5 ms·

Interesting view and great data crunching. But I am amazed how one can write a long article purportedly about the causes of the 07/08 crisis without ever mentio

by t_mann 5y ago

Interesting view and great data crunching. But I am amazed how one can write a long article purportedly about the causes of the 07/08 crisis without ever mentioning credit quality. By my impression, the prevailing view is that the crisis was caused by poor credit quality of some home buyers (I remember the term NINJA borrowers - no income, no job or assets). This was masked away in complex financial products (CDOs,...) that made it hard for buyers like banks to assess individual borrower quality and instead had them rely on (flawed) valuation models by rating agencies. The high ratings for these products allowed the market for them to balloon from a niche to a gigantic size that made it systemically important. When the first cracks started showing, worries about borrowers' credit quality turned into worries about banks' credit quality, leading to bank-run-like situations in the money markets, and ultimately the failure of banks like Lehman Brothers and others. The article seems to start from a misleading claim, one that misses a crucial part of the picture, and that is much easier to refute than the full story. The data is still super interesting to see.

headmelted 5y ago
This is the correct answer. Mortgages work differently in the fastest-rising areas of the US than most anywhere else, in that a borrower can have no equity or negative equity in the home… and just hand back the keys. In the UK this involves a complex and lengthy bankruptcy proceeding. Honestly I think the US way is objectively better, but it massively changes the outcomes of how long someone will stay in a home that’s become a bad investment. The article is also looking at the wrong numbers for rents. How much rents have risen is far less relevant than how many rent starts there are over mortgage starts. The first statistic tells you how much people are having to pay to live, the second tells you if there’s really a shortage of homes or not. Some countries have implemented additional taxes on non-primary homes since the crash, but to my knowledge they’re not particularly punitive. I think this tax really is the solution (e.g. 5% value of the home in landlord tax per year).
DoingIsLearning 5y ago
> caused by poor credit quality of some home buyers Small detail but the wording here implies a causation, that it was the home buyers who were the makers of the crisis. Whereas we now have ample evidence that it was the real estate companies and mortgage lenders who when faced with free money, became predatorial of people who had no capacity or understanding of the financials of becoming a home owner. We can always argue that these were adults who have taken their decisions but again many of these people were promised pie in the sky and they believed it.
- t_mann 5y ago
  Yes, you're right, we should be careful with the wording here. I would also blame the system, where Physics PhDs were paid to put enough math in the product presentations to convince traders that the AAA ratings (for products with substantially higher returns than usual for such ratings) were justified. Of course, the resulting transactions earned all sides huge individual cash bonuses (large enough to allow them to achieve financial independence if they could keep the scheme rolling for just a few years, regardless of whether their employers would go bust), which may arguably have contributed to their willingness to turn a blind eye to common sense.
- parkingrift 5y ago
  At what point do you think individual adults should be responsible for their own decisions? “No capacity or understanding of the financials” makes it sound like these fully grown functioning adults had a learning disability. These people had access to the internet, books, libraries, financial services, and more. If these people were ignorant of the true costs it was willful ignorance.
  - imtringued 5y ago
    > At what point do you think individual adults should be responsible for their own decisions? The problem is that those lenders weren't responsible, tax payers and defrauded home buyers were cleaning up their mess.
    - parkingrift 5y ago
      Defrauded home buyers? Come now. It isn't as if lenders were submitting fraudulent paperwork with fake rates and then sticking homebuyers with the "real" rate after the fact. Home buyers were willingly signing documents with plain English terms, and this was happening in the information age.
- MrMan 5y ago
  poisoning securitized assets with people who are bad credit risks definitely happened. no need to ascribe individual blame to the borrowers, the mortgage originators are licensed professionals.
KaiserPro 5y ago
Over here in the UK this period is described as "the credit crunch" The folk memory describes the cause as banks loaning money to people who patently couldn't afford it, mixing those loans up with mortgages that had passed sensible credit checks. They then homogenised shit mix loans as high quality bonds. All was fine, until the foreclosing happened (repossessions), suddenly the bond repayments weren't as good, and pop, everyone started questioning how good their investments were. sure it was triggered by the american housing market, but it wasn't really a bubble, it was large scale fraud, combined by hubris and a ratings system that was/is corrupt of crushingly incompetent

by t_mann 5y ago

headmelted 5y ago

This is the correct answer. Mortgages work differently in the fastest-rising areas of the US than most anywhere else, in that a borrower can have no equity or negative equity in the home… and just hand back the keys. In the UK this involves a complex and lengthy bankruptcy proceeding. Honestly I think the US way is objectively better, but it massively changes the outcomes of how long someone will stay in a home that’s become a bad investment. The article is also looking at the wrong numbers for rents. How much rents have risen is far less relevant than how many rent starts there are over mortgage starts. The first statistic tells you how much people are having to pay to live, the second tells you if there’s really a shortage of homes or not. Some countries have implemented additional taxes on non-primary homes since the crash, but to my knowledge they’re not particularly punitive. I think this tax really is the solution (e.g. 5% value of the home in landlord tax per year).

DoingIsLearning 5y ago

> caused by poor credit quality of some home buyers Small detail but the wording here implies a causation, that it was the home buyers who were the makers of the crisis. Whereas we now have ample evidence that it was the real estate companies and mortgage lenders who when faced with free money, became predatorial of people who had no capacity or understanding of the financials of becoming a home owner. We can always argue that these were adults who have taken their decisions but again many of these people were promised pie in the sky and they believed it.

t_mann 5y ago
Yes, you're right, we should be careful with the wording here. I would also blame the system, where Physics PhDs were paid to put enough math in the product presentations to convince traders that the AAA ratings (for products with substantially higher returns than usual for such ratings) were justified. Of course, the resulting transactions earned all sides huge individual cash bonuses (large enough to allow them to achieve financial independence if they could keep the scheme rolling for just a few years, regardless of whether their employers would go bust), which may arguably have contributed to their willingness to turn a blind eye to common sense.
parkingrift 5y ago
At what point do you think individual adults should be responsible for their own decisions? “No capacity or understanding of the financials” makes it sound like these fully grown functioning adults had a learning disability. These people had access to the internet, books, libraries, financial services, and more. If these people were ignorant of the true costs it was willful ignorance.
- imtringued 5y ago
  > At what point do you think individual adults should be responsible for their own decisions? The problem is that those lenders weren't responsible, tax payers and defrauded home buyers were cleaning up their mess.
  - parkingrift 5y ago
    Defrauded home buyers? Come now. It isn't as if lenders were submitting fraudulent paperwork with fake rates and then sticking homebuyers with the "real" rate after the fact. Home buyers were willingly signing documents with plain English terms, and this was happening in the information age.
MrMan 5y ago
poisoning securitized assets with people who are bad credit risks definitely happened. no need to ascribe individual blame to the borrowers, the mortgage originators are licensed professionals.

KaiserPro 5y ago

Over here in the UK this period is described as "the credit crunch" The folk memory describes the cause as banks loaning money to people who patently couldn't afford it, mixing those loans up with mortgages that had passed sensible credit checks. They then homogenised shit mix loans as high quality bonds. All was fine, until the foreclosing happened (repossessions), suddenly the bond repayments weren't as good, and pop, everyone started questioning how good their investments were. sure it was triggered by the american housing market, but it wasn't really a bubble, it was large scale fraud, combined by hubris and a ratings system that was/is corrupt of crushingly incompetent