I can see why that would be good for somebody trying to quickly get up to speed on the issue. Some of us have understood that for quite a while now. I was multitasking and may not of heard everything that he said but I think he explained one part in a way that could lead to misunderstandings. That part was when he talked about sub prime borrowers. You would get the impression that the only people getting home loans that they could not afford to pay back were sub prime borrowers. That was not what happened. If it had been that way the problem would not have been nearly as large. Speculators, land lords, home flippers and middle class and wealthy people who wanted homes so nice that even they could not afford them all bought homes that they could not afford with the intention to refinance using the proceeds from the short term future rise in home values to transform the unaffordable home into a affordable home. Both Wall Street and the home buyers had blind faith in rising home values.
I agree. The subprime part was the first to hit the skids but the Alt A mortgages and Prime mortgages started down the same path later on (not to mention other related products like HELOCs). Not that he explained it wrong, but I could see why someone watching it might think the problem was limited to the subprime markets. He also fails to mention synthetic CDOs, where there were no houses as collateral...probably so as to not blow our minds. It also omits the role of FNMA and FRE in the process. As a simplification though, it's good.
The subprime lending started long before that. The implication that it was mortgage lending to lower class people that tanked the system was pretty clear and very wrong. They mentioned the liar loans and the no down payment loans, which implicate the borrowers (and lenders, but that was not emphasized), and left out the adjustable rate binge and fraudulent assessment practices, which implicate the lenders - and were probably bigger factors. The also didn't compare the size of the various factors - there was six or seven times as much money in the derivatives market (which included non-mortgage lending, btw) as in the US mortgage market total, let alone the small fraction of lower class mortgage borrowers. So even the fraudulent lending, which was bigger than the irresponsible mortgage borrowing, was small potatoes compared with the derivative speculation. The tiny fraction of defaulted mortgages that sparked the explosion was almost irrelevant - if not them, something would have come along. The problem was with the financial markets in derivatives. Politically it seriously misleads. Making sure only responsible people can get house loans will not prevent this kind of bubble from happening. It's the bankers who need regulating, not the cigarette smoking parents of big families skimping on their down payments.
That's like saying, Person A is still good, despite defaulting on the loans that Person B, a bad person, gave him. Individual circumstances are relevant(some may have lost their jobs, etc) , but a lot of those people could not afford loans in the first place. Like it or not, they weren't smart enough to realise they couldn't pay it off, and they are partly to blame for their lack of fiscal awareness about their own finances. While the banks are majorly to blame, because they should have these in place, as they're lending out other peoples money, the irresponsible borrowers are also to blame.
True, but a big portion of the ignorance (or, more accurately, overestimation) of their ability to afford a particular mortgage had more to do with inaccurate perceptions of asset price trends. I.e., the evaluation of whether you can afford a house depends strongly on your expectation of what the value of the house will do after you sign the mortgage, and it was the systematic inflation of these expectations that resulted in so many bad mortgages being written. It was not the case that people, en masse, deluded themselves into thinking they could afford mortgage payments far in excess of their income. Rather, they were deluded into thinking that the value of the homes they were buying would rise so quickly that they could refinance around the increasing payments. This delusion was systematically created by the bankers, speculators and ratings agencies, who all conspired to stick their heads in the sand and assume that the housing market (as well as consumption growth and interest rates) would always look like it did in the period 1992-2005. More to the point, the only thing that any particular borrower is responsible for is the foreclosure of the house they purchased. Preventing foreclosures from damaging the solvency of the lenders is the responsibility of the lenders themselves. And preventing damage to the solvency of lenders from damaging the solvency of the wider economy is the job of ratings agencies. So, even assuming that borrowers should have made their own, more prudent assessments of asset price trends (that conflicted the ones coming from the "experts," mind you), they still cannot be held responsible for anything beyond the default of their own loan. It is not the responsibility of the borrowers to ensure that the banks are sufficiently liquid to absorb the foreclosures, nor is it their job to ensure that customers for the bank's securities get an accurate picture of the risk associated with them. The fact is that the banks, ratings agencies and speculators all conspired to pretend that the risk of foreclosures was far less severe than it was, and then - literally - bet the bank on that illusion. That some individual borrowers accepted this idiocy and signed up for the unworkable mortgages the banks were pushing, while sad, doesn't have much bearing on this: the system might have crashed sooner (and so with less damage) if nobody had taken these loans, but it was going to crash one way or the other once the lenders started betting real money on fantasy-land assumptions. If a store sells items for less than wholesale, and so goes out of business, who do you blame? The customers who snapped up the underpriced goods, or the store manager who was dumb enough to sell at a loss in the first place? Or perhaps the store owner who was dumb enough to hire such a blatantly incompetent manager in the first place? Or even the bank who loaned the store owner the money to buy it the place, despite his apparent shortcomings as an executive?
I find the link explanation highly misleading, it doesn't explain chit. The question is - to whom you lent $ X trillions? What should fat cats do with money they've accumulated and/or freshly pulled out of their arse thanks to the generous leverage? Obviously, all more or less credit worthy customers were put under the debt peonage long time ago. Yet, the ease of money creation and security of "too big to fail" makes creation of debt ocean irresistible. If subprime mortgage pyramid would last another year or two, bankers would be giving loans to toddlers and monkeys in zoos. Fractional banking & leverage enables bankers to create money out of nothing and lend it. Yes, if a banker is losing money on his loans, the leverage is a bitch. The bitch which is causing the current credit crisis. However, at the end of the day, a bank may take your property (you busted your ass to pay for) as a "compensation" for the defaulted loan, a loan bank pulled out its arse in the first place. Real property/real labor in an exchange for the power of money creation. Sweet deal, isn't? Yeah, yeah, those poor banks got busted, leverage is a bitch sometimes (rarely), but guess what, an ocean facing mansion is paid for with cash Please Register or Log in to view the hidden image!
At an economics seminar today, they told me that the Credit ratings agency failed majorly in rating many of these loans and these banks, and that there was no way to find out which loans are good or bad.
