went all the way to the Supreme Court for the Federal Reserve to turn over details on the full scope of their swaps with other central banks.) Maybe the bailouts should have happened exactly as they did but the optics & politics should have been done in a more transparent fashion? But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you.
  - chimeracoder 8y ago
    > But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you. You are entirely correct, but unfortunately, I suspect that this is inevitable. Discussions of economic policy on Hacker News almost always end up in this same place.
- brobdingnagians 8y ago
  We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be. It would be far better to have economic corrections along the way with little dips than to keep the house of cards going on worse and worse foundations until it all falls apart in a large depression. Little distortions can be corrected in the short term, but keeping those distortions in the economy long enough can make some very bad effects in the long term. So, we may get the worst of both worlds. Even if the government had simply paid off everyones' mortgages, it would be better for the average person; but instead they transferred the approximate amount required to do exactly that to the banks directly in bailouts. Which means people got stuck with bill for the bailouts [from taxes] and the mortgages; which is rather unfair to the average Joe.
  - thecopy 8y ago
    > We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be. How so?
    - TheOtherHobbes 8y ago
      The economy has become an absolutely horrific place for most of the population. Financial security is an unrealisable dream for most workers. Bailouts saved the economy for the proverbial 1%, who are doing wonderfully. But no one else is. (I'm including many HN readers in the 1% because they work in a privileged and relatively highly paid part of the job market.) When the mountain of debt finally implodes, it's going to be far worse than 2008. This is very different to - say - the 50s and 60s - when ordinary working people could accumulate significant assets by working hard and saving.
      - pas 8y ago
        A no-bailout crash would have hurt the 99% even more. We all can kumbayaa about how the Fed enriched the asset holders, and how unfair that is, but they did what they were able to, while Congress did nothing. (The Obama stimulus was too small, and no reform followed, the 2010 Dodd-Frank Act was a mere correction of something that should have been there all along.) The mountain of debt imploded in 2008, and since then financial regulation is very much systemic stress test based. The next crisis will be at least different. Bankers can just sit back, relax, and watch as the world burns around them.
- simplemts 8y ago
  Debt is worse now than in 2008. We haven't / didn't escape anything, just passed it on to future generation(s). Future generations will be paying the bill for mistakes of their parents.
  - wiz21c 8y ago
    As a parent, I fail to see exactly how I'm guilty of anything here. I used the banks because I had to, I listened to their advice because I can't possibly become an expert on their subjects, etc. I even voted for people who want to regulate them. I don't play on the stock exchange (pension funds do, with my money). I didn't do anything wrong. My children will pay for the mess a few made by pushing unreasonable expectations and by not listening to people like me. There are some fights that must be fought by others. Now if you can provide me with decent alternatives, I'd be glad to here from them. But remember, I have to live in the system.
    - icu 8y ago
      I'm with you on decent alternatives of which I think a non-Fed based monetary system as well as the end of crony capitalism (not capitalism itself) would probably be a decent alternative. However, the biggest problem is the education of the wider public and garnering the democratic will of the people to make necessary changes. Economics, for all its show of being empirical is really just politics, and politics is really just philosophy. In the daily struggle, hustle and bustle of life, few have the time and desire to learn these subjects, let alone pay the price to apply themselves politically to make the necessary changes. Are you willing to? I'm not... at least for now, willing to do anything. Charity starts at home and before I contemplate doing anything political I must ensure my family is well off. However if you are willing, and able to do something, I strongly encourage you to.
      - pas 8y ago
        > a non-Fed based monetary system Could you elaborate on that please? > Economics, for all its show of being empirical is really just politics, and politics is really just philosophy. That's very-very incorrect. Economics is about models, and understanding the past, and maybe trying to peek at the future. But at its core, it's about modeling. And it helps us understand what works and what doesn't. Politics should be about giving the parameters to those models. And philosophy (logic) is about finding the inconsistencies in our politics. And as you say, nowadays people don't care about logic, they care about their beliefs. Even if they are inconsistent. They are too busy to notice that they are wrong.
- teekert 8y ago
  Icelands seems to be doing well, just Google Iceland and banks, for example: [0] [0] https://www.bloomberg.com/news/features/2016-03-31/welcome-to-iceland-where-bad-bankers-go-to-prison https://www.bloomberg.com/news/features/2016-03-31/welcome-t...
- sampo 8y ago
  The Wikipedia article has a list of proposed alternatives. https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008#Alternative_proposals https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati... Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back. https://en.wikipedia.org/wiki/Swedish_banking_rescue https://en.wikipedia.org/wiki/Swedish_banking_rescue
  - pas 8y ago
    > After the crisis, the government starts selling their shares, getting at least part of the money back. Wasn't TARP repaid?
  - m_st 8y ago
    To my (amateur) understanding, that's what they did in Switzerland and it turned out pretty well for the national bank. Personally I also made some smallish stock investments during that time. I only regret that I didn't invest just a little more... the profit is/was huge.
  - chimeracoder 8y ago
    > Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back. You are basically describing TARP, which is what happened (and netted over $11 billion in returns).
- michaelt 8y ago
  But what was the alternative to the bailouts? The bailouts, but engaging with the narrative of a rigged game and applying substantial and highly visible reforms to prevent another financial crisis. I mean, when your ship hits rocks you gotta patch the holes so you don't drown - but then you also gotta stop the captain navigating you into rocks. We did an OK job at the first, but did practically nothing about the second.
  - pas 8y ago
    There were "reforms" (or at least important fixes, like the stress test based financial sector oversight, and other stuff enacted in 2010 as the Dodd-Frank Act), but visibility was and still is shit. (And now Dodd-Frank is being reversed bit-by-bit, but again, nobody really cares, which is not surprising when there are new disasters every day in US politics.) The Obama stimulus was too small, and it simply took too much time for the economy to recover.
    - michaelt 8y ago
      There were reforms to address banks not holding enough cash - but there wasn't anything to address the misaligned incentives and short-term-ism that rewarded people for mispricing assets.
      - pas 8y ago
        > misaligned incentives and short-term-ism that rewarded people for mispricing assets. Yes, absolutely, agreed. But this is the classic problem of not pricing in externalities, like every kind of pollution (climate change), delayed effect on human health, and various second- and higher order consequences. Legislation should demand better goals (sustainability, health friendliness, inequality-decreasing). As long as tax incentives are broken, we'll continue to see the race for the quarterly profit.
- tokyodude 8y ago
  I haven't a clue about the whether the bailouts were important or not. What I feel like I would have liked is for the bailouts to happen AND the top 20 to 100 people from every financial institution to have gone to prison for at least 10 years. The president of Goldman Sachs, the president (or ex-President) of Lehman, etc... etc... What it seems like from the outside is they screwed the world over and completely got away with it on our dime. I don't know if my impression is right or what would convince me the fact that there seemed to be no repercussions for their actions is somehow the right thing. Just saying that's how it seems. I don't believe for a second those people were irreplaceable as some have suggested. People are replaced at giant companies all the time and the companies keep on functioning. If we need one example Steve Jobs death certainly shows that. Could pick any other CEO that left or was shoved out or past away.
  - oh_sigh 8y ago
    Did those people do anything wrong or were they just essentially incompetent or not adequate for the job? Bonus clawbacks after government bailout are one thing but jailing people who probably didn't do anything criminal is a dangerous precedent.
    - s3krit 8y ago
      There exists the concept of criminal negligence. I would say being in the wrong and being incompetent are not mutually exclusive.
    - heavenlyblue 8y ago
      If they are incompetent and they have consciously taken the positions they hold - then they are liable. Finance isn't "revolutionary" tech - there isn't much you can do that requires high risks and actually rewards you in the long run. I would wonder what you'd say about a general who didn't know that using chemical warfare is a possible tribunal scenario. We have a similar legal case in maritime law, where captains can be sued for anything that happens on their ships. If you can't take on that role and it's liability - then you shouldn't be the captain.
- imtringued 8y ago
  If there was no bailout then even people who were paying their mortgages on time would be affected. The bank needs money now so it will have to sell some of it's assets such as the house you're living in but 5 years later it is probably swimming in money.The government effectively acts as a very large insurance company by giving the bank a loan.
  - cjg 8y ago
    The bank doesn't own your house. The asset it has is the mortgage on your house. The bank could could sell the mortgage, but the only impact to you is that your mortgage payments go to someone else.
  - dragonwriter 8y ago
    > If there was no bailout then even people who were paying their mortgages on time would be affected. People who were paying their mortgages were effected by the general economic downturn, collapse of home values, and credit crunch, for some parts of which the bank bailouts were an ineffective remedy. (Bailing out troubled homeowners probably would have been more effective.) > The bank needs money now so it will have to sell some of it's assets such as the house you're living in Unless you are renting from a bank, it's not going to sell your house, because it doesn't own it; particularly, that's not how most mortgages work (there are some that are callable early where that would be a theoretical possibility, but they are almost never used for owner-occupied residential property.) > The government effectively acts as a very large insurance company by giving the bank a loan. No, it was acting as a very large bank. An insurance company would have recieved premiums in advance and not given loans, but just paid out money.
- pjc50 8y ago
  Actual bankruptcy could have resulted in a chain of collapses that might have left large areas of the Western economy without functional banking for weeks or even months. But the bailout should have had a lot more "never again" in it, rather than "how can we get back to the old normal of bubble finance as quickly as possible".
  - pas 8y ago
    > a lot more "never again" What do you have in mind? Could you explain this?
    - pjc50 8y ago
      Ideally when there is a sufficiently large disaster an inquiry is held which suggests measures to prevent the disaster, and these measures are implemented and enforced. Air safety is closest to the ideal on this. Politics and political economy is often very far from it, especially when it's possible to profit from a disaster. Part of the explicit aim of the bailout was to preserve the finance industry status quo, one of very unequal incomes and widespread effects on people by forces outside their control. In the long run this has turned into a sort of formless populist anger that's been successfully transmuted into racial hatred, but there is a real and persistent sense of injustice that needs to be addressed. Turning this into specific plans is too big a question for me. All that has really been done to prevent it happening again has been a raising of European regulatory capital requirements.
      - pas 8y ago
        > Politics and political economy is often very far from it, especially when it's possible to profit from a disaster. Sure, but financial services oversight is not that far from air safety (NTSB, FAA). The SEC, FDIC, CFTC, FSOC (established in 2010 via the Dodd-Frank Act), the Fed, and a few others are rather technical agencies. If they have enough power to request certain kinds of data from financial institutions and fine them if they are deemed not secure/stable/compliant enough, they can and will prevent any similar upcoming crisis. The problem is, of course, that rules are gradually rolled back due to politics, and the oversight agencies understaffed and underbudgeted. Thus they are not proactive, they are reactive, and there was nothing they could have done in 2008 when it was already too late. (So the Fed stepped in with QE, and Congress with TARP, and with ARRA - but that was too small, so recovery took too long.) That said, yes, absolutely the incentives aligned toward preserving the status quo. Which is not necessarily wrong, as doing something radical was likely unhelpful. What needs to be done is clear (better effective proactive expert oversight) but it's politicized. Just like the FCC regulation with the TelComms industry. And so on.
- andrepd 8y ago
  The bailouts are controversial, but it's the bailouts AND the complete absence of criminal responsibility that's inexcusable. It is well known and documented that the financial crisis was no accident; everybody who headed the financial services industry to the state it was in did so knowingly, knowing full well the inevitable consequences, but not giving a damn because the arrangement let them to become handsomely wealthy, beyond our imagination. They masked everything with a mixture of stacking the regulators with their ilk, stacking the universities with their ilk (economics as a field has zero credibility to me since I discovered how many theses "greenlighting" CDOs were written in clear conflict of interest), stacking the government with their ilk. Then while we (working class) were dealing with the fallout, tithing part of our work to reimburse their losses, not ONE of those criminals (with the blood of millions across the globe on their hands, make no mistake) was prosecuted or in any way made to answer for their actions. Much to the contrary, they went on enjoying the same mind-boggling luxurious elite lifestyle they always did. It's feudalism with extra steps.
  - dhimes 8y ago
    complete absence of criminal responsibility that's inexcusable This is what gets me- and they were even given relative anonymity in the press so they could duck some social repercussions of their horrid behavior. I want Brad Pitt to carve a dollar sign on their foreheads. tithing part of our work to reimburse their losses I'm stealing this.
  - asta42 8y ago
    And not only is there absence of criminal responsibility, but the regulation that made banking stable for 100 years and was taken away in 90s (like the Glass-Steagall Act) cannot be put back in place. Seems like people that caused the GFC are the ones in charge of 'fixing' it.
    - rhino369 8y ago
      Glass Steagal didn’t make banking stable. Most countries (including those who weathered the storm much better than the US) don’t have a similar law. In fact, marrying investment and commercial banks during the crisis was a key part of stopping a banking collapse. And the whole crash started by investment only banks failing.
- KarlRutnick 8y ago
  Both US and EU should have done the same as Norwegian Government did during our banking crisis in the 90s. Let the banks fail, stocks to zero, no bailout of investors or paper/derivatives holders etc... then nationalize their brick and mortar operation so the real economy keeps functioning
  - pas 8y ago
    Much of the economy is not brick and mortar anymore. And wasn't in 2008 either. Sure, Congress could have created an Uncle Sam bank, but that wouldn't have solved anything. Stocks, investors, bondholders are important, because they underlie much of US pension plans, social security account, and so on. And even if the day to day operations could have been somehow continued, someone would had to arbitrate what is okay to save, and what is okay to let it perish. And that would have been a much harder and basically impossible task.
  - seppin 8y ago
    Norway is a small country, and in the 90s had very little exposure elsewhere. What you are implying is a meltdown of global assets, to prove a point.
- UncleSlacky 8y ago
  Nationalising the banks, perhaps? Some were, at least partially, like RBS.
- hndamien 8y ago
  Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset.
  - chimeracoder 8y ago
    > Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset. Are you unaware that TARP happened?
    - hndamien 8y ago
      I'm aware, and it was a joke. "purchasing the illiquid MBS, and through that, reducing the potential losses of the institutions that owned them. Later, it was modified slightly to allow the government to buy equity stakes in banks and other financial institutions" Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left. No financial mercy should be shown to the institutions that put themselves in that position. Nobody has ever shed a tear for anybody else financially squeezed, and in this case it would have been good for society and fitting capitalistic justice. Instead, we pumped their bags, regained the value of equity and then had the debts repaid from the equity that was saved. Its a nice story, we got paid back, but the reality is, the Gov/ people should have made out like bandits while those bankers were kicked to the curb. This is how capitalism is supposed to work.
      - chimeracoder 8y ago
        > Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left. I don't think you understand how TARP worked if you think that's even remotely applicable as an analogy > This is how capitalism is supposed to work. Maybe you should learn a little more about the system you claim to be critiquing, so your criticisms don't fall so completely flat.
- apo 8y ago
  The alternative was to let capitalism administer its punishment to reckless speculators. Instead, they were made whole again at the cost of years worth of future demand pulled forward by easy money policies. Worse, the sense that "we made it across" has caused way too many people to jump back on the risk/debt wagon with gleeful abandon. The crisis wasn't resolved, but merely postponed.
- pjmorris 8y ago
  If we're going to be capitalistic, apply Bagehot's dictum (from 1873) "in times of financial crisis central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need" [0] I feel like, jail or no, the financial executives who got us into the mess - and who haven't really gotten us out yet - ought to be former financial executives that are working as, e.g., baristas. Instead, a decision was made that the bloated mortgages that had been issued, would be turned from bad collateral into 'sound collateral', keeping asset prices high. It's like resolving Ford's problems with exploding gas tanks back in the 70's by arranging to buy all the bad cars. [0] https://en.wikipedia.org/wiki/Walter_Bagehot https://en.wikipedia.org/wiki/Walter_Bagehot
  - danharaj 8y ago
    We shouldn't get any banking advice from anyone from the 1800's.
    - pjmorris 8y ago
      You should weigh any advice on its merits.
    - pjmorris 8y ago
      If you're seeking to broaden your perspective, you might find "Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis", written by a director at the Fed, to be worth your time. [0] https://www.federalreserve.gov/newsevents/speech/madigan20090821a.htmhttps://www.federalreserve.gov/newsevents/speech/madigan20090821a.htm https://www.federalreserve.gov/newsevents/speech/madigan2009...
    - seppin 8y ago
      That's like saying we shouldn't pay attention to the lessons of the great depression because it was in the 1930s.
      - danharaj 8y ago
- paulddraper 8y ago
  > But what was the alternative to the bailouts? Nothing. > Another depression? Recession/depression/whatever, that's exactly what we had. At that stage of things, it was essentially unavoidable. > I feel we made it across fairly well. The billions and billions and billions spent by the federal government didn't come from nowhere. They came from taxes (which didn't increase) or deficit financing (which did increase), thus crowding out the investment market and making the recovery much longer.
- InclinedPlane 8y ago
  False dichotomy. The problem was letting it get that bad to start with, and letting any single bank get so huge. If banks had been kept smaller and limited from taking on such crazy risks then it would have been far easier to just let some banks go out of business and let the market adjust itself. Additionally, the fact that people in the street got screwed while hedge funds got their profit margins protected by tax payers is something that shouldn't have been allowed to happen. Much of the pain for the top 1% from the crash was socialized away and absorbed by tax payers and the working class. There should have been much more financial assistance to the working class.
- tootie 8y ago
  Less generous bailouts for one. A lot of creditors were just straight up reimbursed for making bad investments with no penalty. Having them be wiped out would be a disaster, but asking to accept losses in exchange for not being wiped out would have been a good compromise. The other option, which we didn't have at the time but do now, is for the federal government to take over failing banks to keep them afloat long enough to be dismantled. It's called orderly liquidation.
- andrewla 8y ago
  Late to the discussion, but the alternative to the bailouts was to not bailout, and let the problems unwind. As mortgages were sold at firesale prices to attempt to remain solvent, it would be in the interest of the purchasers to lower the effective rates on the mortgages, because they could still book a profit at the lower rates. The net effect would have been to cripple most of the national banks to the point where they would have to be liquidated and purchased piecemeal by smaller banks and local credit unions that managed to behave responsibly during the crisis. The FDIC already exists and has a mandate to draw unlimited funds to make customers whole up to the limits. This is already priced in. As to what would happen as companies failed to make payroll as their banking arrangements failed, it's likely that there would have been problems along the way, but the existing credit markets, especially short-term consumer credit (i.e. credit cards) would have allowed most households to stay solvent while the banks reorganized around the new reality. I'm far from convinced that there would have been a depression -- for the most part I believe that it would have self-corrected on an individual or company basis except for the finance sector, which created the crisis in the first place.
- howard941 8y ago
  I believe too many made out fairly well and by not wiping out the shareholders we've created a gaping maw of a moral hazard. Corporate governance is in tatters, has been since roughly the 80s when the goal became quarterly earnings at all costs. Wiping out the shareholders when bailing out would have incentivized the next set of shareholders to police their investment. Now the only disincentives are executive compensation and some additional express limits on dividends.
icantdrive55 8y ago
"Other analysts point to the dangers of lofty stock prices and rising indebtedness among non-financial corporations, many of which have been borrowing heavily to finance stock buybacks and other ventures. A recent McKinsey study showed that in the past ten years the amount of outstanding corporate debt has tripled across the world. In the United States, the study noted, almost two-thirds of non-financial debt is rated as junk or one notch above junk. Roughly three trillion dollars of this questionable credit is set to mature in the next five years. If the economy falters, or if interest rates rise sharply, many corporations may find themselves in the position of new mortgage holders a decade ago—unable to repay or roll over their debts." 1. This has me concerned. 2. I almost feel like some of these 1 percenters are gambling. They know they are the only ones getting these loans, at low very interest rates. Interest rates that have been to low for to long. (Yes--give me a 5% cd. I'm not investing in this bloated market.) 3. And the thesis of the article is wether Trump, and the GOP will bailout these boys if they screw things up? Of course the GOP will take care of their own. Trump will go along with them if he's around? He will probally blame our wonderful social safety net. That will be his mantra if we have a crisis. "Those freeloading food spamp people are ruling America, and the Mexicans of course? Kelly Ann, "It's called the Snap something me Capitan?"
vinceguidry 8y ago
The takeaway I got from reading the article to the end does not match the impression given by the headline, though the headline isn't exactly wrong, per se. The conclusion given is that the mechanisms put in place to avoid another recession work just fine but that the political will to use them has been dried up by the political retrenchment of the right. That said, if you're at all curious, you should read the article, if not the book it's summarizing, because it's really really good. One thing that had escaped me was the fact that America's bailout of its own banks and QE were both drops in the bucket compared to the massive amount of liquidity the Fed injected into the global financial system, all of which was paid back just like the bailouts. On a personal level, this allays my fears of another recession. The Anglosphere will wake up one day as if it was dreaming, and the political upwelling that put Trump into office will fade back down into insignificance. Another recession at this stage will only accelerate that process, provide some juicy real estate opportunities to those positioned well enough to take advantage, and we'll be back to normal within a few years to a decade. I strongly suspect that Trump won't stand in the way of another global firefighting operation conducted by the Fed should it become necessary, he's way too cynical to not do something that works. We should avoid 'othering' the alt-right if we can. These are Americans like you and me, as scared and uncertain as all of us, momentarily in the spotlight and proud of it, but ultimately decent human beings just like the rest of us.
- Marazan 8y ago
  The alt-right are ficking Nazis. Say it with me: Nazis are bad. Sorry if that hurts their feelings.
- wuschel 8y ago
  Just had to look up what you mean by 'alt-right': Quoting Wikipedia: "The alt-right, or alternative right, is a loosely-connected and somewhat ill-defined grouping of white supremacists/white nationalists, neo-Nazis, neo-fascists, neo-Confederates, Holocaust deniers, and other far-right fringe hate groups." This does not sound like the average citizen to me, but rather the extreme part of the spectrum of values. I'd rather be with Popper's position on a valiant, liberal society, and will not accept people who stand against human dignity, protection of minorities, and the lessons from history. There are no excuses for doing this.
sidstling 8y ago
I don't think I agree with the article. Not from a European perspective. I'm Danish and we've had anti-establishment parties all my life on both the left and right side of the political spectrum. The populist rightwingers most similar to Trump and the teaparty saw their dawn in 1998 where they got elected with 7.4% of the votes. In 2001, three months after 9/11, they recived 12%. In 2005 it was 13.3%. In 2007, before the financial crisis they got 13.9%. In 2011 they got 12.3% and then in 2015 they got their current 21.1%. If you look at the data, our right wing populist party saw a small decline following the financial crisis. They saw two major increases, one following 9/11 and one at the height of the European migration crisis but at this point our economy had fully recovered. I think it's some what like this around much of Europe. Back in 2001 we got critiqued by the European Council because we elected a racist party to government, but Austria recieved much sterner critique at the same time. In Eastern Europe the local economies have seen huge increases along with right-wing populism. Greece, who took the worst of the financial crisis, turned to the intellectual left, not populism. I think the article is probably on point about America. The tea-party saw it's dawn in the years following the financial crisis. You had the occupy movement and now you have the alt-right. We didn't really see similar movements in Europe though. I guess we do today, and I think we're unfortunately receiving a lot of bad influence from America. I mean, I can go on the Danish subreddit right now and see people complain about the MSM. Which makes no sense, because our media-landscape is completely different from the American. On facebook we have anti-vaxxer and flathearter groups, mostly using sources like infowars or breitbart because we simply don't have nonsense-media equivalents in my country. At least not yet. So I guess, in a way the article isn't wrong, but all the nonsense is happening in an economy that's mostly better than before 2007.
- freddie_mercury 8y ago
  Tooze makes the case that Fidesz's victory in Hungary in 2010 was a direct result of the terms of the IMF bailout. That the supremacy of the Law & Justice party in Poland was a result of the crisis. That the fall of Tymoshenko and Yushchenko -- tarred with the pains of the crisi -- in Ukraine led to rehabilitation of Yanukovych and the subsequent Russian invasion of Crimea. In Greece the populists didn't take power in the same ways but it is disingenuous to pretend they didn't exist and exert power as a result of the crisis. To call New Democracy -- the party that took power after the crisis -- "not populist" is a mis-reading of history, I think. They campaigned on fear of illegal immigrants, after all. And the second biggest party is SYRIZA -- which is definitely populist -- and which didn't even exist until the crisis destroyed PASOK. And by 2015 SYRIZA's clearly populist platform was enough to take it power in Greece. One of the themes of Tooze's book isn't that the consequences were immediate. Sure, it took 6-7 years for SYRIZA to get to power in Greece. But that is still a direct consequence of the crisis.
nicktelford 8y ago
While a generally fascinating piece that connects together the events in the American and European financial and political systems, it shouldn't be understated how much of an effect the refugee crisis is having on European politics, which can be attributed largely to the "Arab Spring"; itself largely a consequence of the 2008 financial crisis.
- m_st 8y ago
  Could you elaborate the link of the Arab Spring to the 2008 financial crisis? I can't think of a link and neither does the English Wikipedia article.
  - thdxr 8y ago
    Probably referring to the narrative of rising commodity costs driving revolt. Not a very substantiated view as commodity costs in the area have been worse in the not to distant past
    - hef19898 8y ago
      I think that is always realitve. Sure, in absolute numbers that might be true (I didn't check), in relative terms not so much if I remember well. At least in some countries affected by the Arab Spring people started to demonstrate against increasing bread Prices. That and general uncertainity combined did not cause the revolts but definetly a factor. What thfollowed was a bad handling of the crisis by the Western powers. And with all the convenient dictators, viable road-blocks for everyone trying to get to Europe, in North Africa gone already existing refugees had open venues to Europe. Add to that all the People trying to get out of the civil wars that followed after the revolts in certain countries and you can explain a big part of the so called refugee crisis. Unfortunately this crisis, despite being basically over in Terms of numbers, is playing an ever increasing roll in European politics. And I personally don't like the results a single bit, not every country is realizing what voting for righ-wing populists means like the French did. Germany certainlly isn't.
      - 8y ago
bitxbit 8y ago
I experienced the financial crisis first hand on Wall Street, a place fraught with people who pretended to know the ins and outs of risks. It was also a brutally honest place when it came to winners and losers. But that changed when Hank Paulson, then the Secretary of Treasury, knelt down on camera and begged Nancy Pelosi for what was effectively a blank check. Wall Street could not face reality when it was its turn to be the loser. I believe the real cost of 2008 is moral hazard. They destroyed the fundamental values of capitalism and I can't help but feel that we are all still pretending.
- rwc 8y ago
  Wow I don’t remember this kneeling down on camera. Can you link?
  - shshhdhs 8y ago
    I don’t recall him kneeling. I think the commentator was exaggerating
    - bitxbit 8y ago
      No, I am not exaggerating. https://www.nytimes.com/2008/09/26/business/26bailout.html https://www.nytimes.com/2008/09/26/business/26bailout.html [“I didn’t know I was going to be the referee for an internal G.O.P. ideological civil war,” Mr. Frank said, according to The A.P.Thursday, in the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr., literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.] There are some pictures of it as well but appears most of them have been taken down over the years.
      - EADGBE 8y ago
        > There are some pictures of it as well but appears most of them have been taken down over the years. Convenient
      - 8y ago
ThomPete 8y ago
The best explanation I have heard of the financial crisis was in the book "The End of Alchemy: Money, Banking and the Future of the Global Economy" by the former head of Bank of England. It makes the convincing case that there is no real single place to point fingers and that the crash was the logical consequence of people all doing the "right thing" I can highly recommend it as it also takes a historical view of money and what it is and how it's been used historically. A very interesting book. So yeah there is a real cost of 2008 but there is also real opportunities. These things can't be measured until decades later. However, the anti establishment movement didn't rise because of the financial crisis it rose because of globalization and the alliance between politicians and large international organizations to take away opportunities from its own citizens and start giving it to countries like China after the fall of Soviet Union. Mixed with that and the liberal social welfare system in Europe and PC culture which claimed any critical voice was facist, racist etc. That's why the antiestablishment came about not because of 2008 and wallstreet.
- dhimes 8y ago
  Without reading the book or even TFA, I'll comment on the concept of everybody doing the "right thing" leading to bad outcomes. I have a hunch that this is a pretty universal law, and the only way to mitigate it is through regulations that ban some of those "right things." I think that honest, moral players welcome good regulations because it keeps them from having to go down a slippery slope.
  - pc86 8y ago
    I think most people are fine with regulations when they feel they're evenly applied, or that it's unlikely their competitors will be able to break them without consequence. It's when they feel that regulations will affect them more than others or that their competitors will be able to ignore them while they won't that people start getting loud.
  - nostrademons 8y ago
    The other way to mitigate it is to incentivize some of the players in the system to ferret out and report wrongdoing on the part of other players. Think of short-sellers in a market: they can profit handsomely by identifying fraud or irrational exuberance, taking a position opposite it, and then loudly reporting the fraud so everyone knows about it. The legal system is also setup like this, as is the U.S. government: there's no one entity that regulates the U.S. government, but the government itself consists of a set of interlocking institutions, each of which has leverage to prevent the others from becoming too powerful.
RickJWagner 8y ago
As long as there have been economies there have been periodic upheavals. I don't think that can be changed. What can be changed is how the next meltdown/booming economy will affect our own personal finances. It's a life skill, one that should be given more attention in school.
- EADGBE 8y ago
  > What can be changed is how the next meltdown/booming economy will affect our own personal finances. It's a life skill, one that should be given more attention in school. It's sad that this is the first mention of this in the thread. Ever since graduating high school and finding myself in college for a useless degree, during the Great Recession and trying to come away from it intact; I've been a big proponent of financial literacy K-12, living within your means, having a "plan" and not being afraid to wait for it (read: college isn't for everyone, and alternatives exist; also taking a year or two before you start is sometimes a great idea), and knowing what a budget is and how to use it. Overspending and under-making will always lead to catastrophes when the well runs dry. Trusting the parents to do this on their own time can't seriously be more important that some of the superfluous credits taken before graduating high school.
- freddie_mercury 8y ago
  Australia has gone 27 years without a recession. There's a big difference between "sure, we'll never totally get rid of them" and "do you want them every 5 years or every 50 years?" or "do you want 25% unemployment or 10% unemployment?" It is overly fatalistic to pretend they can't be changed in any way whatsoever and there's no difference between different periodicities and scale of upheavals.
ptero 8y ago
Just a personal observation / data point as a lot of folks everywhere are saying "put bankers in prison" any time they recall 2008 crisis. This is from the US, no idea how things played out in other countries: Government shares a significant portion of the blame for this crisis. It required raising affordability of homes (i.e., loans) for lower income families. They might as well legislate away entropy, friction or gravity. Banks cannot lower home selling prices, so instead they had to become "creative" with loans, for example lend at 0% for the first 5 years. And lend more than today's purchase price (creating strong demand for inflated assessments) so some of that extra cash can be used to pay mortgage for a few years. Five years later the music stops unless you can refinance again and kick that can down the road. This insane game of musical chairs, where banks generate toxic loans, securitize them and throw them at someone else, had to end in tears. Everyone understood this. But faced with the regulation to raise affordability, what exactly should the lenders have done? They HAD to use at least X% of new loans to low income families. Sadly, this is yet another case of good intentions (helping lower income families) implemented as a clumsy regulation that ends up hurting people you wanted to help. My 2c.
- ghostly_s 8y ago
  What was the vehicle by which US gov't 'required raising affordability of homes'?
  - TimJYoung 8y ago
    Yeah, I want to know that, also. My understanding is that anything explicitly backed by the government (Fannie Mae) was your standard 30-year mortgage with the normal requirements. The interest-only loans, variable-rate loans, etc. were all originated through the brokers like Countrywide and packaged/sold as securities.
    - hueving 8y ago
      "In 2006, Fannie and Freddie insured 70% of all subprime loans so they needed to keep these loans viable" https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae_and_Freddie_Mac https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...
Lavery 8y ago
In a lot of ways, the current expression of the tech sector (certainly from a valuation standpoint) and the startup scene particularly feels like a consequence of the response to the financial crisis. Critics of the Fed spent years loudly worrying about how the various QE programs were going to drive up inflation. Of course, this didn't materialize, at least as measured in the usual basket of goods and services. What did happen was a broad and sustained inflation in financial assets / collapse in yields that drove everyone further out along the risk curve, with VC being the furthest point out. The tie in to inflation is darkly amusing the because the classic precursor to inflation is wage growth. Broadly, there hasn't been any--except in the tech sector, which has seen a veritable explosion in pay from where it was a decade ago.
- fzzzy 8y ago
  I'd just like to point out that the tech pay explosion likely has a lot to do with this: https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_Litigation https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_L...
  - Lavery 8y ago
    No question that played a role, but it's not like the settlement happened in 2011 and then salaries immediately corrected to the current levels and stayed. This has been a steady climb upwards.
- deleted 8y ago
  [deleted]
- pitaj 8y ago
  Business Cycle Theory explains exactly this. When interest rates are too low, people go elsewhere for returns, resulting in malinvestment. What it doesn't do is predict when the crash will happen, or say how to spot which investments are bad.
victor106 8y ago
Ray Dalio just published an excellent free book on this. You can download it here https://www.principles.com/A-Template-For-Understanding-Big-Debt-Crises-By-Ray-Dalio.pdf https://www.principles.com/A-Template-For-Understanding-Big-...
WorkUntilRetire 8y ago
Did Lehman run index funds? What happened to their customers? What would happen today if a firm like Schwab or Fidelity suddenly went bankrupt? Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to zero, wiping out customer’s retirement?
- craftyguy 8y ago
  > Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to zero, wiping out customer’s retirement? I'm no expert, but I wouldn't think so if those funds track the indexes, since the index 'values' are the collective values of the stocks they represent. On the other hand, SWPPX, etc would no longer be maintained. That's a really good question though, I hope someone with more knowledge comments!
- akashshah87 8y ago
  Not an exact answer to your question, but see this post on the Bogleheads wiki regarding Vanguard - https://www.bogleheads.org/wiki/Vanguard_safety https://www.bogleheads.org/wiki/Vanguard_safety
tomcam 8y ago
It seems like, relatively speaking, Iceland sailed through this by acting like capitalists: they let the loans fail, consumers took a haircut, and bankers were sent to jail. Is this a worthwhile comparison or were there fundamental differences that I (very likely) don't understand?
- howard941 8y ago
  Here in the US we're told the banks were to big too fail, the banksters too powerful to jail.
- aero142 8y ago
  I love the idea, but this really doesn't dispute the central point. Iceland is an economy with a $24B GDP that is smaller than Vermont's, the lowest US state. The claim is that letting large US banks fail is a systemic risk that causes cascading failure. Using Iceland as an example doesn't dispute that point.
  - tomcam 8y ago
    But the citizens of Iceland did in fact lose a ton of money. I think maybe it does dispute the point? (Arguing more from ignorance here.)
augustus2010 8y ago
I just wonder why China doesn't have a economic crisis like the EU or the US. Is their system more superior than us?
- moate 8y ago
  Based on different economics. Even the more socialist leaning EU nations aren't dealing with straight up Communism. China's big problem right now is actually that they brought so many people out of poverty that they're focused on controlling inflation. Also, they have a state controlled media that reports only what the state wants. Helps smooth over the rough edges with praise of their great and successful system.
  - chillacy 8y ago
    China’s system is probably better characterized as “State Capitalism” than communism, since the workers don’t own the means of production.
    - moate 8y ago
      We could just go with "Russian Communism" as well and call it a day. Your point is valid, it's not proper Communism as Marx envisioned.
      - chillacy 8y ago
        For sure, Russian Communism after capitalist reforms of the 80s. There's definitely still a lot of top-down planning in China, but there also aren't people lining up for allocated food.
- zjaffee 8y ago
  Because people there still view homes as a worthy investment, their housing bubble never collapsed even though home values are some of the least affordable in the world (even when rent is considered affordable).
- 8y ago
dba7dba 8y ago
The aftermath produced a lost decade for European economies and helped lead to the rise of anti-establishment political movements here and abroad. I was visiting family in Hawaii during the 1st Christmas after the financial crisis started. Guess what? The beach chairs around the pools at the Waikiki area hotels were packed with guests. Every single one of them. Note I went because family is there, and stayed with them. Granted, some guests were probably there because they already had reservations made before the shtf moment came. Or maybe some there were just vacationing at Waikiki as they downgraded their vacation plan to more moderate level, instead of going to Maldives or something. But the point is the rich were far less impacted by the crisis. And when the crisis slowly faded away, the rich swooped in and accumulated more wealth. Like all the foreclosed homes in US being bought up by rich folks to be flipped, or worse, bought to be rented out. The rich were barely impacted by the crisis, and the crisis just turned into an opportunity for the rich to accumulate more wealth more easily.
8bitsrule 8y ago
IMO the article falls far short of telling 'The Real Cost' for the people of the US. It's pretty damned superficial, and far from packed with observations (let alone empirical ones). A look at Cassidy's CV tells me why.

301 points by okket 8y ago

nafey 8y ago

But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.

freddie_mercury 8y ago
This comment reads like a hot-take based solely on the subject without reading the article because you don't really engage substantively with any of the nuances the article talks about. As such, I'm not sure it really contributes as much to the discussion as if you did engage substantively with the details of the article. For example: Even if there was no alternative, that doesn't mean a clear understanding of the costs & downstream consequences is a bad thing. Even if some kind of bailout was necessary, bailouts can take many forms. Do you think the bailout chosen was the best form? There wasn't, actually, one bailout. There were many ad hoc choices made along the way. Why was Lehman allowed to fail? It was purely an ideological choice; the Fed clearly had the ability to save it, they just underestimated the pain it would. Why were swaps extended to some countries but not others? Why didn't the ECB help out Hungary or even Austria? For that matter, why was the Federal Reserve acting as a global lender of last resort without telling anyone, not even Congress. (It required a Freedom of Information lawsuit that went all the way to the Supreme Court for the Federal Reserve to turn over details on the full scope of their swaps with other central banks.) Maybe the bailouts should have happened exactly as they did but the optics & politics should have been done in a more transparent fashion? But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you.
- chimeracoder 8y ago
  > But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you. You are entirely correct, but unfortunately, I suspect that this is inevitable. Discussions of economic policy on Hacker News almost always end up in this same place.
brobdingnagians 8y ago
We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be. It would be far better to have economic corrections along the way with little dips than to keep the house of cards going on worse and worse foundations until it all falls apart in a large depression. Little distortions can be corrected in the short term, but keeping those distortions in the economy long enough can make some very bad effects in the long term. So, we may get the worst of both worlds. Even if the government had simply paid off everyones' mortgages, it would be better for the average person; but instead they transferred the approximate amount required to do exactly that to the banks directly in bailouts. Which means people got stuck with bill for the bailouts [from taxes] and the mortgages; which is rather unfair to the average Joe.
- thecopy 8y ago
  > We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be. How so?
  - TheOtherHobbes 8y ago
    The economy has become an absolutely horrific place for most of the population. Financial security is an unrealisable dream for most workers. Bailouts saved the economy for the proverbial 1%, who are doing wonderfully. But no one else is. (I'm including many HN readers in the 1% because they work in a privileged and relatively highly paid part of the job market.) When the mountain of debt finally implodes, it's going to be far worse than 2008. This is very different to - say - the 50s and 60s - when ordinary working people could accumulate significant assets by working hard and saving.
    - pas 8y ago
      A no-bailout crash would have hurt the 99% even more. We all can kumbayaa about how the Fed enriched the asset holders, and how unfair that is, but they did what they were able to, while Congress did nothing. (The Obama stimulus was too small, and no reform followed, the 2010 Dodd-Frank Act was a mere correction of something that should have been there all along.) The mountain of debt imploded in 2008, and since then financial regulation is very much systemic stress test based. The next crisis will be at least different. Bankers can just sit back, relax, and watch as the world burns around them.
simplemts 8y ago
Debt is worse now than in 2008. We haven't / didn't escape anything, just passed it on to future generation(s). Future generations will be paying the bill for mistakes of their parents.
- wiz21c 8y ago
  As a parent, I fail to see exactly how I'm guilty of anything here. I used the banks because I had to, I listened to their advice because I can't possibly become an expert on their subjects, etc. I even voted for people who want to regulate them. I don't play on the stock exchange (pension funds do, with my money). I didn't do anything wrong. My children will pay for the mess a few made by pushing unreasonable expectations and by not listening to people like me. There are some fights that must be fought by others. Now if you can provide me with decent alternatives, I'd be glad to here from them. But remember, I have to live in the system.
  - icu 8y ago
    I'm with you on decent alternatives of which I think a non-Fed based monetary system as well as the end of crony capitalism (not capitalism itself) would probably be a decent alternative. However, the biggest problem is the education of the wider public and garnering the democratic will of the people to make necessary changes. Economics, for all its show of being empirical is really just politics, and politics is really just philosophy. In the daily struggle, hustle and bustle of life, few have the time and desire to learn these subjects, let alone pay the price to apply themselves politically to make the necessary changes. Are you willing to? I'm not... at least for now, willing to do anything. Charity starts at home and before I contemplate doing anything political I must ensure my family is well off. However if you are willing, and able to do something, I strongly encourage you to.
    - pas 8y ago
      > a non-Fed based monetary system Could you elaborate on that please? > Economics, for all its show of being empirical is really just politics, and politics is really just philosophy. That's very-very incorrect. Economics is about models, and understanding the past, and maybe trying to peek at the future. But at its core, it's about modeling. And it helps us understand what works and what doesn't. Politics should be about giving the parameters to those models. And philosophy (logic) is about finding the inconsistencies in our politics. And as you say, nowadays people don't care about logic, they care about their beliefs. Even if they are inconsistent. They are too busy to notice that they are wrong.
teekert 8y ago
Icelands seems to be doing well, just Google Iceland and banks, for example: [0] [0] https://www.bloomberg.com/news/features/2016-03-31/welcome-to-iceland-where-bad-bankers-go-to-prison https://www.bloomberg.com/news/features/2016-03-31/welcome-t...
sampo 8y ago
The Wikipedia article has a list of proposed alternatives. https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008#Alternative_proposals https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati... Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back. https://en.wikipedia.org/wiki/Swedish_banking_rescue https://en.wikipedia.org/wiki/Swedish_banking_rescue
- pas 8y ago
  > After the crisis, the government starts selling their shares, getting at least part of the money back. Wasn't TARP repaid?
- m_st 8y ago
  To my (amateur) understanding, that's what they did in Switzerland and it turned out pretty well for the national bank. Personally I also made some smallish stock investments during that time. I only regret that I didn't invest just a little more... the profit is/was huge.
- chimeracoder 8y ago
  > Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back. You are basically describing TARP, which is what happened (and netted over $11 billion in returns).
michaelt 8y ago
But what was the alternative to the bailouts? The bailouts, but engaging with the narrative of a rigged game and applying substantial and highly visible reforms to prevent another financial crisis. I mean, when your ship hits rocks you gotta patch the holes so you don't drown - but then you also gotta stop the captain navigating you into rocks. We did an OK job at the first, but did practically nothing about the second.
- pas 8y ago
  There were "reforms" (or at least important fixes, like the stress test based financial sector oversight, and other stuff enacted in 2010 as the Dodd-Frank Act), but visibility was and still is shit. (And now Dodd-Frank is being reversed bit-by-bit, but again, nobody really cares, which is not surprising when there are new disasters every day in US politics.) The Obama stimulus was too small, and it simply took too much time for the economy to recover.
  - michaelt 8y ago
    There were reforms to address banks not holding enough cash - but there wasn't anything to address the misaligned incentives and short-term-ism that rewarded people for mispricing assets.
    - pas 8y ago
      > misaligned incentives and short-term-ism that rewarded people for mispricing assets. Yes, absolutely, agreed. But this is the classic problem of not pricing in externalities, like every kind of pollution (climate change), delayed effect on human health, and various second- and higher order consequences. Legislation should demand better goals (sustainability, health friendliness, inequality-decreasing). As long as tax incentives are broken, we'll continue to see the race for the quarterly profit.
tokyodude 8y ago
I haven't a clue about the whether the bailouts were important or not. What I feel like I would have liked is for the bailouts to happen AND the top 20 to 100 people from every financial institution to have gone to prison for at least 10 years. The president of Goldman Sachs, the president (or ex-President) of Lehman, etc... etc... What it seems like from the outside is they screwed the world over and completely got away with it on our dime. I don't know if my impression is right or what would convince me the fact that there seemed to be no repercussions for their actions is somehow the right thing. Just saying that's how it seems. I don't believe for a second those people were irreplaceable as some have suggested. People are replaced at giant companies all the time and the companies keep on functioning. If we need one example Steve Jobs death certainly shows that. Could pick any other CEO that left or was shoved out or past away.
- oh_sigh 8y ago
  Did those people do anything wrong or were they just essentially incompetent or not adequate for the job? Bonus clawbacks after government bailout are one thing but jailing people who probably didn't do anything criminal is a dangerous precedent.
  - s3krit 8y ago
    There exists the concept of criminal negligence. I would say being in the wrong and being incompetent are not mutually exclusive.
  - heavenlyblue 8y ago
    If they are incompetent and they have consciously taken the positions they hold - then they are liable. Finance isn't "revolutionary" tech - there isn't much you can do that requires high risks and actually rewards you in the long run. I would wonder what you'd say about a general who didn't know that using chemical warfare is a possible tribunal scenario. We have a similar legal case in maritime law, where captains can be sued for anything that happens on their ships. If you can't take on that role and it's liability - then you shouldn't be the captain.
imtringued 8y ago
If there was no bailout then even people who were paying their mortgages on time would be affected. The bank needs money now so it will have to sell some of it's assets such as the house you're living in but 5 years later it is probably swimming in money.The government effectively acts as a very large insurance company by giving the bank a loan.
- cjg 8y ago
  The bank doesn't own your house. The asset it has is the mortgage on your house. The bank could could sell the mortgage, but the only impact to you is that your mortgage payments go to someone else.
- dragonwriter 8y ago
  > If there was no bailout then even people who were paying their mortgages on time would be affected. People who were paying their mortgages were effected by the general economic downturn, collapse of home values, and credit crunch, for some parts of which the bank bailouts were an ineffective remedy. (Bailing out troubled homeowners probably would have been more effective.) > The bank needs money now so it will have to sell some of it's assets such as the house you're living in Unless you are renting from a bank, it's not going to sell your house, because it doesn't own it; particularly, that's not how most mortgages work (there are some that are callable early where that would be a theoretical possibility, but they are almost never used for owner-occupied residential property.) > The government effectively acts as a very large insurance company by giving the bank a loan. No, it was acting as a very large bank. An insurance company would have recieved premiums in advance and not given loans, but just paid out money.
pjc50 8y ago
Actual bankruptcy could have resulted in a chain of collapses that might have left large areas of the Western economy without functional banking for weeks or even months. But the bailout should have had a lot more "never again" in it, rather than "how can we get back to the old normal of bubble finance as quickly as possible".
- pas 8y ago
  > a lot more "never again" What do you have in mind? Could you explain this?
  - pjc50 8y ago
    Ideally when there is a sufficiently large disaster an inquiry is held which suggests measures to prevent the disaster, and these measures are implemented and enforced. Air safety is closest to the ideal on this. Politics and political economy is often very far from it, especially when it's possible to profit from a disaster. Part of the explicit aim of the bailout was to preserve the finance industry status quo, one of very unequal incomes and widespread effects on people by forces outside their control. In the long run this has turned into a sort of formless populist anger that's been successfully transmuted into racial hatred, but there is a real and persistent sense of injustice that needs to be addressed. Turning this into specific plans is too big a question for me. All that has really been done to prevent it happening again has been a raising of European regulatory capital requirements.
    - pas 8y ago
      > Politics and political economy is often very far from it, especially when it's possible to profit from a disaster. Sure, but financial services oversight is not that far from air safety (NTSB, FAA). The SEC, FDIC, CFTC, FSOC (established in 2010 via the Dodd-Frank Act), the Fed, and a few others are rather technical agencies. If they have enough power to request certain kinds of data from financial institutions and fine them if they are deemed not secure/stable/compliant enough, they can and will prevent any similar upcoming crisis. The problem is, of course, that rules are gradually rolled back due to politics, and the oversight agencies understaffed and underbudgeted. Thus they are not proactive, they are reactive, and there was nothing they could have done in 2008 when it was already too late. (So the Fed stepped in with QE, and Congress with TARP, and with ARRA - but that was too small, so recovery took too long.) That said, yes, absolutely the incentives aligned toward preserving the status quo. Which is not necessarily wrong, as doing something radical was likely unhelpful. What needs to be done is clear (better effective proactive expert oversight) but it's politicized. Just like the FCC regulation with the TelComms industry. And so on.
andrepd 8y ago
The bailouts are controversial, but it's the bailouts AND the complete absence of criminal responsibility that's inexcusable. It is well known and documented that the financial crisis was no accident; everybody who headed the financial services industry to the state it was in did so knowingly, knowing full well the inevitable consequences, but not giving a damn because the arrangement let them to become handsomely wealthy, beyond our imagination. They masked everything with a mixture of stacking the regulators with their ilk, stacking the universities with their ilk (economics as a field has zero credibility to me since I discovered how many theses "greenlighting" CDOs were written in clear conflict of interest), stacking the government with their ilk. Then while we (working class) were dealing with the fallout, tithing part of our work to reimburse their losses, not ONE of those criminals (with the blood of millions across the globe on their hands, make no mistake) was prosecuted or in any way made to answer for their actions. Much to the contrary, they went on enjoying the same mind-boggling luxurious elite lifestyle they always did. It's feudalism with extra steps.
- dhimes 8y ago
  complete absence of criminal responsibility that's inexcusable This is what gets me- and they were even given relative anonymity in the press so they could duck some social repercussions of their horrid behavior. I want Brad Pitt to carve a dollar sign on their foreheads. tithing part of our work to reimburse their losses I'm stealing this.
- asta42 8y ago
  And not only is there absence of criminal responsibility, but the regulation that made banking stable for 100 years and was taken away in 90s (like the Glass-Steagall Act) cannot be put back in place. Seems like people that caused the GFC are the ones in charge of 'fixing' it.
  - rhino369 8y ago
    Glass Steagal didn’t make banking stable. Most countries (including those who weathered the storm much better than the US) don’t have a similar law. In fact, marrying investment and commercial banks during the crisis was a key part of stopping a banking collapse. And the whole crash started by investment only banks failing.
KarlRutnick 8y ago
Both US and EU should have done the same as Norwegian Government did during our banking crisis in the 90s. Let the banks fail, stocks to zero, no bailout of investors or paper/derivatives holders etc... then nationalize their brick and mortar operation so the real economy keeps functioning
- pas 8y ago
  Much of the economy is not brick and mortar anymore. And wasn't in 2008 either. Sure, Congress could have created an Uncle Sam bank, but that wouldn't have solved anything. Stocks, investors, bondholders are important, because they underlie much of US pension plans, social security account, and so on. And even if the day to day operations could have been somehow continued, someone would had to arbitrate what is okay to save, and what is okay to let it perish. And that would have been a much harder and basically impossible task.
- seppin 8y ago
  Norway is a small country, and in the 90s had very little exposure elsewhere. What you are implying is a meltdown of global assets, to prove a point.
UncleSlacky 8y ago
Nationalising the banks, perhaps? Some were, at least partially, like RBS.
hndamien 8y ago
Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset.
- chimeracoder 8y ago
  > Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset. Are you unaware that TARP happened?
  - hndamien 8y ago
    I'm aware, and it was a joke. "purchasing the illiquid MBS, and through that, reducing the potential losses of the institutions that owned them. Later, it was modified slightly to allow the government to buy equity stakes in banks and other financial institutions" Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left. No financial mercy should be shown to the institutions that put themselves in that position. Nobody has ever shed a tear for anybody else financially squeezed, and in this case it would have been good for society and fitting capitalistic justice. Instead, we pumped their bags, regained the value of equity and then had the debts repaid from the equity that was saved. Its a nice story, we got paid back, but the reality is, the Gov/ people should have made out like bandits while those bankers were kicked to the curb. This is how capitalism is supposed to work.
    - chimeracoder 8y ago
      > Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left. I don't think you understand how TARP worked if you think that's even remotely applicable as an analogy > This is how capitalism is supposed to work. Maybe you should learn a little more about the system you claim to be critiquing, so your criticisms don't fall so completely flat.
apo 8y ago
The alternative was to let capitalism administer its punishment to reckless speculators. Instead, they were made whole again at the cost of years worth of future demand pulled forward by easy money policies. Worse, the sense that "we made it across" has caused way too many people to jump back on the risk/debt wagon with gleeful abandon. The crisis wasn't resolved, but merely postponed.
pjmorris 8y ago
If we're going to be capitalistic, apply Bagehot's dictum (from 1873) "in times of financial crisis central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need" [0] I feel like, jail or no, the financial executives who got us into the mess - and who haven't really gotten us out yet - ought to be former financial executives that are working as, e.g., baristas. Instead, a decision was made that the bloated mortgages that had been issued, would be turned from bad collateral into 'sound collateral', keeping asset prices high. It's like resolving Ford's problems with exploding gas tanks back in the 70's by arranging to buy all the bad cars. [0] https://en.wikipedia.org/wiki/Walter_Bagehot https://en.wikipedia.org/wiki/Walter_Bagehot
- danharaj 8y ago
  We shouldn't get any banking advice from anyone from the 1800's.
  - pjmorris 8y ago
    You should weigh any advice on its merits.
  - pjmorris 8y ago
    If you're seeking to broaden your perspective, you might find "Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis", written by a director at the Fed, to be worth your time. [0] https://www.federalreserve.gov/newsevents/speech/madigan20090821a.htmhttps://www.federalreserve.gov/newsevents/speech/madigan20090821a.htm https://www.federalreserve.gov/newsevents/speech/madigan2009...
  - seppin 8y ago
    That's like saying we shouldn't pay attention to the lessons of the great depression because it was in the 1930s.
    - danharaj 8y ago
paulddraper 8y ago
> But what was the alternative to the bailouts? Nothing. > Another depression? Recession/depression/whatever, that's exactly what we had. At that stage of things, it was essentially unavoidable. > I feel we made it across fairly well. The billions and billions and billions spent by the federal government didn't come from nowhere. They came from taxes (which didn't increase) or deficit financing (which did increase), thus crowding out the investment market and making the recovery much longer.
InclinedPlane 8y ago
False dichotomy. The problem was letting it get that bad to start with, and letting any single bank get so huge. If banks had been kept smaller and limited from taking on such crazy risks then it would have been far easier to just let some banks go out of business and let the market adjust itself. Additionally, the fact that people in the street got screwed while hedge funds got their profit margins protected by tax payers is something that shouldn't have been allowed to happen. Much of the pain for the top 1% from the crash was socialized away and absorbed by tax payers and the working class. There should have been much more financial assistance to the working class.
tootie 8y ago
Less generous bailouts for one. A lot of creditors were just straight up reimbursed for making bad investments with no penalty. Having them be wiped out would be a disaster, but asking to accept losses in exchange for not being wiped out would have been a good compromise. The other option, which we didn't have at the time but do now, is for the federal government to take over failing banks to keep them afloat long enough to be dismantled. It's called orderly liquidation.
andrewla 8y ago
Late to the discussion, but the alternative to the bailouts was to not bailout, and let the problems unwind. As mortgages were sold at firesale prices to attempt to remain solvent, it would be in the interest of the purchasers to lower the effective rates on the mortgages, because they could still book a profit at the lower rates. The net effect would have been to cripple most of the national banks to the point where they would have to be liquidated and purchased piecemeal by smaller banks and local credit unions that managed to behave responsibly during the crisis. The FDIC already exists and has a mandate to draw unlimited funds to make customers whole up to the limits. This is already priced in. As to what would happen as companies failed to make payroll as their banking arrangements failed, it's likely that there would have been problems along the way, but the existing credit markets, especially short-term consumer credit (i.e. credit cards) would have allowed most households to stay solvent while the banks reorganized around the new reality. I'm far from convinced that there would have been a depression -- for the most part I believe that it would have self-corrected on an individual or company basis except for the finance sector, which created the crisis in the first place.
howard941 8y ago
I believe too many made out fairly well and by not wiping out the shareholders we've created a gaping maw of a moral hazard. Corporate governance is in tatters, has been since roughly the 80s when the goal became quarterly earnings at all costs. Wiping out the shareholders when bailing out would have incentivized the next set of shareholders to police their investment. Now the only disincentives are executive compensation and some additional express limits on dividends.

icantdrive55 8y ago

"Other analysts point to the dangers of lofty stock prices and rising indebtedness among non-financial corporations, many of which have been borrowing heavily to finance stock buybacks and other ventures. A recent McKinsey study showed that in the past ten years the amount of outstanding corporate debt has tripled across the world. In the United States, the study noted, almost two-thirds of non-financial debt is rated as junk or one notch above junk. Roughly three trillion dollars of this questionable credit is set to mature in the next five years. If the economy falters, or if interest rates rise sharply, many corporations may find themselves in the position of new mortgage holders a decade ago—unable to repay or roll over their debts." 1. This has me concerned. 2. I almost feel like some of these 1 percenters are gambling. They know they are the only ones getting these loans, at low very interest rates. Interest rates that have been to low for to long. (Yes--give me a 5% cd. I'm not investing in this bloated market.) 3. And the thesis of the article is wether Trump, and the GOP will bailout these boys if they screw things up? Of course the GOP will take care of their own. Trump will go along with them if he's around? He will probally blame our wonderful social safety net. That will be his mantra if we have a crisis. "Those freeloading food spamp people are ruling America, and the Mexicans of course? Kelly Ann, "It's called the Snap something me Capitan?"

vinceguidry 8y ago

The takeaway I got from reading the article to the end does not match the impression given by the headline, though the headline isn't exactly wrong, per se. The conclusion given is that the mechanisms put in place to avoid another recession work just fine but that the political will to use them has been dried up by the political retrenchment of the right. That said, if you're at all curious, you should read the article, if not the book it's summarizing, because it's really really good. One thing that had escaped me was the fact that America's bailout of its own banks and QE were both drops in the bucket compared to the massive amount of liquidity the Fed injected into the global financial system, all of which was paid back just like the bailouts. On a personal level, this allays my fears of another recession. The Anglosphere will wake up one day as if it was dreaming, and the political upwelling that put Trump into office will fade back down into insignificance. Another recession at this stage will only accelerate that process, provide some juicy real estate opportunities to those positioned well enough to take advantage, and we'll be back to normal within a few years to a decade. I strongly suspect that Trump won't stand in the way of another global firefighting operation conducted by the Fed should it become necessary, he's way too cynical to not do something that works. We should avoid 'othering' the alt-right if we can. These are Americans like you and me, as scared and uncertain as all of us, momentarily in the spotlight and proud of it, but ultimately decent human beings just like the rest of us.

Marazan 8y ago
The alt-right are ficking Nazis. Say it with me: Nazis are bad. Sorry if that hurts their feelings.
wuschel 8y ago
Just had to look up what you mean by 'alt-right': Quoting Wikipedia: "The alt-right, or alternative right, is a loosely-connected and somewhat ill-defined grouping of white supremacists/white nationalists, neo-Nazis, neo-fascists, neo-Confederates, Holocaust deniers, and other far-right fringe hate groups." This does not sound like the average citizen to me, but rather the extreme part of the spectrum of values. I'd rather be with Popper's position on a valiant, liberal society, and will not accept people who stand against human dignity, protection of minorities, and the lessons from history. There are no excuses for doing this.

sidstling 8y ago

I don't think I agree with the article. Not from a European perspective. I'm Danish and we've had anti-establishment parties all my life on both the left and right side of the political spectrum. The populist rightwingers most similar to Trump and the teaparty saw their dawn in 1998 where they got elected with 7.4% of the votes. In 2001, three months after 9/11, they recived 12%. In 2005 it was 13.3%. In 2007, before the financial crisis they got 13.9%. In 2011 they got 12.3% and then in 2015 they got their current 21.1%. If you look at the data, our right wing populist party saw a small decline following the financial crisis. They saw two major increases, one following 9/11 and one at the height of the European migration crisis but at this point our economy had fully recovered. I think it's some what like this around much of Europe. Back in 2001 we got critiqued by the European Council because we elected a racist party to government, but Austria recieved much sterner critique at the same time. In Eastern Europe the local economies have seen huge increases along with right-wing populism. Greece, who took the worst of the financial crisis, turned to the intellectual left, not populism. I think the article is probably on point about America. The tea-party saw it's dawn in the years following the financial crisis. You had the occupy movement and now you have the alt-right. We didn't really see similar movements in Europe though. I guess we do today, and I think we're unfortunately receiving a lot of bad influence from America. I mean, I can go on the Danish subreddit right now and see people complain about the MSM. Which makes no sense, because our media-landscape is completely different from the American. On facebook we have anti-vaxxer and flathearter groups, mostly using sources like infowars or breitbart because we simply don't have nonsense-media equivalents in my country. At least not yet. So I guess, in a way the article isn't wrong, but all the nonsense is happening in an economy that's mostly better than before 2007.

freddie_mercury 8y ago
Tooze makes the case that Fidesz's victory in Hungary in 2010 was a direct result of the terms of the IMF bailout. That the supremacy of the Law & Justice party in Poland was a result of the crisis. That the fall of Tymoshenko and Yushchenko -- tarred with the pains of the crisi -- in Ukraine led to rehabilitation of Yanukovych and the subsequent Russian invasion of Crimea. In Greece the populists didn't take power in the same ways but it is disingenuous to pretend they didn't exist and exert power as a result of the crisis. To call New Democracy -- the party that took power after the crisis -- "not populist" is a mis-reading of history, I think. They campaigned on fear of illegal immigrants, after all. And the second biggest party is SYRIZA -- which is definitely populist -- and which didn't even exist until the crisis destroyed PASOK. And by 2015 SYRIZA's clearly populist platform was enough to take it power in Greece. One of the themes of Tooze's book isn't that the consequences were immediate. Sure, it took 6-7 years for SYRIZA to get to power in Greece. But that is still a direct consequence of the crisis.

nicktelford 8y ago

While a generally fascinating piece that connects together the events in the American and European financial and political systems, it shouldn't be understated how much of an effect the refugee crisis is having on European politics, which can be attributed largely to the "Arab Spring"; itself largely a consequence of the 2008 financial crisis.

m_st 8y ago
Could you elaborate the link of the Arab Spring to the 2008 financial crisis? I can't think of a link and neither does the English Wikipedia article.
- thdxr 8y ago
  Probably referring to the narrative of rising commodity costs driving revolt. Not a very substantiated view as commodity costs in the area have been worse in the not to distant past
  - hef19898 8y ago
    I think that is always realitve. Sure, in absolute numbers that might be true (I didn't check), in relative terms not so much if I remember well. At least in some countries affected by the Arab Spring people started to demonstrate against increasing bread Prices. That and general uncertainity combined did not cause the revolts but definetly a factor. What thfollowed was a bad handling of the crisis by the Western powers. And with all the convenient dictators, viable road-blocks for everyone trying to get to Europe, in North Africa gone already existing refugees had open venues to Europe. Add to that all the People trying to get out of the civil wars that followed after the revolts in certain countries and you can explain a big part of the so called refugee crisis. Unfortunately this crisis, despite being basically over in Terms of numbers, is playing an ever increasing roll in European politics. And I personally don't like the results a single bit, not every country is realizing what voting for righ-wing populists means like the French did. Germany certainlly isn't.
    - 8y ago

bitxbit 8y ago

I experienced the financial crisis first hand on Wall Street, a place fraught with people who pretended to know the ins and outs of risks. It was also a brutally honest place when it came to winners and losers. But that changed when Hank Paulson, then the Secretary of Treasury, knelt down on camera and begged Nancy Pelosi for what was effectively a blank check. Wall Street could not face reality when it was its turn to be the loser. I believe the real cost of 2008 is moral hazard. They destroyed the fundamental values of capitalism and I can't help but feel that we are all still pretending.

rwc 8y ago
Wow I don’t remember this kneeling down on camera. Can you link?
- shshhdhs 8y ago
  I don’t recall him kneeling. I think the commentator was exaggerating
  - bitxbit 8y ago
    No, I am not exaggerating. https://www.nytimes.com/2008/09/26/business/26bailout.html https://www.nytimes.com/2008/09/26/business/26bailout.html [“I didn’t know I was going to be the referee for an internal G.O.P. ideological civil war,” Mr. Frank said, according to The A.P.Thursday, in the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr., literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.] There are some pictures of it as well but appears most of them have been taken down over the years.
    - EADGBE 8y ago
      > There are some pictures of it as well but appears most of them have been taken down over the years. Convenient
    - 8y ago

ThomPete 8y ago

The best explanation I have heard of the financial crisis was in the book "The End of Alchemy: Money, Banking and the Future of the Global Economy" by the former head of Bank of England. It makes the convincing case that there is no real single place to point fingers and that the crash was the logical consequence of people all doing the "right thing" I can highly recommend it as it also takes a historical view of money and what it is and how it's been used historically. A very interesting book. So yeah there is a real cost of 2008 but there is also real opportunities. These things can't be measured until decades later. However, the anti establishment movement didn't rise because of the financial crisis it rose because of globalization and the alliance between politicians and large international organizations to take away opportunities from its own citizens and start giving it to countries like China after the fall of Soviet Union. Mixed with that and the liberal social welfare system in Europe and PC culture which claimed any critical voice was facist, racist etc. That's why the antiestablishment came about not because of 2008 and wallstreet.

dhimes 8y ago
Without reading the book or even TFA, I'll comment on the concept of everybody doing the "right thing" leading to bad outcomes. I have a hunch that this is a pretty universal law, and the only way to mitigate it is through regulations that ban some of those "right things." I think that honest, moral players welcome good regulations because it keeps them from having to go down a slippery slope.
- pc86 8y ago
  I think most people are fine with regulations when they feel they're evenly applied, or that it's unlikely their competitors will be able to break them without consequence. It's when they feel that regulations will affect them more than others or that their competitors will be able to ignore them while they won't that people start getting loud.
- nostrademons 8y ago
  The other way to mitigate it is to incentivize some of the players in the system to ferret out and report wrongdoing on the part of other players. Think of short-sellers in a market: they can profit handsomely by identifying fraud or irrational exuberance, taking a position opposite it, and then loudly reporting the fraud so everyone knows about it. The legal system is also setup like this, as is the U.S. government: there's no one entity that regulates the U.S. government, but the government itself consists of a set of interlocking institutions, each of which has leverage to prevent the others from becoming too powerful.

RickJWagner 8y ago

As long as there have been economies there have been periodic upheavals. I don't think that can be changed. What can be changed is how the next meltdown/booming economy will affect our own personal finances. It's a life skill, one that should be given more attention in school.

EADGBE 8y ago
> What can be changed is how the next meltdown/booming economy will affect our own personal finances. It's a life skill, one that should be given more attention in school. It's sad that this is the first mention of this in the thread. Ever since graduating high school and finding myself in college for a useless degree, during the Great Recession and trying to come away from it intact; I've been a big proponent of financial literacy K-12, living within your means, having a "plan" and not being afraid to wait for it (read: college isn't for everyone, and alternatives exist; also taking a year or two before you start is sometimes a great idea), and knowing what a budget is and how to use it. Overspending and under-making will always lead to catastrophes when the well runs dry. Trusting the parents to do this on their own time can't seriously be more important that some of the superfluous credits taken before graduating high school.
freddie_mercury 8y ago
Australia has gone 27 years without a recession. There's a big difference between "sure, we'll never totally get rid of them" and "do you want them every 5 years or every 50 years?" or "do you want 25% unemployment or 10% unemployment?" It is overly fatalistic to pretend they can't be changed in any way whatsoever and there's no difference between different periodicities and scale of upheavals.

ptero 8y ago

Just a personal observation / data point as a lot of folks everywhere are saying "put bankers in prison" any time they recall 2008 crisis. This is from the US, no idea how things played out in other countries: Government shares a significant portion of the blame for this crisis. It required raising affordability of homes (i.e., loans) for lower income families. They might as well legislate away entropy, friction or gravity. Banks cannot lower home selling prices, so instead they had to become "creative" with loans, for example lend at 0% for the first 5 years. And lend more than today's purchase price (creating strong demand for inflated assessments) so some of that extra cash can be used to pay mortgage for a few years. Five years later the music stops unless you can refinance again and kick that can down the road. This insane game of musical chairs, where banks generate toxic loans, securitize them and throw them at someone else, had to end in tears. Everyone understood this. But faced with the regulation to raise affordability, what exactly should the lenders have done? They HAD to use at least X% of new loans to low income families. Sadly, this is yet another case of good intentions (helping lower income families) implemented as a clumsy regulation that ends up hurting people you wanted to help. My 2c.

ghostly_s 8y ago
What was the vehicle by which US gov't 'required raising affordability of homes'?
- TimJYoung 8y ago
  Yeah, I want to know that, also. My understanding is that anything explicitly backed by the government (Fannie Mae) was your standard 30-year mortgage with the normal requirements. The interest-only loans, variable-rate loans, etc. were all originated through the brokers like Countrywide and packaged/sold as securities.
  - hueving 8y ago
    "In 2006, Fannie and Freddie insured 70% of all subprime loans so they needed to keep these loans viable" https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae_and_Freddie_Mac https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...

Lavery 8y ago

In a lot of ways, the current expression of the tech sector (certainly from a valuation standpoint) and the startup scene particularly feels like a consequence of the response to the financial crisis. Critics of the Fed spent years loudly worrying about how the various QE programs were going to drive up inflation. Of course, this didn't materialize, at least as measured in the usual basket of goods and services. What did happen was a broad and sustained inflation in financial assets / collapse in yields that drove everyone further out along the risk curve, with VC being the furthest point out. The tie in to inflation is darkly amusing the because the classic precursor to inflation is wage growth. Broadly, there hasn't been any--except in the tech sector, which has seen a veritable explosion in pay from where it was a decade ago.

fzzzy 8y ago
I'd just like to point out that the tech pay explosion likely has a lot to do with this: https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_Litigation https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_L...
- Lavery 8y ago
  No question that played a role, but it's not like the settlement happened in 2011 and then salaries immediately corrected to the current levels and stayed. This has been a steady climb upwards.
deleted 8y ago
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pitaj 8y ago
Business Cycle Theory explains exactly this. When interest rates are too low, people go elsewhere for returns, resulting in malinvestment. What it doesn't do is predict when the crash will happen, or say how to spot which investments are bad.

victor106 8y ago

Ray Dalio just published an excellent free book on this. You can download it here https://www.principles.com/A-Template-For-Understanding-Big-Debt-Crises-By-Ray-Dalio.pdf https://www.principles.com/A-Template-For-Understanding-Big-...

WorkUntilRetire 8y ago

Did Lehman run index funds? What happened to their customers? What would happen today if a firm like Schwab or Fidelity suddenly went bankrupt? Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to zero, wiping out customer’s retirement?

craftyguy 8y ago
> Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to zero, wiping out customer’s retirement? I'm no expert, but I wouldn't think so if those funds track the indexes, since the index 'values' are the collective values of the stocks they represent. On the other hand, SWPPX, etc would no longer be maintained. That's a really good question though, I hope someone with more knowledge comments!
akashshah87 8y ago
Not an exact answer to your question, but see this post on the Bogleheads wiki regarding Vanguard - https://www.bogleheads.org/wiki/Vanguard_safety https://www.bogleheads.org/wiki/Vanguard_safety

tomcam 8y ago

It seems like, relatively speaking, Iceland sailed through this by acting like capitalists: they let the loans fail, consumers took a haircut, and bankers were sent to jail. Is this a worthwhile comparison or were there fundamental differences that I (very likely) don't understand?

howard941 8y ago
Here in the US we're told the banks were to big too fail, the banksters too powerful to jail.
aero142 8y ago
I love the idea, but this really doesn't dispute the central point. Iceland is an economy with a $24B GDP that is smaller than Vermont's, the lowest US state. The claim is that letting large US banks fail is a systemic risk that causes cascading failure. Using Iceland as an example doesn't dispute that point.
- tomcam 8y ago
  But the citizens of Iceland did in fact lose a ton of money. I think maybe it does dispute the point? (Arguing more from ignorance here.)

augustus2010 8y ago

I just wonder why China doesn't have a economic crisis like the EU or the US. Is their system more superior than us?

moate 8y ago
Based on different economics. Even the more socialist leaning EU nations aren't dealing with straight up Communism. China's big problem right now is actually that they brought so many people out of poverty that they're focused on controlling inflation. Also, they have a state controlled media that reports only what the state wants. Helps smooth over the rough edges with praise of their great and successful system.
- chillacy 8y ago
  China’s system is probably better characterized as “State Capitalism” than communism, since the workers don’t own the means of production.
  - moate 8y ago
    We could just go with "Russian Communism" as well and call it a day. Your point is valid, it's not proper Communism as Marx envisioned.
    - chillacy 8y ago
      For sure, Russian Communism after capitalist reforms of the 80s. There's definitely still a lot of top-down planning in China, but there also aren't people lining up for allocated food.
zjaffee 8y ago
Because people there still view homes as a worthy investment, their housing bubble never collapsed even though home values are some of the least affordable in the world (even when rent is considered affordable).
8y ago

dba7dba 8y ago

The aftermath produced a lost decade for European economies and helped lead to the rise of anti-establishment political movements here and abroad. I was visiting family in Hawaii during the 1st Christmas after the financial crisis started. Guess what? The beach chairs around the pools at the Waikiki area hotels were packed with guests. Every single one of them. Note I went because family is there, and stayed with them. Granted, some guests were probably there because they already had reservations made before the shtf moment came. Or maybe some there were just vacationing at Waikiki as they downgraded their vacation plan to more moderate level, instead of going to Maldives or something. But the point is the rich were far less impacted by the crisis. And when the crisis slowly faded away, the rich swooped in and accumulated more wealth. Like all the foreclosed homes in US being bought up by rich folks to be flipped, or worse, bought to be rented out. The rich were barely impacted by the crisis, and the crisis just turned into an opportunity for the rich to accumulate more wealth more easily.

8bitsrule 8y ago

IMO the article falls far short of telling 'The Real Cost' for the people of the US. It's pretty damned superficial, and far from packed with observations (let alone empirical ones). A look at Cassidy's CV tells me why.