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My understanding is that the mortgage crisis of 2007 is an example of something like this going bad. Technically it was just Americans owing money to other Amer

My understanding is that the mortgage crisis of 2007 is an example of something like this going bad. Technically it was just Americans owing money to other Americans right? But I think how these things go bad is something like: - Some loans start to default. Either randomly, or because the easy availability of credit encourages riskier projects. - Conservative lenders get spooked and exit. Credit becomes a bit scarcer. - This repeats in a cycle. Each round wipes out more businesses. At first it's mostly the obviously risky ones, but increasingly it's normal business with unlucky timing. - People start to see the writing on the wall, credit markets lock up, and panic sets in. Major corporations find themselves unable to make payroll. Ordinary financial stuff like currency exchanges stop working, while everyone scrambles to figure out which intermediary banks might be insolvent.

metalliqaz 6y ago
the 2007 crisis wasn't caused by debt. it was caused by huge structures of derivatives based on that debt.
- imnotlost 6y ago
  Obviously a lot of that debt couldn't be serviced and a lot of it was extended to people who just couldn't afford it. The derivatives were a multiplier.
  - metalliqaz 6y ago
    yeah a multiplier, so instead of a steep correction in the housing market, there was a global financial meltdown
- oconnor663 6y ago
  This isn't my field, so I should be clear that I'm making stuff up based on podcasts I've listened to :) The way I understand it is that things like MBS's and CDS's were the low-level details of that specific crisis, which we might not expect to happen again in exactly the same way. But the high-level picture was that the failure of major institutions had ripple effects that both 1) directly caused other institutions to fail and 2) indirectly created a lot of uncertainty about who might fail next. Importantly, (2) can cause more failures, by freezing up the markets that a lot of businesses depend on for everyday transactions. This cycle between (1) and (2) can be a general effect, that we might expect to see again in future crises, regardless of what specific low-level details set it off.
- imtringued 6y ago
  It was caused by banks irresponsibly handing out debt and individual investors betting against that debt.
PragmaticPulp 6y ago
The 2007 mortgage crisis had many causes, but much of it comes back to bad debt being issued to people who couldn’t afford it, then the debt was repackaged into instruments that deliberately obscured the risk with good debt ratings. At the time, real estate investing felt like Bitcoin or GameStop today: Everywhere you turned, it felt like everyone else was getting hilariously rich by investing in it and anyone who wasn’t speculating in real estate was going to be left out. Dinner party and online forum conversation was all about how real estate prices could only go up and how we were going to be destroyed by inflation if we didn’t put all of our money into real estate, the real store of value. The difference was that anyone could walk into a bank and get a huge mortgage without much scrutiny. As strange as it sounds, lenders would give you a mortgage based on “stated income” without verifying paystubs or even checking if you had a job. I remember realizing the frenzy was out of control when an unemployed acquaintance suddenly moved into a large new house and was talking about building her real estate rental empire. If money was free and house prices only go up, the only way to lose was to not play, right? As we all know, it turns out house prices can go down and debt really does have to be paid back. Low interest rates alone won’t cause this cycle to repeat without similar Mia pricing of risk, but it certainly increases the probability of bubbles popping as quickly as they inflated. FWIW, the finance world seems keenly aware of the bubble-like nature of our current situation this time around, contrary to what I saw during the 2008 era.
- blackrock 6y ago
  So how’s it different now? Housing prices have gone up almost $200,000 in some areas.
  - betterunix2 6y ago
    Housing prices have gone up in response to demand, which spiked because of the pandemic -- in other words, new information entered the system (a pandemic can turn a desirable city into an undesirable place to live) and the market worked exactly as it should. It may be that suburban housing is more valuable because we are going to be dealing with pandemic-related messes for many years.
  - 6y ago

metalliqaz 6y ago

the 2007 crisis wasn't caused by debt. it was caused by huge structures of derivatives based on that debt.

imnotlost 6y ago
Obviously a lot of that debt couldn't be serviced and a lot of it was extended to people who just couldn't afford it. The derivatives were a multiplier.
- metalliqaz 6y ago
  yeah a multiplier, so instead of a steep correction in the housing market, there was a global financial meltdown
oconnor663 6y ago
This isn't my field, so I should be clear that I'm making stuff up based on podcasts I've listened to :) The way I understand it is that things like MBS's and CDS's were the low-level details of that specific crisis, which we might not expect to happen again in exactly the same way. But the high-level picture was that the failure of major institutions had ripple effects that both 1) directly caused other institutions to fail and 2) indirectly created a lot of uncertainty about who might fail next. Importantly, (2) can cause more failures, by freezing up the markets that a lot of businesses depend on for everyday transactions. This cycle between (1) and (2) can be a general effect, that we might expect to see again in future crises, regardless of what specific low-level details set it off.
imtringued 6y ago
It was caused by banks irresponsibly handing out debt and individual investors betting against that debt.

PragmaticPulp 6y ago

The 2007 mortgage crisis had many causes, but much of it comes back to bad debt being issued to people who couldn’t afford it, then the debt was repackaged into instruments that deliberately obscured the risk with good debt ratings. At the time, real estate investing felt like Bitcoin or GameStop today: Everywhere you turned, it felt like everyone else was getting hilariously rich by investing in it and anyone who wasn’t speculating in real estate was going to be left out. Dinner party and online forum conversation was all about how real estate prices could only go up and how we were going to be destroyed by inflation if we didn’t put all of our money into real estate, the real store of value. The difference was that anyone could walk into a bank and get a huge mortgage without much scrutiny. As strange as it sounds, lenders would give you a mortgage based on “stated income” without verifying paystubs or even checking if you had a job. I remember realizing the frenzy was out of control when an unemployed acquaintance suddenly moved into a large new house and was talking about building her real estate rental empire. If money was free and house prices only go up, the only way to lose was to not play, right? As we all know, it turns out house prices can go down and debt really does have to be paid back. Low interest rates alone won’t cause this cycle to repeat without similar Mia pricing of risk, but it certainly increases the probability of bubbles popping as quickly as they inflated. FWIW, the finance world seems keenly aware of the bubble-like nature of our current situation this time around, contrary to what I saw during the 2008 era.

blackrock 6y ago
So how’s it different now? Housing prices have gone up almost $200,000 in some areas.
- betterunix2 6y ago
  Housing prices have gone up in response to demand, which spiked because of the pandemic -- in other words, new information entered the system (a pandemic can turn a desirable city into an undesirable place to live) and the market worked exactly as it should. It may be that suburban housing is more valuable because we are going to be dealing with pandemic-related messes for many years.
- 6y ago