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In the subprime crisis 10 million American families lost their homes and 8.7 million people lost their jobs. In the case of the collapse of an AI bubble, I don

by simonh 1y ago

In the subprime crisis 10 million American families lost their homes and 8.7 million people lost their jobs. In the case of the collapse of an AI bubble, I don't see as much of a direct relationship to effects on the average Joe. Yes all those billions spent by tech investors will get written off, the companies heavily invested in AI will shed well paid tech jobs in a sector that was craving talent anyway. I think the biggest effect would be the fact that all that capital was spent on AI tech rather than productive assets and businesses. That's a big opportunity cost, and would hit growth, but I don't see it wiping out ordinary people in the same way. The pain will be heavily concentrated on investors and for everyone else it will just be a slow drag but not a catastrophe. The real problem is if there are other negative economic effects that compound with it.

smsm42 1y ago
> In the subprime crisis 10 million American families lost their homes When you say "lost their homes", do you mean "I owned the house and somehow I now own no house and have no money for it, it just evaporated", or do you mean "I took a loan I could not afford, on a house I could not afford, while investing a tiny amount of money or none at all into the deal, and hoping to profit from ever increasing prices, and using my equity as an infinite-money ATM, and when that stopped, the bank took the house back"? If the latter, then what was lost is not "homes" but unrealistic prospects of profits from the thin air. If the former, I'd like to know how exactly a subprime crisis could cause something like that.
- pixl97 1y ago
  That is a very broad and angry brush you're painting with. There were plenty of people that bought houses at reasonable prices and down-payments and still lost their ass when downstream ramifications took out unrelated businessss.
  - smsm42 1y ago
    I don't doubt that, I just think when throwing around million-sized numbers it is necessary to be aware that these numbers are not describing one case, they describe a lot of different cases. There were a lot of people that were hurt by the subprime fallout (myself included, though I did not lose a home because I could not afford one at the time anyway) and also a lot of people engaging in absolutely reckless speculation (which also was one of the reasons why I was not able to afford a home at the time). There's more than one side to that picture, and some of the people who gut hurt were also the people who made it possible to get that crazy in the first place.
- xboxnolifes 1y ago
  Actual people lived in those actual homes and ended up being actually hurt in the housing market crash. Actual people are not relying on actual AI. And I doubt many actual people would be hurt by the AI crash.
  - amdsn 1y ago
    I don't share your doubts. Even people not directly exposed to the bubble may be indirectly exposed by way of funds they've invested in or retirement accounts, or even just by having invested in something that invested in something that may evaporate with the bubble. Not to mention jobs that may disappear, which will result in the people who held those jobs being less able to spend their money, which has knock-on effects in the rest of the economy if it happens at large enough scale.
- BobaFloutist 1y ago
  Didn't a lot of people lose their houses because they bought a house with a mortgage payment they could absolutely afford with their income, and then got laid off when the economy contracted? And, frankly, it's literally the bank's job not to make loans that people will default on too frequently (for their own sake), so if you're not exceptionally knowledgeable about banking, it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. Like, sure, you shouldn't trust them not to screw you on the terms and with interest, but banks mostly are trying to make loans they expect to get paid back, and I would personally expect them to have a good idea of how much they can trust me with.
  - smsm42 1y ago
    > And, frankly, it's literally the bank's job not to make loans that people will default on too frequently It's not the bank's job though to decide whether it's ok for you to treat the house as a long-term asset which consumes a part of your cash flow, or as a speculative gamble. You can find a bank that will support either, but it's on you to decide which road to take. And if somebody takes the speculative road and loses, then it's not exactly the banks' fault. The adult should take responsibility for their own actions. > it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. No, it's not reasonable at all. Loan officers do not have a fiduciary duty towards you. They have a fiduciary duty towards the bank, so that's what they worry about - to take care of bank's interests. Assuming those interests would always align with yours is a dangerous naiveté. There are financial advisors who are fiduciaries - and you can hire one if you need - but you won't find them in your mortage bank's loan office. Yes, the bank is interested, in most cases, not to produce overtly bad loans - but that doesn't mean they care how you are going to pay it, and there's a lot of chance they'd sell your loan to another servicer in a year or two anyway. They have no duty to figure out if taking this loan won't harm you, that's your duty.
    - xp84 1y ago
      Agree with 95% of this. The only slight tweak id make is that the banks did err in assuming the value of the homes being used as collateral could not tank. Setting aside for a moment the reality of pretty rapid sales of the note to another entity, in general, it shouldn’t matter very much to the bank if you’re able to pay the loan back, assuming that their predictions are correct about the value of the home, and assuming as well that you don’t physically destroy it. Either they get their money or they get to sell the house and get their money.
- ajross 1y ago
  Uh... neither. The former is wrong, because as you point out the housing supply isn't a matter of finance. People have homes. But your respin is kind of a whopper too. While there were absolutely people cynically leveraging real estate to make a buck, the overwhelming majority of foreclosures in the wake of the '08 crisis were just regular homeowners. They needed a home (maybe they moved, or got married, grew up, downsized, etc... people need homes!). So they called a real estate agent and a bank to figure out what they could get, and everyone told them (correctly) that they could get a great home at a very reasonable price with very little down payment. Because everyone else was doing it. So they did.
  - xp84 1y ago
    Insert the comment everyone’s mom says about peer pressure: “if everybody else was jumping off a cliff, would you jump too?” Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame, regardless of whether “everyone was doing it.“ I don’t mean any criticism toward people who happened to lose their jobs and would’ve otherwise been able to continue paying on the loans they’d taken. Nor am I saying it’s OK to take advantage of people who don’t bother to read or understand the assumptions inherent in the contracts that they’re signing. But people were incredibly naïve if they accepted some broker’s verbal assertion that they’ll always be able to refinance the otherwise-unaffordable house on favorable terms in 3 or 5 years or whatever.
    - ajross 1y ago
      > Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame Come on. Median homeowners (even median HN commenters) are hard put to even define those terms, much less execute your strategy correctly. This kind of blame-the-dummies caveat emptor absolutism fails in the modern world. It's like demanding people decide on their own medical diagnoses and select treatments from a menu. We license realtors and banks, regulate mortgage marketing and have a CFPB for a reason.
- wakawaka28 1y ago
  You are kind of on to something in that people had loans they shouldn't have gotten in the first place. But as with many things of this nature, the casualties were all over the place. The labor market turned to shit, just as prices crashed and interest rates went up. People who paid faithfully and thought they had equity were shocked to find they were underwater in months. That's one HUGE down side of low down payments: it doesn't take much for a price swing to wipe out all your equity and leave you in a no-win situation when it comes to selling your house. Down payments ought to be at least 20% of the price of the house, to discourage people from taking out bad loans or walking away from them. The government should not subsidize mortgage credit or fix interest rates in any way.
- simonh 1y ago
  At the time most of those people took out those loans on those houses, they could afford them. Several things happened in various combinations. Interest rates shot up making the loans unaffordable. House prices collapsed so now they had taken out loans on houses worth dramatically less than they bought them for. They lost their job. In some cases they lost their job meaning they needed to move to find work, but that would mean selling a house worth less than they bought it for which mans they'd owe the difference, and the mortgage on the new house would be unaffordable anyway due to the increase in mortgage rates. Then bear in mind the hyper aggressive marketing tactics, and assurances from financial institutions and politicians that this was all fine and there was no risk. Ultimately though, this has nothing at all to do with my comment. I meant "they lost their homes" and that's all. I didn't assign any blame to anyone, nor did I try to accuse anyone of anything, all I talked about was the potential economic repercussions.
vouwfietsman 1y ago
AFAIK its theorized much of the GDP growth of the US, as well as the stock market growth of important index funds, is mostly as a result of select tech companies surfing the AI hype. In that case, a prolonged recession may occur (that would've occurred anyway), and the effect will be felt throughout the economy. But, again, that's just a general recession being triggered by the AI bubble bursting, i.e. AI no longer propping up the economy, so that's not a bad thing. What the results of that are in terms of severity or impact I wouldn't know, I don't think anyone knows.
- WillPostForFood 1y ago
  Why do you think it would be a prolonged recession? Dot com bust, for example, was just two quarters of GDP decline, followed by solid growth. 2007 was much worse, because it was a crisis of financial institutions. AI bubble may be bigger than dot com, but feels more like it in that is a narrow section of the economy. Even more narrow than dot com.
  - vouwfietsman 1y ago
    Well I think nobody knows this stuff, so don't take my word for it. I think prolonged makes sense because AI is holding off a depression, but that depression does not have a singular obvious cause. I think there's a bunch of reasons to be pessimistic about the global economy, including of course (geo)political, (trade)wars, extremism, stagnating production, etc. Contrary to the dotcom bubble, current AI might not actually be a useful-but-overvalued tech. It may just not be that useful at all. In that case, a rally like dotcom is out.

by simonh 1y ago

smsm42 1y ago

> In the subprime crisis 10 million American families lost their homes When you say "lost their homes", do you mean "I owned the house and somehow I now own no house and have no money for it, it just evaporated", or do you mean "I took a loan I could not afford, on a house I could not afford, while investing a tiny amount of money or none at all into the deal, and hoping to profit from ever increasing prices, and using my equity as an infinite-money ATM, and when that stopped, the bank took the house back"? If the latter, then what was lost is not "homes" but unrealistic prospects of profits from the thin air. If the former, I'd like to know how exactly a subprime crisis could cause something like that.

pixl97 1y ago
That is a very broad and angry brush you're painting with. There were plenty of people that bought houses at reasonable prices and down-payments and still lost their ass when downstream ramifications took out unrelated businessss.
- smsm42 1y ago
  I don't doubt that, I just think when throwing around million-sized numbers it is necessary to be aware that these numbers are not describing one case, they describe a lot of different cases. There were a lot of people that were hurt by the subprime fallout (myself included, though I did not lose a home because I could not afford one at the time anyway) and also a lot of people engaging in absolutely reckless speculation (which also was one of the reasons why I was not able to afford a home at the time). There's more than one side to that picture, and some of the people who gut hurt were also the people who made it possible to get that crazy in the first place.
xboxnolifes 1y ago
Actual people lived in those actual homes and ended up being actually hurt in the housing market crash. Actual people are not relying on actual AI. And I doubt many actual people would be hurt by the AI crash.
- amdsn 1y ago
  I don't share your doubts. Even people not directly exposed to the bubble may be indirectly exposed by way of funds they've invested in or retirement accounts, or even just by having invested in something that invested in something that may evaporate with the bubble. Not to mention jobs that may disappear, which will result in the people who held those jobs being less able to spend their money, which has knock-on effects in the rest of the economy if it happens at large enough scale.
BobaFloutist 1y ago
Didn't a lot of people lose their houses because they bought a house with a mortgage payment they could absolutely afford with their income, and then got laid off when the economy contracted? And, frankly, it's literally the bank's job not to make loans that people will default on too frequently (for their own sake), so if you're not exceptionally knowledgeable about banking, it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. Like, sure, you shouldn't trust them not to screw you on the terms and with interest, but banks mostly are trying to make loans they expect to get paid back, and I would personally expect them to have a good idea of how much they can trust me with.
- smsm42 1y ago
  > And, frankly, it's literally the bank's job not to make loans that people will default on too frequently It's not the bank's job though to decide whether it's ok for you to treat the house as a long-term asset which consumes a part of your cash flow, or as a speculative gamble. You can find a bank that will support either, but it's on you to decide which road to take. And if somebody takes the speculative road and loses, then it's not exactly the banks' fault. The adult should take responsibility for their own actions. > it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. No, it's not reasonable at all. Loan officers do not have a fiduciary duty towards you. They have a fiduciary duty towards the bank, so that's what they worry about - to take care of bank's interests. Assuming those interests would always align with yours is a dangerous naiveté. There are financial advisors who are fiduciaries - and you can hire one if you need - but you won't find them in your mortage bank's loan office. Yes, the bank is interested, in most cases, not to produce overtly bad loans - but that doesn't mean they care how you are going to pay it, and there's a lot of chance they'd sell your loan to another servicer in a year or two anyway. They have no duty to figure out if taking this loan won't harm you, that's your duty.
  - xp84 1y ago
    Agree with 95% of this. The only slight tweak id make is that the banks did err in assuming the value of the homes being used as collateral could not tank. Setting aside for a moment the reality of pretty rapid sales of the note to another entity, in general, it shouldn’t matter very much to the bank if you’re able to pay the loan back, assuming that their predictions are correct about the value of the home, and assuming as well that you don’t physically destroy it. Either they get their money or they get to sell the house and get their money.
ajross 1y ago
Uh... neither. The former is wrong, because as you point out the housing supply isn't a matter of finance. People have homes. But your respin is kind of a whopper too. While there were absolutely people cynically leveraging real estate to make a buck, the overwhelming majority of foreclosures in the wake of the '08 crisis were just regular homeowners. They needed a home (maybe they moved, or got married, grew up, downsized, etc... people need homes!). So they called a real estate agent and a bank to figure out what they could get, and everyone told them (correctly) that they could get a great home at a very reasonable price with very little down payment. Because everyone else was doing it. So they did.
- xp84 1y ago
  Insert the comment everyone’s mom says about peer pressure: “if everybody else was jumping off a cliff, would you jump too?” Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame, regardless of whether “everyone was doing it.“ I don’t mean any criticism toward people who happened to lose their jobs and would’ve otherwise been able to continue paying on the loans they’d taken. Nor am I saying it’s OK to take advantage of people who don’t bother to read or understand the assumptions inherent in the contracts that they’re signing. But people were incredibly naïve if they accepted some broker’s verbal assertion that they’ll always be able to refinance the otherwise-unaffordable house on favorable terms in 3 or 5 years or whatever.
  - ajross 1y ago
    > Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame Come on. Median homeowners (even median HN commenters) are hard put to even define those terms, much less execute your strategy correctly. This kind of blame-the-dummies caveat emptor absolutism fails in the modern world. It's like demanding people decide on their own medical diagnoses and select treatments from a menu. We license realtors and banks, regulate mortgage marketing and have a CFPB for a reason.
wakawaka28 1y ago
You are kind of on to something in that people had loans they shouldn't have gotten in the first place. But as with many things of this nature, the casualties were all over the place. The labor market turned to shit, just as prices crashed and interest rates went up. People who paid faithfully and thought they had equity were shocked to find they were underwater in months. That's one HUGE down side of low down payments: it doesn't take much for a price swing to wipe out all your equity and leave you in a no-win situation when it comes to selling your house. Down payments ought to be at least 20% of the price of the house, to discourage people from taking out bad loans or walking away from them. The government should not subsidize mortgage credit or fix interest rates in any way.
simonh 1y ago
At the time most of those people took out those loans on those houses, they could afford them. Several things happened in various combinations. Interest rates shot up making the loans unaffordable. House prices collapsed so now they had taken out loans on houses worth dramatically less than they bought them for. They lost their job. In some cases they lost their job meaning they needed to move to find work, but that would mean selling a house worth less than they bought it for which mans they'd owe the difference, and the mortgage on the new house would be unaffordable anyway due to the increase in mortgage rates. Then bear in mind the hyper aggressive marketing tactics, and assurances from financial institutions and politicians that this was all fine and there was no risk. Ultimately though, this has nothing at all to do with my comment. I meant "they lost their homes" and that's all. I didn't assign any blame to anyone, nor did I try to accuse anyone of anything, all I talked about was the potential economic repercussions.

vouwfietsman 1y ago

AFAIK its theorized much of the GDP growth of the US, as well as the stock market growth of important index funds, is mostly as a result of select tech companies surfing the AI hype. In that case, a prolonged recession may occur (that would've occurred anyway), and the effect will be felt throughout the economy. But, again, that's just a general recession being triggered by the AI bubble bursting, i.e. AI no longer propping up the economy, so that's not a bad thing. What the results of that are in terms of severity or impact I wouldn't know, I don't think anyone knows.

WillPostForFood 1y ago
Why do you think it would be a prolonged recession? Dot com bust, for example, was just two quarters of GDP decline, followed by solid growth. 2007 was much worse, because it was a crisis of financial institutions. AI bubble may be bigger than dot com, but feels more like it in that is a narrow section of the economy. Even more narrow than dot com.
- vouwfietsman 1y ago
  Well I think nobody knows this stuff, so don't take my word for it. I think prolonged makes sense because AI is holding off a depression, but that depression does not have a singular obvious cause. I think there's a bunch of reasons to be pessimistic about the global economy, including of course (geo)political, (trade)wars, extremism, stagnating production, etc. Contrary to the dotcom bubble, current AI might not actually be a useful-but-overvalued tech. It may just not be that useful at all. In that case, a rally like dotcom is out.