5 ms·

What caused the Great Recession? It could have been $18 beer.

28 points by aaronklein 15y ago

cateye 15y ago
The analogy would be even better with bread in stead of beer.
- aaronklein 15y ago
  How so? :)
- burgerbrain 15y ago
  You need bread. You don't need beer, and you don't need Mc'Mansions.
deleted 15y ago
[deleted]
a3camero 15y ago
I was expecting an article that began with Iceland and their ludicrously high beer prices denominated in Kroners. Seems like this has limited hacker relevance.
- davidw 15y ago
  > Seems like this has limited hacker relevance. Maybe it's a honeypot:-)
- aaronklein 15y ago
  How can a story that references beer have limited hacker relevance? ;)
zeteo 15y ago
The quoted $18 price plays no role in the story; the point is that it was bought on credit, with the people taking the credit being insolvent, and that there was a systemic bias towards issuing them credit anyways.
- enjo 15y ago
  Sure it does. The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing. In this story beer went to $18 and everyone was willing to pay it, not because it was worth $18 but because no one was having to actually SPEND anything (yet) for it (except those buying the bonds). It may not have been the most important thing, but you need the "bubble" in the story for the bubble to "pop":)
  - zeteo 15y ago
    >The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing That's not correct. The market expands as new bonds are issued. The key factor is that further credit is given, regardless of the size of each individual loan.
    - aaronklein 15y ago
      Both factors help increase the total size of the bubble.
      - zeteo 15y ago
        Yes, but this is about what causes the bubble. Sloppy credit is necessary and sufficient for that. Price increases are at worst an aggravating factor once the bubble is already under way.
fanboy123 15y ago
Misleading intro to article. The expansion of credit was not due to over ambitious politicans who wanted homeownership for the poor. It was fueled by lax accounting and regulatory standards which expanded private securitizations of mortgages (did not involve freddie and fannie). This generated money which went into legislator pockets though. It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result. Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much. I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.
- aaronklein 15y ago
  That's just not accurate. Go look at government-backed Fannie and Freddie and what they did in partnership with their cronies like Angelo Mozilo at Countrywide Home Loans. Big Business and Big Government have formed a cartel to make money off each other. And that is exactly what led to the Great Recession.
  - fanboy123 15y ago
    freddie and fannie started issuing "subprime" loans in the 90s, to lower income and minority borrowers with reasonable default rates. by the time the boom came around their marketshare in this market plummeted because everybody else dropped their standards (the garbage was to be somebody elses problem anyways) and their marketshare dropped. the growth in subprime during the bubble period had little to do with them. they are currently the garbage bilge where junk loans are deposited, but that is by design to protect housing prices. they were not a huge area of growth when housing overheated, subprime or otherwise.
    - yummyfajitas 15y ago
      the garbage was to be somebody elses problem Simply false. The garbage was usually your own problem, the AAA tranch was sold to someone else. This is what took down Lehman, for example. BNC Mortgage (owned by Lehman) made bad loans, Lehman sold off the AAA tranches while holding the riskier tranches for themselves.
brunnock 15y ago
What is this guy talking about? TARP funds wound up costing only $19B and no new taxes were levied on the middle class.
- aaronklein 15y ago
  If you seriously think that this whole debacle hasn't taxed our economy and the value of our currency more than $19B...then you're smoking something really good. :) I know we have -3% unemployment in tech. Not quite so elsewhere, my friend.
ericmoritz 15y ago
They forgot the part of the story where the government used public money to keep Heidi’s bar in business.
- mdda 15y ago
  Or the part where the people that said they would pay back their bar tabs were thrown in jail.
- aaronklein 15y ago
  LOL...true
stephenjudkins 15y ago
I'm hesitant to wade into this debate, but this is a pretty sophistic argument, for a few reasons: * He largely ignores the potential for a catastrophic financial collapse in 2008-2009. At the time, pretty much everyone agreed that stopping the bleeding was a good idea. Among economists, that some sort of vigorous action was necessary is close to a consensus view. To completely dismiss this is ridiculous. Further, he doesn't address how expensive TARP actually ended up being, or that the majority of the money has been paid back. * The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The only meaningful tax increases that I can recall come as part of the Affordable Care Act. * The author makes no concrete arguments for why no changes to financial regulations are unnecessary. Instead, there's a glib aside that the 'government also announces a series of regulations to “fix” the problem'. Really? This is important. Tell us why. If the government had stopped banks from selling Heidi's bonds as AAA-rated securities, wouldn't this crisis have not happened? Overall, this is a simple, facile metaphor with many implicit assumptions, designed to bolster the author's libertarian worldview. To the author's credit, he does a good job explaining the fundamentals of the housing crisis.
- yummyfajitas 15y ago
  Tarp money was mostly paid back. The Fannie/Freddie bailout was not and is unlikely ever to be. The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The funds were obtained on credit. Most people believe the only way the US can pay down this debt is to raise taxes. (I disagree, spending can also be cut. But neither major party is unwilling to cut spending - look what happened the last time they claimed they would cut spending: http://www.economist.com/blogs/democracyinamerica/2011/08/deficit-reduction http://www.economist.com/blogs/democracyinamerica/2011/08/de... )
  - stephenjudkins 15y ago
    I mostly agree with you. The likely situation is that the US will pay down its debt through a combination of spending cuts and tax hikes. But there is no doubt that the tax hikes will be substantial. I believe we're in a pretty poisonous political environment, where the dominant strategy for a politician seems to be to convince your constituents that they're being taken advantage of. Most people who benefit from government programs don't realize it (see http://economix.blogs.nytimes.com/2011/02/11/keep-your-government-hands-off-my-government-programs/ http://economix.blogs.nytimes.com/2011/02/11/keep-your-gover...), and most voters have an incredibly skewed view of what, exactly, the government spends money on. When polled, voters oppose cuts to almost every major program. That the median voter has largely incoherent views on the budget, but is very angry about it, leads us right into our current mess. To my original point: OP's argument is big on righteous indignation, along with a narrative that allows him to cast himself as a "good guy" and short on actual facts to how to dig our way out of this mess.
rsanchez1 15y ago
He seems to think it was "free market principles at work" that caused this. It was those dangling carrots in front of poor people and convincing them that letting any Joe Scmoe borrow money for a house was a good thing. Now these same people are out there sympathizing with the people whose lives they destroyed and promising more things, such as putting all their loans under control of the government. At least the bank can't send a swat team to my house to collect payments.

28 points by aaronklein 15y ago

cateye 15y ago

The analogy would be even better with bread in stead of beer.

aaronklein 15y ago
How so? :)
burgerbrain 15y ago
You need bread. You don't need beer, and you don't need Mc'Mansions.

deleted 15y ago

[deleted]

a3camero 15y ago

I was expecting an article that began with Iceland and their ludicrously high beer prices denominated in Kroners. Seems like this has limited hacker relevance.

davidw 15y ago
> Seems like this has limited hacker relevance. Maybe it's a honeypot:-)
aaronklein 15y ago
How can a story that references beer have limited hacker relevance? ;)

zeteo 15y ago

The quoted $18 price plays no role in the story; the point is that it was bought on credit, with the people taking the credit being insolvent, and that there was a systemic bias towards issuing them credit anyways.

enjo 15y ago
Sure it does. The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing. In this story beer went to $18 and everyone was willing to pay it, not because it was worth $18 but because no one was having to actually SPEND anything (yet) for it (except those buying the bonds). It may not have been the most important thing, but you need the "bubble" in the story for the bubble to "pop":)
- zeteo 15y ago
  >The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing That's not correct. The market expands as new bonds are issued. The key factor is that further credit is given, regardless of the size of each individual loan.
  - aaronklein 15y ago
    Both factors help increase the total size of the bubble.
    - zeteo 15y ago
      Yes, but this is about what causes the bubble. Sloppy credit is necessary and sufficient for that. Price increases are at worst an aggravating factor once the bubble is already under way.

fanboy123 15y ago

Misleading intro to article. The expansion of credit was not due to over ambitious politicans who wanted homeownership for the poor. It was fueled by lax accounting and regulatory standards which expanded private securitizations of mortgages (did not involve freddie and fannie). This generated money which went into legislator pockets though. It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result. Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much. I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.

aaronklein 15y ago
That's just not accurate. Go look at government-backed Fannie and Freddie and what they did in partnership with their cronies like Angelo Mozilo at Countrywide Home Loans. Big Business and Big Government have formed a cartel to make money off each other. And that is exactly what led to the Great Recession.
- fanboy123 15y ago
  freddie and fannie started issuing "subprime" loans in the 90s, to lower income and minority borrowers with reasonable default rates. by the time the boom came around their marketshare in this market plummeted because everybody else dropped their standards (the garbage was to be somebody elses problem anyways) and their marketshare dropped. the growth in subprime during the bubble period had little to do with them. they are currently the garbage bilge where junk loans are deposited, but that is by design to protect housing prices. they were not a huge area of growth when housing overheated, subprime or otherwise.
  - yummyfajitas 15y ago
    the garbage was to be somebody elses problem Simply false. The garbage was usually your own problem, the AAA tranch was sold to someone else. This is what took down Lehman, for example. BNC Mortgage (owned by Lehman) made bad loans, Lehman sold off the AAA tranches while holding the riskier tranches for themselves.

brunnock 15y ago

What is this guy talking about? TARP funds wound up costing only $19B and no new taxes were levied on the middle class.

aaronklein 15y ago
If you seriously think that this whole debacle hasn't taxed our economy and the value of our currency more than $19B...then you're smoking something really good. :) I know we have -3% unemployment in tech. Not quite so elsewhere, my friend.

ericmoritz 15y ago

They forgot the part of the story where the government used public money to keep Heidi’s bar in business.

mdda 15y ago
Or the part where the people that said they would pay back their bar tabs were thrown in jail.
aaronklein 15y ago
LOL...true

stephenjudkins 15y ago

I'm hesitant to wade into this debate, but this is a pretty sophistic argument, for a few reasons: * He largely ignores the potential for a catastrophic financial collapse in 2008-2009. At the time, pretty much everyone agreed that stopping the bleeding was a good idea. Among economists, that some sort of vigorous action was necessary is close to a consensus view. To completely dismiss this is ridiculous. Further, he doesn't address how expensive TARP actually ended up being, or that the majority of the money has been paid back. * The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The only meaningful tax increases that I can recall come as part of the Affordable Care Act. * The author makes no concrete arguments for why no changes to financial regulations are unnecessary. Instead, there's a glib aside that the 'government also announces a series of regulations to “fix” the problem'. Really? This is important. Tell us why. If the government had stopped banks from selling Heidi's bonds as AAA-rated securities, wouldn't this crisis have not happened? Overall, this is a simple, facile metaphor with many implicit assumptions, designed to bolster the author's libertarian worldview. To the author's credit, he does a good job explaining the fundamentals of the housing crisis.

yummyfajitas 15y ago
Tarp money was mostly paid back. The Fannie/Freddie bailout was not and is unlikely ever to be. The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The funds were obtained on credit. Most people believe the only way the US can pay down this debt is to raise taxes. (I disagree, spending can also be cut. But neither major party is unwilling to cut spending - look what happened the last time they claimed they would cut spending: http://www.economist.com/blogs/democracyinamerica/2011/08/deficit-reduction http://www.economist.com/blogs/democracyinamerica/2011/08/de... )
- stephenjudkins 15y ago
  I mostly agree with you. The likely situation is that the US will pay down its debt through a combination of spending cuts and tax hikes. But there is no doubt that the tax hikes will be substantial. I believe we're in a pretty poisonous political environment, where the dominant strategy for a politician seems to be to convince your constituents that they're being taken advantage of. Most people who benefit from government programs don't realize it (see http://economix.blogs.nytimes.com/2011/02/11/keep-your-government-hands-off-my-government-programs/ http://economix.blogs.nytimes.com/2011/02/11/keep-your-gover...), and most voters have an incredibly skewed view of what, exactly, the government spends money on. When polled, voters oppose cuts to almost every major program. That the median voter has largely incoherent views on the budget, but is very angry about it, leads us right into our current mess. To my original point: OP's argument is big on righteous indignation, along with a narrative that allows him to cast himself as a "good guy" and short on actual facts to how to dig our way out of this mess.

rsanchez1 15y ago

He seems to think it was "free market principles at work" that caused this. It was those dangling carrots in front of poor people and convincing them that letting any Joe Scmoe borrow money for a house was a good thing. Now these same people are out there sympathizing with the people whose lives they destroyed and promising more things, such as putting all their loans under control of the government. At least the bank can't send a swat team to my house to collect payments.