2008 Financial Crisis Caused by too Much Regulation

Posted by dbhalling 9 years, 2 months ago to Economics
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This is an excellent article that shows Congress, Presidents, Fannie and Freddie and regulations are what caused the 2008 housing meltdown, not the deregulation narrative
SOURCE URL: http://www.forbes.com/sites/danielfisher/2015/01/08/why-everything-you-know-about-the-financial-crisis-is-wrong/


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  • Posted by edweaver 9 years, 2 months ago
    I do agree this is one aspect of the meltdown. I would just point out that even though the government was more or less forcing banks to loan to people that could not afford to repay, these people still signed onto a mortgage that they could not afford. IMHO, ultimately it was the people themselves that caused this aspect of the meltdown.

    Respectfully,
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    • Posted by 9 years, 2 months ago
      That is somewhat true, but you also have to remember that real median income did not increase during that decade. Most people buy a house assuming that their income with some ups and downs will increase. Even during the Great Depression real per capita median incomes increased.

      This lack of growth in incomes was symptomatic of a number of bad economic decisions made the Bush II administration and our courts.

      You are also ignoring that the government forced banks to increase these sort of loans by law.

      Regardless, the financial meltdown was not caused by deregulation, which the mantra of the statists.
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      • Posted by edweaver 9 years, 2 months ago
        I do agree wholeheartedly that the meltdown was not caused by deregulation.

        My philosophy has always been to never count on what I don't have and that includes income. When I build my first home, I was shocked at how much the banks would loan. It was way out of my comfort zone to borrow as much as I could have. That was my first clue in 1996 we were headed for trouble. I did not realize how bad it was going to be until 2005 when I learned that people were getting interest only, no money down loans, at more than the face value of the property they were buying. Rolling boats & cars & credit card debt into them.
        I have to stand on my statement that people signed the mortgage so it is more their responsibility than the lenders or the government. IMHO, this is only the governments problem if we expect them to take care of us.
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        • Posted by 45frank 9 years, 2 months ago
          Agree, don't understand don't sign until you do. My first build home was in NJ and when housing was souring so did my taxes, they started at $2,400.00 in 89 and when I left in the $6,000.00 range. I knew it was time to move on.
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    • Posted by Robbie53024 9 years, 2 months ago
      Who's to blame - the fool who borrows the money that they know they cannot repay, or the fool who lends it knowing they won't repay?
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      • Posted by Genez 9 years, 2 months ago
        The people getting the loan are foolish for buying into more than they can afford. If they fail to make the payments and lose the house, that is their fault. We called that a 'natural consequence' when we were raising our kids..

        The problem as many have alluded to, is that there were regulations put in place that forced financial institutions to make loans based on more than just financial data... Race, socioeconomic status, location etc played in. Also, the standards for lending were GREATLY reduced which increased the number of so called 'predatory' (AKA high risk) loans.

        And the foolish buyers paid whatever interest rate, fee, etc just to get in a house. The reality is, despite liberal policies trying to justify making sure everyone could own a home, NOT everyone should own a home. Some are simply not capable financially. Others do not need the increased responsibility that comes with property ownership and should stay renters, leasors, etc.
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    • Posted by 45frank 9 years, 2 months ago
      Agreed and unless someone put a gun to their head they were/are responsible.
      Second if they didn't know they couldn't afford their mortgage payment they had no right to a mortgage in the first place..
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      • Posted by eddieh 9 years, 2 months ago
        Very true but, doesn't everyone want a bigger house in a better neighborhood? No one said these people were educated enough in the mortgage lingo as not to be convinced and tricked into signing their life away. They trusted crooked loan officers who were just increasing their commissions..
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        • Posted by 9 years, 2 months ago
          Also our tax code pushing people into real estate to lower their current taxes and in the case of personal homes the advantage in capital gains. Just another regulation that contributed to the 2008 melt down.
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        • Posted by 45frank 9 years, 2 months ago
          I downsized in 2004 knowing the housing market had to bust, I am downsizing yet again now, No not everyone wants a bigger house then their neighbor.
          How did the lenders mislead people,

          If they lied about what the payment was then they should be punished accordingly.

          I had two mortgages in my life and I was told at least 20 times what my payments were, how many, and when they were due by my attorney as well as the lender.
          As I said if you didn't know what your payment was to be you didn't deserve a any loan.
          Otherwise oh well.
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          • Posted by 9 years, 2 months ago
            Taxes? Subdivision fees? Many people have been caught innocently by these and these made the house unaffordable or put them underwater. Not to mention health problems, or a business that went under.

            Bottom line you are ignoring the role of the government in causing this problem. The government was the primary actor and cause. Some of the problems were directly related to the housing crisis, but other bad government decisions also contributed. Place the blame where it is deserved and it is not on greedy home buyers.
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            • Posted by LetsShrug 9 years, 2 months ago
              Why can't some of the blame go to the home buyer...getting in over your head and believing something too good to be true isn't responsible purchasing.
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              • Posted by khalling 9 years, 2 months ago
                It goes to cause. The banks wouldn't have offered TGTBT deals if they weren 't pushed by the govt. Also the banks assessed the risk, as you' ve said, to be mitigated. Regardless if other regulations had not been in place you would not have seen such a huge bubble. Investment would have had inumerous places to flow not just real estate. For instance look at the number of companies that went public 2007-08. Compare that to 2000. The money traveled to the easiest place.
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            • Posted by 45frank 9 years, 2 months ago
              I will agree they should have been told about all fees no doubt and anyone who lied should be jailed.
              Maybe it's just me and I checked everything before I ever buy anything.
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          • Posted by eddieh 9 years, 2 months ago
            I know people who did jail time for appraisals that were too high and fudging numbers on paperwork to get the mortgages passed and the buyers really did not understand what was going on.
            I also many people who, like you, were smart enough to handle your finances well.
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  • Posted by PeterAsher 9 years, 2 months ago
    The rarely pointed out factor in borderline qualifiers going under is maintenance.

    People who have not been raised in or owned a home have little awareness of the chores and expenses that are not encountered as renters. The best example is when the furnace goes, the owner has no funds to replace it and walks away.

    When one tallies up all the time and money needed from lawn mowing to routine repair cycles up to big sticker items it can readily be seen that basing an already flawed budget analysis on ability to pay without having a line item for anticipating those costs was foolish.

    Nevertheless; the mortgage debacle was just one of the factors contributing to “The perfect (debt) storm.”

    My observations, back in early 2009 were that the root cause of this actual depression was the policies of credit card lending.

    "This recession was not caused by a credit crunch and it was not caused by the sub-prime crisis. The cause was that the economy was built on a debt bubble that expanded to a level of unsustainable debt service. The capability to produce goods and services expanded to the money supply allotted to it, but an economy that attains equilibrium on the advancement of purchasing power must inevitably contract when that advancement can no longer be maintained. . Defaulting mortgage debt was the proverbial last-straw-on-the-camel’s-back, the final load on this unsustainable debt.

    Debt service now claims a substantial portion of overall purchasing power. The portion remaining to drive the economy is therefore now less than it would be even on a no-credit, spend-it-as-you-earn-it basis. The economy that has expanded to fulfill the demand of earnings-plus-advanced-payment, must contract to the demand of earnings-minus-cost-of-debt-service. What for decades was an economy built on, “Buy now, pay later,” has become, “Pay now, buy later!”

    http://takeamericaforward.com/economy/st...

    This was further exacerbated by their ability to contractually raise interest rate to astronomical amounts. No additional economic growth is created out of consumer’s spending money being sent elsewhere as interest payment unless that money results in its receivers spending into the domestic economy.

    Joe six-pack’s cash flow being transferred to a buyer of a custom wooden speed boat built at Lake Lugano doesn’t cut it!

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    • Posted by 9 years, 2 months ago
      No this is not just a debt bubble, but bad economic policies that killed the growth in the economy. Talking about debt service, what about government service? The portion that Americans pay for government has increased enormously since 2000 and that started from an already high place The problem is the government, not the people.
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      • Posted by PeterAsher 9 years, 2 months ago
        Of course it was not “just” the debt bubble.

        There are factors affecting the production of goods and factors that drain that wealth.

        Government service, welfare, higher prices paid for X amount of corporate shares due to the premiums of hedge fund activities, etc. Any activity that enables one to obtain purchasing power without producing goods or services of useful value diminishes the ability of the economy to sustain itself.

        Rather than call it a debt bubble. Let’s call it an artificially expanded production facility.

        I like to call this “The Starbucks” syndrome.

        In the period of artificial abundance, created by lending “Printed money” that was not “backed” by someone else’s foregone purchasing power; people experienced a level of affluence in which they were willing to purchase things they could otherwise do without. More Starbucks opened up. When the artificially expanded purchasing power contracted, that kind of purchase is the first to go. Back to; make it at home, take a thermos to work. Many Starbucks closed.

        We are on the Oregon Coast. The first business to go in the nearby small town on #101 was the hardware store; a year later, the small supermarket. Then last year, the pharmacy and this year, up the road, the only gift shop and restaurant on a twenty mile stretch. The Bobcat equipment sales and rental up in Tillamook is also gone.

        Top-end, view-home activity is a small fraction of what it was before. The two design/build projects we have been doing were financed by the owner’s savings, earnings and borrowing against equity in other properties as construction loans are almost non-existent.

        Where does the financial energy come from to turn this around? It would seem to require a “Sea change” across the economic spectrum:

        Eliminate most of the welfare state by putting idle hands to work, rolling back government services to only what was essential (and only one agency per need), reversing the tax policies that drives production off-shore, eliminate all formal exchanges that trade “Betting paper” not backed by a physical asset and more that aren't coming to mind at this late hour.

        Follow that up with revising the whole concept of bank lending to have credit directed much more to financing means of production and without leveraging via fractionalization.

        I don’t see it happening other than “Rising from the ashes.”

        Got Gulch?
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        • Posted by 9 years, 2 months ago
          Austrians often suggest that it was only a credit bubble and ignore many other contributing factors. The government wants us to blame lenders and Wall Street and deregulation. And the conservatives (literally) want to blame borrowers, but the real problem starts with government policies, which included over lending but did not stop there.
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  • Posted by CircuitGuy 9 years, 2 months ago
    It seems to me the core of the problem is than Fannie and Freddie's bonds were tacitly guaranteed by the gov't. If the gov't had clearly said these bonds positively will not be bailed out, maybe investors would have taken note of the risky lending and not valued them as highly, i.e. their rates would have been higher, commensurate with the risky lending practices.

    We could have stayed with Glass-Steagall or we could have had deregulation (the better option). But we had a hybrid where investment companies were acting as banks backed by the gov't, tacitly backed. The tacit backing was the problem.
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    • Posted by 45frank 9 years, 2 months ago
      What happens when the next bubble hit and it's closer then we think?
      We are so far in debt there is no more lets just borrow some more and buy our way out, There is NO MORE, wages are declining, more then half all the newer created jobs are min. wage and part time, Americans savings at an all time low, there are still millions out of work not even being counted.
      The next crash may be out last?!?!?!?
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      • Posted by 9 years, 2 months ago
        The next crash will result in the dollar not being the world's reserve currency and this may cause just by itself a substantial drop in US standards of living This may also be the trigger for the next collapse.
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