How did it happen?

[clifp]

I heard a great quote from one of the wall st big wigs. (IIRC, it was Citigroup/former Treasury Sec Rubin)

The only asset class that wasn't way overvalued was risk

This seems to me the essence of the financial problem. Sure it is risky to loan $500,000 to a person making $50,000 with bad credit on a house that three years ago was worth $300,000 and it worth $525,000 today. But, if we package them with a bunch of other loans, perform some financial sleight of hand, slap a AAA rating on them and buy insurance viola we have a AAA security. Lots of people were willing to to willing buy these things for the extra <1% interest vs a treasury bond. Turns out we were collectively crazy.

I am not really sure that deregulation was to blame. After all Fannie/Freddie had an entire large government organization whose entire purpose was to supervise and regulate Freddie and Fannie. That didn't work out so well either, cause I think the regulators also had a failure of imagination.

 

[Texarkandy]

I'm certainly not a whiz on a lot of the technical details/history of government changes in the rules of the financial markets - but I suspect there is pretty much equal blame for politicians of both parties over the last 30 years.

A lot of this does seem to tie right back to real estate.

As to how far home prices can deflate. To me the value of any house in the long-term is certainly no less than the price of the lot, materials, & the labor costs of the contractors to put it together (assuming one had all the cash in hand)

 

[ChrisC]

The leveraging by investment banks is truly remarkable; In today's New York Times, Paul Krugman wrote a very on-target article, entitled "Financial Russian Roulette, about the risk-taking by the investment banks; this should be contrasted with the regulatory framework in place to curb risk-taking by insured depository institutions. The separation created by Glass-Stegall has long outlived its usefulness in today's economy.

Freddie and Fannie had a toothless regulator, which is exactly the way they and Congress planned it. If we play with the taxpayer's money or the credit of the U.S., we ought to have tough regulation in place to prevent debacles, like Bear Stearns, Freddie and Fannie, or Indy Mac -- of course, not even the toughest regulator can regulate the tidal waves of stupidity and greed.

 

[al_bundy]

Well, Gramm-Leach got the ball rolling. Of course, we could always blame Citi, Sandy Weill and the boys were the ones to throw down the gauntlet to the Feds and said: "We're forming Citigroup, which is illegal under the current laws, so are you gonna change the laws or what"

Glass Steagall was landmark legislation in a dark hour of the nation's past. It was killed after decades of lobbying by banks. Looks like giving banks carte blanche to buy whatever they wanted hasn't wokred out so well.........

why are BoA and Chase doing OK then?

 

[audreyh1]

Leverage, stupidity, securitization to "spread the risk" (impossible), and more leverage.

Seemed like a great idea while the party was roaring and investment banks were collecting fees left and right and convincing themselves they had passed on the risk.

BUT

Woops! These things come home to roost eventually. Lots of banks not only drank their own koolaid but were leveraged on it too!

Unbelievable!

Audrey

 

[ladelfina]

The rise of derivatives, to me, can only be explained by the need of the system for exponentially more debt, given that the amount of already-highly-leveraged-but-regulated debt was inadequate for the desired expansion of the financial universe.

http://www.early-retirement.org/forums/f28/the-lifting-of-the-veil-36734.html

The tendency, or temptation, of every empire/regime/administration is to borrow, overextend, and overspend, and it always ends in collapse. We tend to look at economic cycles only within these larger cycles.