Avoid the 2008 crisis

[minhow]

There are topics and videos about avoiding the 2008 financial crisis, but they have a POD that are based on austerity, instead of keeping how things were.

But what if instead of the subprime mortgages being prevented, the government just kept the pre-2008 system on, subsidizing and bailing out the banks, to keep them working, and giving credit for people that can't repay them. Maybe someone that likes to print money is appointed to fed.

Do that look ASB? Liking or not, people were owning homes, even if they can't pay them, and is unlikely that a government would like to be responsible for kicking people from their houses, even if they are in debt, specially on an electoral year.

What would be the consequences of this? What effects will be without the financial crisis and people living with less austerity? How long that would be viable?

 

[PeterEzgo]

I don't think you understand the sheer scale of the 2008 financial crisis. The mortgage market was overvalued by trillions of dollars. No government in the world, no combination of governments could subsidize their way out of the crisis completely. There was going to be a sharp and painful adjustment period no matter what anyone did.

 

[Mad Bad Rabbit]

Keep the Fed from setting ~0% interest rates during the Bush Administration, so Wall Street can make money off of responsible loans.

 

[Godot]

The subprime loans were absolutely unsustainable - the point wasn't to profit off of the people who couldn't afford houses, it was to bundle those loans into packages that could be securitized. You needed a certain number of mortgages to create such a package and it became very easy to fudge the numbers to make them seem like safe bets that further bets could be placed upon.

2008 happened when it did as the adjustable rate mortgages expired and the rates shot up enormously. The mortgages failed, the fiction of AAA ratings for those packages became evident, and the whole thing fell apart.

There is no universe in which those securities can be kept afloat no matter how printer happy the Fed is.

 

[minhow]

It's impossible to avert the crisis by keeping the things like they were? A bubble burst was inevitable it seems.

Keep the Fed from setting ~0% interest rates during the Bush Administration, so Wall Street can make money off of responsible loans.

That would be a way to keep the crisis to happen.

 

[CaptainCalvert]

One other option for the US would be to let the irresponsible and poorly managed banks fail but to use the roughly $3,000 per person to instead support or bail out the mortgage holders who'd been rorted. Assuming that average household occupancy is about three people and that half housholds have mortgages, that's an average $20,000 per mortgage holder. They're no less deserving than the irresponsible greedy banks and it can't be seen as a reward for failure.

Would it have been any better overall? Well it was (and arguably still is) destructive, so not easy to make it much worse, and maybe it woild be better, since a) responsible banks still existed and - with up to $1T of federal support - they can help out a lot b) the worst-run banks fold, no bonuses are paid to the people who engineered or permitted such bad practice, and a clear message is sent to big businesses that good business pays. c) the pressure for austerity is reduced, since the market has to readjust itself d) ordinary people tend to spend their money where richer ones tend to save it, so the economy is more likely to keep ticking over.
Small state and free market politicians can benefit from walking the talk, interventionists can point to the value of supporting real people, not faceless and incompetent organisations.
Win win all round.

 

[Mad Bad Rabbit]

One other option for the US would be to let the irresponsible and poorly managed banks fail but to use the roughly $3,000 per person to instead support or bail out the mortgage holders who'd been rorted. Assuming that average household occupancy is about three people and that half housholds have mortgages, that's an average $20,000 per mortgage holder. They're no less deserving than the irresponsible greedy banks and it can't be seen as a reward for failure.

[ the meme where the new guy brainstorms an impolitic idea and is thrown out the window ]

 

[PeterEzgo]

That would be a way to keep the crisis to happen.

That might lessen the size of the crisis but the seeds of the 2008 financial crisis were sown starting in the 1970s. There was going to be a major market correction no matter what economic policies George W. Bush's administration pursued.

snip

Not bailing out the banks would work until every business in America that relies on a line of credit (which is practically every business in America) is unable to pay their bills and going bankrupt. An extra $3000 is only going to go so far when every person in the United States is going to be unemployed very soon.

I feel like people don't understand just how close to financial Armageddon we came in 2008. Every single bank in the United States was at significant risk of failure. Not just the big investment banks but the mom-and-pop regional banks too. We were replaying the beginning of the Great Depression with a different spark.

Bailing out the banks was the best option out of a lot of really terrible ones. Was it implemented perfectly? Hell no. Could it have been done better, with and without the benefit of hindsight? Of course. But we skated by with just a prolonged recession when we were looking at a real Second Great Depression for a while there.

 

[Derek Pullem]

Keep the Fed from setting ~0% interest rates during the Bush Administration, so Wall Street can make money off of responsible loans.

Why does that stop someone doing what they did IOTL and make even more money (Greed is good......)?

 

[Mad Bad Rabbit]

Why does that stop someone doing what they did IOTL and make even more money (Greed is good......)?

Nobody was doing it before interest rates got set to artificially low levels tho.

 

[RedSword12]

Not bailing out the banks would work until every business in America that relies on a line of credit (which is practically every business in America) is unable to pay their bills and going bankrupt. An extra $3000 is only going to go so far when every person in the United States is going to be unemployed very soon.

I feel like people don't understand just how close to financial Armageddon we came in 2008. Every single bank in the United States was at significant risk of failure. Not just the big investment banks but the mom-and-pop regional banks too. We were replaying the beginning of the Great Depression with a different spark.

Bailing out the banks was the best option out of a lot of really terrible ones. Was it implemented perfectly? Hell no. Could it have been done better, with and without the benefit of hindsight? Of course. But we skated by with just a prolonged recession when we were looking at a real Second Great Depression for a while there.

Sure, bailing out the banks was necessary. But the bankers themselves should have been sent to prison for fraud.

 

[PeterEzgo]

Sure, bailing out the banks was necessary. But the bankers themselves should have been sent to prison for fraud.

Eh. Plenty of bankers committed fraud, sure, but plenty of them were just straight up bad at their jobs. Separating out which ones were evil and which ones were incompetent is and was a fool's errand.

And plenty of regular, everyday people committed fraud by lying on their mortgage applications (even if the bankers knew they were lying). Not many of them went to jail either.

 

[minhow]

Its hard to keep the pre-2008 standards of living without a recession then?

 

[High Plains Drifter]

The sub-prime mortgage loan bubble was a disaster waiting to happen.

Maybe if the Fed and Alan Greenspan (Fed Chair from 87-06) had publicly taken it up as an issue, making warnings, and encouraging the bond rating companies to perform actual due diligence on the quality of the bundled bonds based off mortgages ... then the bubble and the mortgage specific fall out from it would not be as bad.

However, the biggest basis for why the 07-08 Financial Crisis was a true existential crisis of the whole Financial system was the use of Over the Counter (OTC) derivates based on the bonds/insurance related to sub prime mortgage loans by most big investment/lending corporations (Merril Lynch, Bear Stearns, Goldman Sachs, etc).

OTCs are unregulated and unreported financial agreements between. All the big Financial players had OTCs with each other pertaining to sub prime mortgage loan based bonds. Company A will pay Company B $X amount if Condition N is met and vice versa if Condition Q is met with regards to the return on the bond or the failure rate % of mortgages within the grouping of mortgages that made up a particular bond, or something else. Then, Company A, feeling so strongly that they would "win" the OTC (aka "bet) with Company B; Company A would then make multiple other OTCs with Companies, C, D, and E on the outcome of that original OTC.

When the bubble on sub prime mortgage loans and the beginning of large number of failures of bonds based on those sub prime loans happened, a ridiculous number of OTCs (such as credit default swaps for anyone who read or watched The Big Short) came due. Suddenly, a crap load of the Big Financial Institutions needed cash infusions in order to pay off their OTC losses ... and banks got cold feet. Why would a Bank want to make a loan, even a short term loan, to say Bear Stearns, when the Bank had A) no idea how many OTCs that Bear Stearns was going to have to pay off; and, B) was Bear Stearns going to be liquid enough to pay back the loan or would it go bankrupt. There were just too many OTCs out there and no one knew how many or had a way to check.

So Banks and Investment Firms and other Financial players began to stop loaning to each other. The entire financial system came close to collapsing because money stopped moving around ... until the Fed basically publicly agreed to back everyone's debt to ensure they stayed out of bankruptcy. At that point I believe Bear Stearns had already gone bankrupt and the Fed/US Gov't did force Merril Lynch to merge with someone else whose balance sheet looked a lot healthier or they'd have let Merril Lynch go bankrupt too.

ALL that said, there is a perfect POD from about 1998 that would have solved the OTC issue. Brooksley Born, the Chair of the Commodity Future Trading Commission, proposed creation of regulation that would have required the centralized registering of OTCs. No regulation as to what could be in an OTC, but simply a clearing house that identified the companies involved in an OTC and the general amount of the OTC.

If that had been in place in 07-08, banks would have most likely continued to make loans to each other because they would have had an actual idea as to how solvent the financial institutions they were making loans to were. The size of the Fed's intervention because of the sub prime mortgage loan bubble burst would have been vastly reduced. And all markets would have performed better ... though I am not saying they all would have performed ok.

Alas, the Investment Firms and the politicians on Capitol Hill that they buy hated Ms. Born's idea. Alan Greenspan hated the idea. And US Secretary of the Treasury, Larry Summers, called Ms Born to yell at her and tell her to pull back the proposed regulations. Within a year, Ms. Born "voluntarily" retired. In 2009, she received the John F Kennedy Profiles in Courage Award for her fruitless efforts to try and fix some of the root problems behind the -07-08 Crash.

So if only the Clinton Administration and the Democratic Congress had had just a little bit of foresight and smarts.

 

[CalBear]

Chat Subject.

 

[CaptainCalvert]

The sub-prime mortgage loan bubble was a disaster waiting to happen.

Maybe if the Fed and Alan Greenspan (Fed Chair from 87-06) had publicly taken it up as an issue, making warnings, and encouraging the bond rating companies to perform actual due diligence on the quality of the bundled bonds based off mortgages ... then the bubble and the mortgage specific fall out from it would not be as bad.

However, the biggest basis for why the 07-08 Financial Crisis was a true existential crisis of the whole Financial system was the use of Over the Counter (OTC) derivates based on the bonds/insurance related to sub prime mortgage loans by most big investment/lending corporations (Merril Lynch, Bear Stearns, Goldman Sachs, etc).

OTCs are unregulated and unreported financial agreements between. All the big Financial players had OTCs with each other pertaining to sub prime mortgage loan based bonds. Company A will pay Company B $X amount if Condition N is met and vice versa if Condition Q is met with regards to the return on the bond or the failure rate % of mortgages within the grouping of mortgages that made up a particular bond, or something else. Then, Company A, feeling so strongly that they would "win" the OTC (aka "bet) with Company B; Company A would then make multiple other OTCs with Companies, C, D, and E on the outcome of that original OTC.

When the bubble on sub prime mortgage loans and the beginning of large number of failures of bonds based on those sub prime loans happened, a ridiculous number of OTCs (such as credit default swaps for anyone who read or watched The Big Short) came due. Suddenly, a crap load of the Big Financial Institutions needed cash infusions in order to pay off their OTC losses ... and banks got cold feet. Why would a Bank want to make a loan, even a short term loan, to say Bear Stearns, when the Bank had A) no idea how many OTCs that Bear Stearns was going to have to pay off; and, B) was Bear Stearns going to be liquid enough to pay back the loan or would it go bankrupt. There were just too many OTCs out there and no one knew how many or had a way to check.

So Banks and Investment Firms and other Financial players began to stop loaning to each other. The entire financial system came close to collapsing because money stopped moving around ... until the Fed basically publicly agreed to back everyone's debt to ensure they stayed out of bankruptcy. At that point I believe Bear Stearns had already gone bankrupt and the Fed/US Gov't did force Merril Lynch to merge with someone else whose balance sheet looked a lot healthier or they'd have let Merril Lynch go bankrupt too.

ALL that said, there is a perfect POD from about 1998 that would have solved the OTC issue. Brooksley Born, the Chair of the Commodity Future Trading Commission, proposed creation of regulation that would have required the centralized registering of OTCs. No regulation as to what could be in an OTC, but simply a clearing house that identified the companies involved in an OTC and the general amount of the OTC.

If that had been in place in 07-08, banks would have most likely continued to make loans to each other because they would have had an actual idea as to how solvent the financial institutions they were making loans to were. The size of the Fed's intervention because of the sub prime mortgage loan bubble burst would have been vastly reduced. And all markets would have performed better ... though I am not saying they all would have performed ok.

Alas, the Investment Firms and the politicians on Capitol Hill that they buy hated Ms. Born's idea. Alan Greenspan hated the idea. And US Secretary of the Treasury, Larry Summers, called Ms Born to yell at her and tell her to pull back the proposed regulations. Within a year, Ms. Born "voluntarily" retired. In 2009, she received the John F Kennedy Profiles in Courage Award for her fruitless efforts to try and fix some of the root problems behind the -07-08 Crash.

So if only the Clinton Administration and the Democratic Congress had had just a little bit of foresight and smarts.

Who was it reputedly said
"It's the economy, stupid!"....

 

[SealTheRealDeal]

What if the feds buy the dip?

Like buyouts of undervalued companies instead of bailouts for banks. Then lower taxes because the federal government has new income streams, as well as in-house contractors to set a floor for competition.

 

[minhow]

How long would the crisis would be delayed if the FED "subsidized" the banks to avoid the crash? What would be the effects of this? A bigger crisis?