Debate:Who is to blame for the banking crisis?

This is a Debate page. Feel free to add your own spin on the story. Please keep it civil! This debate was created by SirChuckB.

Conservapedia's Take

CP now has an article on the Banking Crisis (not as good as ours of course), and early iterations of the article appear to be fairly balanced in their reporting of it. It's a complicated issue, obviously, but how do you take it when Bush endorses the $700billion bailout, as do the Democrats, while McCain and the House Republicans oppose it?

And how long will it be before Andy whitewashes the article, and blames the Democrats, atheists and Hollywood values for the whole thing? Bondurant 08:20, 26 September 2008 (EDT)

The party line will be that Bush warned the country and tried to do something about it when he <OH LOOK A DISTRACTION SORRY NO CITATIONS HERE>, while the Democrats (Pelosi will take the fall for them on this one) were viciously undermining negotiations by being unreasonable. And of course the whole "McCain is a leader for setting aside partisanship to suspend his campaign" crap.--Tom Moore^{fiat justitia ruat coelum} 08:23, 26 September 2008 (EDT)

I thought the line was the liberal guilt was the source of all the poorly planned mortgages, not capitalistic greed. - Lardashe

Maybe Ed Poor will return from the wilderness before Andy gets his hands on it. In which case, the article will be stripped back to a line of text, along the lines of, "The Financial Crisis of 2008 is a financial crisis that happened in 2008." Bondurant 08:42, 26 September 2008 (EDT)

And woe betide anyone who tries adding to it! Totnesmartin 08:49, 26 September 2008 (EDT)

Who is to blame?

Interestingly enough, the mainline Conservative (read: not batshit insane like Andy) seems to shift the blame to personal responsibility. It's not the fault of the banking institutions that used questionable tactics to expolit an American desire to live above our means, and then compound the error by buying and selling the risky loans between themselves, or the fault of the congress (Republican andDemocrat) that led to this. No, it's the fault of the individual person who entered into these expolitive schemes.... I suppose it does have some merit... But I think that argument is (at best) attacking the symptom, not the cause. SirChuckB^{Call the FBI} 12:09, 26 September 2008 (EDT)

My problem with this argument is quite simple. I work as a researcher in the legal fields, and while we do not do real estate as teh focus of our practice, contracts from friends do fall into our laps for review now and then. The language of loans, and the concept of loan repayment is no where near as simple as it *aught* to be, so buyers listen to things that are spoken in greek and say "I can affor 900$ per month...how much of a house can I affor". I'm pretty well educated, and that was my VERY question of my own realtor. and I was told by the banks that I could secure a loan of 400,000 dollars (I make roughly 30K, my hubby barely more) of a house. We were told this by banks. Luckily, my friends in teh legal field explained in common sense what ARMS were, and what happens.

Folks, the language of contracts, and the language of loans are written precisely to obscure reality of how much you can afford, how payments are calculated, etc. To blame this one people who do walk into the whole house buying process as trying to get "what they can afford" and saying they are buying "over their heads" is not reality. It is unreasonable to expect people who are not experts in this field to have to know more than the normal shopper. Without regulations, day to day people who are good, honest, folk are victims of the sell. People buying homes are not "over buying" in thier minds, they are buying the home that they are told they can afford.--En attendant Godot_{"«Poetry involves the mysteries of the irrational perceived through rational words. V.Nabokov»} 12:19, 26 September 2008 (EDT)

It seems too many people are asking the wrong question then. "How much house can I afford" is not as important as "how much house do I need?" and "what is the market price for such a house in this area?" If someone is told "you can afford up to $400,000" but the average price for a house in the area is $150,000, they should not be looking for a $400,000 house. People should have a general idea of what their income is compared to the regional average. If they are somewhere in the middle, but are looking for a house at more than twice the average, the shouldn't need a realtor or a lawyer to tell them that maybe they're biting off more than they can chew. This "buy as much as you can afford" mindset, if it is widespread, would seem to be a contributing factor to this crisis. DickTurpis 13:19, 26 September 2008 (EDT)

But that's just it Dick people (for the most part) aren't buying these huge expensive houses, they're buying what they need. For example, in Colorado where I live, there's a settlement by the name of Green Valley Ranch. Upper Middle to Middle middle class housing. A lot of people working regular 9-5 jobs were convinced that they could afford these houses, usually done by juggling the books on that payments. One problem that was huge was the variable rate balloon after a locked in rate period. People saw their payments go from 500 a month to 1500 a month with no notice. Shifting all the blame to the consumer for shady loan practices is a very thin defense. This is just another example of what happens with unregulated capitalism... Someone please help me with this, but I can't think of any deregulations that have been good for the average person. SirChuckB^{Call the FBI} 13:41, 26 September 2008 (EDT)

Oh, I'm not trying to blame any people (or Dick people) as a whole. The basic issue is people buying more than they could afford. It was mostly the subprime loans to poorer people causing the problems, but wealthier people are having their homes foreclosed as well, simply because they bought too much house. Housing speculators didn't help either. But certainly I would agree that banks lending money to people to buy houses they could not afford is the crux of the problem. And some of these practices are incredibly shady (the tripling of payments you mentioned). One of those unfortunate paradoxes is that the people least able to afford their payments are the ones who pay the highest rates. No much can be done about that, as it's dictated by the laws of economics, but it sucks for the poor. DickTurpis 13:53, 26 September 2008 (EDT)

(unindent) I think there's plenty of blame to go around. You have the shady mortgage broker trying to convince a person making $60K/yr that they can have the ridiculous McMansion, the home purchaser falsifying their income when they are allowed to self-declare it (I'm not accusing WFG of this), the speculators falsely inflating the housing prices in that neighborhood, the banks selling not only interest-only but also negative amortization loans, banks pitching HELOC loans as a piggybank for vacations and luxury SUVs, a culture that increasingly encourages people to feel entitled to whatever material goods they want NOW (I saw an ad recently to the tune of "Don't let anybody convince you that you can't own a Porsche, especially you"), and it doesn't take a very strong wind to blow the house down (no pun intended). The sense of entitlement does seem to be much greater now than it used to be. A lot of you are in college- some undergrads, some grad schoolers, some in professional school. Watch when people you know graduate, and see how long it takes for a significant number of them are in McMansions with a gigantic plasma screen TV. You'll probably be surprised. Corry^{I'll be in the hospital bar.} 14:59, 26 September 2008 (EDT)

Don't forget that the subprime loans exacerbated an inflated housing market, which made it easy for middle/upper middle class folks to get large, low interest home equity loans - which really should be used for major capital expenditures like home improvements or helping pay for kids' college, but just as often went to pay down credit card debt. When the bubble stopped growing, a lot of these people were also in a bind, and servicing their debts has reduced their ability to save/consume... But anyway, I am of the opinion, along with some others here, that the deregulation in the financial industry was 30% of the straws that broke the camel's back, because it led to the vicious circle of sub-prime lending, bundling and reselling those mortgages in an opaque fashion, and then pouring the money back into even more suspect loans. Personally, I think the government should restore faith and confidence by printing a shit load of money and injecting it into the economy at the level of the individual mortgage (paying down principal, re-issuing loan on better terms, and getting a first position in the portion of the equity in the house in return). That money would "trickle up" to the mortgage lenders, saving the more responsible ones, and keep people in their houses, even though that house might now be 1/3 owned by the government (PS, this is a lot like some of what was done in the Great Depression). ħuman 15:19, 26 September 2008 (EDT)

Dick, I"m not sure where you are from or what your background is, but we bought our first house this September. We bought a condo for 160K. FOR A CONDO. it was outrageous, but we were told this is what "the market says your house is worth". It's now worth 120K. If we had to get out of the loan for any reason, we would be in short sale, do to nothing we did. Secondly, i know of NO ONE in Colorado who decided to buy more than they needed. They decided to buy a home. Colorado *homes* (not condos) generally start in the 250s. for your average family, that is stretched to the limit under the best of loans, and it is going to be a crappy, run down house, in a lower end of the home owners - meaning bad schools, bad neighborhoods, etc. When we bought our house, we happened to have the advantage of free legal advice, and free loan advice because of who I work for. I learned a lot. But unlike 75% of Americans, I'm very educated and able to do my own research, able to understand complex math schemes and deal with terms that are new and tossed at me so fast all I can do is nod. My husband, very educated but french, felt lost the entire time, cause it was such foreign concepts that simply do not exist in France. IN france, the govt controls the appraisal, the gvt controls the inspection, and teh govt controls the language in loans, sets limits on both high and low rates on loans, and provides guides for day to day people about how to find a home they can afford. None of that was provided to us, so he kept asking "how do we know if we are getting a good deal?" "how do we know if this is right for us", etc. That is what regulations provides the Average Joe. security that what you are doing when you buy makes sense. the line "buy what you can't afford" is a case of blaming the victim. no one was trying to over spend. they were trying to buy homes.--En attendant Godot_{"«Poetry involves the mysteries of the irrational perceived through rational words. V.Nabokov»} 15:35, 26 September 2008 (EDT)

I don't think you can say nobody was buying above their means, but I think the number is much smaller than they throw around (if I had to assume, I'd say about 10%, 20 at most) SirChuckB^{Call the FBI} 16:17, 26 September 2008 (EDT)

Regardless of who it "blames", don't buy what you can't afford is basically universally sound advice. I'm not accusing any specific people of doing this, I'm just saying it happens. SirChuck, when you say 10 to 20% are not buying above their means, what is that 10 to 20% of? If someone is having their home foreclosed, it is because they cannot afford it (maybe they could one the time, but things changed). Banks don't seek to foreclose; they'd rather have the steady payments coming in for 30 years than a house they'd sell at a loss. If they wanted to sell real estate they'd be in the real estate business, not the banking business. Deregulation allowed the banks to do lots of shady and irresponsible things. Part of the problem, I believe, is that the ones who were taking these risks with sub-prime loans were not the ones who had a stake in the game. They were basically gambling with other people's money, which encourages irresponsible behavior. In theory, if a broker wants to make a risky loan to a less than fully qualified homebuyer, it's their prerogative. If it pays off, they'll get a better return than if they made a less risky loan, and if the person can't make the payments, then they take a loss and are hopefully a bit more cautious in the future. That's how the market works, but it doesn't work if the ones taking the risks aren't the ones who stand to lose. It also doesn't work quite so well when enough poor decisions lead to a collapse of the entire economy. From the buyer's perspective, it's always tricky when one is duped into making a bad decision. To some degree, people should know better, but you really can't expect everyone to, especially if they are the victim of fraud. Every situation is going to be different. DickTurpis 16:59, 26 September 2008 (EDT)

My vote is for "stupid people". If any of you are offended by that, I shall rephrase it to "libertarians". Radioactive afikomen ^{Please ignore all my awful pre-2014 comments.} 16:17, 26 September 2008 (EDT)

When I estimate 10%, I mean the people who are suffering from foreclosure. I agree with you Dick that the selling of loans is a huge mistake, as it does lead to irresponsible lending. I had that response all ready before you hit on that in your post :) The problem is a lot of people who are of getting foreclosed are facing it because of a change from outside. What I mean is that it's not like they just couldn't afford it and now their paying for it. Sometimes they could afford it and then something unexpected happens, like their payments tripling. A lot of people got these predatory loans, with personal guarantees that the rate "will barely change, you won't notice it." I agree that it was partially their fault for not knowing, but misplaced trust is a universal human flaw that people have been exploiting since the beginning of time. I'm not saying that all the blame falls on the lenders, but a good half of it falls with them, and another large slice lies at the feet of those who approved the deregulation. SirChuckB^{Call the FBI} 17:11, 26 September 2008 (EDT)

Blame Shifting

I found this funny... If you wanna read the screeching opinions of two of the more insane Conversvatives. First, there's Larry Elder, chief of the Uncle Toms. His arguments varies between "It's the homeowners own fault for taking the loans," and "We didn't give real capitalism a chance" (because slightly regulated capitalism worked out so well.) and then there's well known crank Ann Coulter. She has decided that blame falls on... brace yourselves, Those damn Liberals and their affirmative action loans. What an idiot SirChuckB^{Call the FBI} 16:16, 26 September 2008 (EDT)

And I was having such a good day until you menioned fecking Ann Coulter. You do know it's Friday, now is not the time to be thinking; "Gee, Ann Coulter, what a bitch". I'm really not suprised though, she'll blame everything on them old libruls, you know, earthquakes, famine, torandos, lightning strikes etc. And of course, even if it's clearly and undeniably a conservative at fault, suddenly BAM, they're a true conservative anymore because they're wrong. This is the kind of woman that ball-gags were invented for. ArmondikoV^postate 18:06, 26 September 2008 (EDT)

There is one amusing post from a radical right that blames gays and those dame nig Hispanics. It's on KOS, but i'll get a link later. debates are on in just 2 hours, and i don't have enough adult beverages to survive at this point.--En attendant Godot_{"«Poetry involves the mysteries of the irrational perceived through rational words. V.Nabokov»} 18:28, 26 September 2008 (EDT)

On the bright side, that mental image has completely cured by ball gag fetish.... Thanks Armond... You should go into therapy SirChuckB^{Call the FBI} 18:59, 26 September 2008 (EDT)

Cuts

Or, more specifically, the morons who cut public spending and used the money to increase their military and executive powers (*cough* Internet surveillance *cough*) Seriously, someone should give Snowden a medal.Bazer63 (talk) 09:36, 12 July 2014 (UTC)

Democrats Created TARP, Obama Urged Its Passage

Actually Democrats created the 2008 TARP, and half of Republicans voted against it. And Democrats forced banks to lend with Adjustable Rate Mortgages back in 1977 with the Community Reinvestment Act passed by a Democrat Congress and Jimmy Carter. Obama was the TARP's biggest cheerleader and Bush passed additional bailout funding only because Obama urged him to.

Sources:

http://www.nytimes.com/2009/01/13/washington/13cong.html?pagewanted=all&_r=0

http://content.time.com/time/business/article/0,8599,1871532,00.html

http://abcnews.go.com/blogs/politics/2008/10/obama-urges-bai/

https://www.govtrack.us/congress/votes/110-2008/h681

http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6

--Jzyehoshua (talk) 01:01, 20 July 2014 (UTC)

Alan Greenspan and others

With the passage of Glass-Steagall in the 30's, the government put a cap on insurance rates. While this didn't really matter much for a long time, that inevitably caused some fuckups down the road. In the 70's, with high inflation, nominal interest rates rose to keep up and went over this cap, which really screwed everything up, as price ceilings often do. This helped lead to the creation of various non-bank banks as people put their money into institutions not covered by Glass-Steagall which weren't subject to those interest rate regulations. When the government deregulated the banking sector in the 1980's, they left these non-bank-banks outside of the FDIC as well, and didn't regulate them like the rest of the banks. That was a bit of a fuckup. You'll see why later.

In the aftermath of 9/11, Alan Greenspan pumped money into the economy and drove down the interest rate in an attempt to prevent a crash due to shaken confidence. That's not really a bad idea. The problem is that he kept it up for three years. Many people with terrible credit took out mortgages on homes they couldn't afford, which made perfect sense given low interest rates. Many of these were adjustable rate as well. Greenspan, only recognizing his fuckup after three years, then tried to cool down the economy and raised interest rates. In 2007 when many of those adjustable rate mortgages adjusted their rates upwards, that's when everything went to shit and we had a crash.

But why did that cause the crash? Well, the banks had securitized mortgages. Many non-bank banks put their money in these investments since they were seen as safe. In fact, a majority of the economy's money was placed in these non-bank-banks. These had effectively displaced commercial banks as the primary lender for the economy. The thing is, they weren't covered by the FDIC. So just like how the lack of deposit insurance caused a crash in 1929, so too did a lack of deposit insurance on these mutual funds cause a crash in 2007. In order to prevent everything from being on fire the Fed pumped money into the banks and the government passed a bailout, which was them effectively engaging in sloppy post-hoc deposit insurance anyway.

Then the fed started paying banks money on excess reserves. This was very new. Banks are required to keep a certain portion of all their deposits in easily accessible form, just in case a panic happens so that there's something of a buffer. These are the required reserves. They're normally paid interest on required reserves, and they loan out the rest because otherwise they don't get any return. Now however, the fed started paying money on excess reserves. They did this to encourage the banks to grow a reserve of capital so as to leave them less vulnerable to a crash. But then they continued this policy into the modern day, paying the largest banks billions of dollars through effectively printing money, resulting in us having low interest rates and huge amounts of money not being lent out and investing in growing the economy. This fed policy is why we had a lost decade.

What could have been done to prevent this? The same thing we did in response to 1929: deposit insurance. Through risk-based deposit insurance on all the shadow banks, we can prevent another crash from occurring. We just need to ensure these mutual funds and various shadow-institutions. By making the premiums for the insurance be risk-based, we effectively prevent any moral hazard from emerging, which avoids the problem of moral hazard generated by the knowledge that the government will always bail you out if you fuck up. This way, if banks engage in riskier behavior, they must pay a higher premium on their insurance. The government will also assume the worst for any information not disclosed and jack up premiums, so banks will be incentivized to provide as much detail as possible. Furthermore, banks will voluntarily take on the insurance, as they will be able to more easily attract customers. In this way, we can prevent a future crisis from occurring.

The thing is, risk-based deposit insurance already exists. The Fed already provides it to commercial bank deposits. No new framework needs to be created. We just need to let these other banks voluntarily apply. This way, the government won't have to bail them out either. The pot of money generated by them paying premiums will pay for any bailouts. And while it is far more difficult to calculate systemic risk rather than just normal risk, even if calculations for systemic risk are a lowball figure the government could just pass a bill to pump a few billion into the FDIC to fund some payouts, which is far easier than the bailout which did occur anyway. Systemic risk can not be mitigated by investments either, so this would still not generate any moral hazard as the banks would act in an identical manner regardless of whether or not they were forced to pay premiums for systemic risk in addition to normal risk.

Erik Tiber (talk) 01:20, 19 April 2017 (UTC)