Fed handed out $1.2 Trillion in secret loans during the crisis.

[joeblack]

You do realize that by "improving the system" by letting the banks fail, that nice little nest egg you have in your savings account at the treasury branch would be gone, right? Grandma's GIC's would disappear as well. The new family saving up for a down payment on a house would have seen that payment disappear as well... Flushing out the garbage is right.

These "prudent companies" you speak of were all tied to eachother via the way the Western financial system is organized. One goes down, they all go down. And that's exactly what we saw happen. Bear Stearns essentially collapsed, Lehman collapsed, and Morgan Stanley was next. This wasn't something that could be phased in over a long stretch of time ie. gradual Swedish-style restructing. Something had to happen over night, and this was the result.

Am I agreeing with essentially privatizing the gains, while making the public eat the losses? Of course not. But if it is a stop-gap measure to make sure the system stays in place so that we all can draw cash out of at ATM at the end of the day, I'm okay with that as long as serious changes happen afterwards. Again, least-worst option.

But by all means, please explain how the damage is overstated. Possibly toss in some examples of how bank runs don't ever happen, and bank collapses are business as usual. I really would like to be on the other side of the fence, hating these companies for getting hand-outs for sucking at life and believing that all the big banks in the US disappearing wouldn't really matter, but it's that last part that I have a hard time getting my head around. The hating is easy, believing the financial system will still succeed when all its legs have been cut out from under it are a different story.

The effects of letting these reckless institutions fail have been direly overstated and people bought into it hook, line, and sinker. It would not have "brought down the financial system". Far from it, it would have improved the system, as we flushed out the garbage. Prudent companies would have remained and come out much stronger after acquiring their old competitors at major discounts. The bailouts were a horrible horrible mistake.

The fact that many companies that were acting recklessly were about to get destroyed is indeed proof the market works, as Pliny said. These companies were getting what was coming to them. Then the government decided to bail them out. To prop up worthless garbage companies so that they could continue to spam the financial system with their junk. That's not the market anymore, that's politics interfering with it to no good end.

Edited August 27, 2011 by joeblack

[Bonam]

You do realize that by "improving the system" by letting the banks fail, that nice little nest egg you have in your savings account at the treasury branch would be gone, right? Grandma's GIC's would disappear as well. The new family saving up for a down payment on a house would have seen that payment disappear as well... Flushing out the garbage is right.

No, deposit accounts were insured by the government under existing programs, have been for a long time. If a bank failed, each of its customers would have been reimbursed the value of their deposit accounts up to $100k - $250k, depending on jurisdiction.

These "prudent companies" you speak of were all tied to eachother via the way the Western financial system is organized. One goes down, they all go down. And that's exactly what we saw happen. Bear Stearns essentially collapsed, Lehman collapsed, and Morgan Stanley was next. This wasn't something that could be phased in over a long stretch of time ie. gradual Swedish-style restructing. Something had to happen over night, and this was the result.

Those are all investment banks. Were Royal Bank and Bank of Montreal, for example, gonna go bankrupt? Nope, they were solid all through the recession. In fact, they coulda bought up these hundred billion dollar businesses above for a paltry few million during the bankruptcy processes if they wanted to.

Am I agreeing with essentially privatizing the gains, while making the public eat the losses? Of course not. But if it is a stop-gap measure to make sure the system stays in place so that we all can draw cash out of at ATM at the end of the day, I'm okay with that as long as serious changes happen afterwards. Again, least-worst option.

What serious change would happen after? Who are you kidding? If the mutlibillion dollar actors that caused the situation are left around via bailout, they will continue to act as they have before. New regulations may restrict them somewhat, but they will still pursue the riskiest tactics available, leveraging the market for trillions of dollars, as that is their nature. Investment banks that fail to invest prudently should be allowed to fail, period.

But by all means, please explain how the damage is overstated. Possibly toss in some examples of how bank runs don't ever happen, and bank collapses are business as usual. I really would like to be on the other side of the fence, hating these companies for getting hand-outs for sucking at life and believing that all the big banks in the US disappearing wouldn't really matter, but it's that last part that I have a hard time getting my head around.

The part you seem to miss is the difference between deposit banks for consumers and investment banks. Many of the investment banks would have perished, true, and rightly. The deposit banks, meanwhile, had trillions in deposits, and were backed by existing insurance programs (both private and federal) that they paid for to insure customer deposits. Most of them would have survived. You really only need to do a quick look around to see that not every company took the same risks. Many did not. They should have been allowed to prosper. As customers fled banks that over-leveraged themselves, they would have switched their business to banks seen as more conservative. That would be a strong signal to the market that people want a bank to be a safe place to keep their money, and banks that want significant market share would then follow a business model that made that happen.

The hating is easy, believing the financial system will still succeed when all its legs have been cut out from under it are a different story.

As long as there is an economy, there is a financial system. Unless you believe the US would have fallen back into the stone age, it is impossible to believe that the financial system would have "collapsed". People would have continued to use money as a medium of exchange of goods and services, and so the financial system would have continued to exist. A few months after the bankruptcies of any banks that went bankrupt, we'd be back to a normal situation. Some people that had deposits above insured amounts would have lost some money, but those people know and accept the risks when keeping such sums lying around in banks.

[Pliny]

Your history lesson is full of bogus facts as usual. The instituions subject to government control and regulation were actually reducing securitization prior to the meltdown, and the vast majority of mortgages were being securitized by investment banks and other institutions not subject to much regulation.

THe mortal hazard was created in the last 90's when the private sector started experimenting with new vehicles to hide risk.

Your usual response.

I agree the creation of "moral hazard" was started in the late nineties with the revitalization of the Community Reinvestment Act by Bill Clinton. Bush, not being an economic whiz and being distracted with terrorism, allowed it to carry on, although he did express some concern before 2006 after which Barney Frank, Nasty Pelosi and Harry Reid more or less called the shots, easing any concerns others may have had.

[maple_leafs182]

joeblack, you are right, millions would of suffered if they did nothing. The thing is they did nothing to solve the problem, they simply propped up a failed economy by throwing cheap money at it, all they are doing is delaying the inevitable. Millions if not billions will suffer when the economy crashes again, now this is all dragging out for a longer period of time then if they had just let the banks and corporations fail in the first place.

[joeblack]

Bonam,

To use your words, the part you yourself are missing and glossing over is the fact that the situation wasn't a strictly "investment bank" problem.

The way the investment banks work is, like you said, not necessarily like a traditional bank. That being said, investment banks USE traditional banks as their lender. For every dollar an investment bank had on the books, JP Morgan and Wells Fargo would loan, say, 5 dollars to said investment bank. Bear Sterns, Morgan Stanley, Citi, all those guys were heavily leveraged via this route. And the traditional banks wouldn't just lend based on cash values, they would accept balance sheet asset figures as collateral. So when the investment banks showed $50 million in sub-prime mortgage securities, the traditional banks would loan say 5x that amount using said securities as collateral. Of course we all know those sub-prime vehicles were garbage, but the traditional banks didn't at the time. So when Lehman collapsed, the traditional banks couldn't get their money because Lehman spent it on the wrong side of a trade, and the collateral they put up turned out to be worth zero. The trad banks were left holding dust, which is exactly what happened. All the talks of "toxic assets" was about exactly this issue, just using fancier language.

This kind of thing happened all across Wall Street. It's how aquisitions are financed. It's how short positions are taken. If the investment banks were allowed to fail, suddenly the traditional banks are out all the money they had tied up in the investment banks, either through cash or securities. And these aren't small amounts either; we are talking 1-3 trillion depending on which estimate you go with. This causes a serious problem, as the way our financial system is designed, banks don't have dollar-for-dollar reserves on hand. For every dollar a US bank had on hand as reserves, I believe the figure was fifteen dollars were loaned out. So the issue that arises is that when an investment bank fails, AND the citizen population want their money at the same time because they are worried about their own bank failing, the banks can't cover the shortage. This causes panic, and it doesn't matter how "insured" your funds are, when the capital isn't on hand to pay you out regardless. Roosevelt had to have mandatory bank "holidays" (aka. close banks) in the 30's due to bank runs.

Add to the mix that Chinese investors have their investments in US banks. US banks have loans outstanding to Canadian banks. Canadian banks have loans to US banks. Euro banks have loans to US banks. And you think these guys always play with numbers of less than $250,000? Of course not. There is 7 trillion dollars in physical deposits in the US. The US government can't even come up with a way to pay off 14 trillion in debt in two years; what funds to you expect the US government to insure all the funds of depositors at failed banks? Yes you could print money, but then again Zimbabwe tried that and look how well it worked. And because all these institutions are tied to eachother via huge capital in US markets, once that capital disappears, Bank of Montreal is in serious trouble.

What will probably happen here is we will agree to disagree. I have no faith whatsoever that the government could have contained bank failures had they let the market run its course. The way the current reserve system is structured, it would have been impossible to limit the fallout to JUST investment banks, when traditional institutions were the biggest creditors to the investment banks.

Edited August 27, 2011 by joeblack

[maple_leafs182]

Bonam,

To use your words, the part you yourself are missing and glossing over is the fact that the situation wasn't a strictly "investment bank" problem.

The way the investment banks work is, like you said, not necessarily like a traditional bank. That being said, investment banks USE traditional banks as their lender. For every dollar an investment bank had on the books, JP Morgan and Wells Fargo would loan, say, 5 dollars to said investment bank. Bear Sterns, Morgan Stanley, Citi, all those guys were heavily leveraged via this route. And the traditional banks wouldn't just lend based on cash values, they would accept balance sheet asset figures as collateral. So when the investment banks showed $50 million in sub-prime mortgage securities, the traditional banks would loan say 5x that amount using said securities as collateral. Of course we all know those sub-prime vehicles were garbage, but the traditional banks didn't at the time. So when Lehman collapsed, the traditional banks couldn't get their money because Lehman spent it on the wrong side of a trade, and the collateral they put up turned out to be worth zero. The trad banks were left holding dust, which is exactly what happened. All the talks of "toxic assets" was about exactly this issue, just using fancier language.

This kind of thing happened all across Wall Street. It's how aquisitions are financed. It's how short positions are taken. If the investment banks were allowed to fail, suddenly the traditional banks are out all the money they had tied up in the investment banks, either through cash or securities. And these aren't small amounts either; we are talking 1-3 trillion depending on which estimate you go with. This causes a serious problem, as the way our financial system is designed, banks don't have dollar-for-dollar reserves on hand. For every dollar a US bank had on hand as reserves, I believe the figure was fifteen dollars were loaned out. So the issue that arises is that when an investment bank fails, AND the citizen population want their money at the same time because they are worried about their own bank failing, the banks can't cover the shortage. This causes panic, and it doesn't matter how "insured" your funds are, when the capital isn't on hand to pay you out regardless. Roosevelt had to have mandatory bank "holidays" (aka. close banks) in the 30's due to bank runs.

Add to the mix that Chinese investors have their investments in US banks. US banks have loans outstanding to Canadian banks. Canadian banks have loans to US banks. Euro banks have loans to US banks. And you think these guys always play with numbers of less than $250,000? Of course not. There is 7 trillion dollars in physical deposits in the US. The US government can't even come up with a way to pay off 14 trillion in debt in two years; what funds to you expect the US government to insure all the funds of depositors at failed banks? Yes you could print money, but then again Zimbabwe tried that and look how well it worked. And because all these institutions are tied to eachother via huge capital in US markets, once that capital disappears, Bank of Montreal is in serious trouble.

What will probably happen here is we will agree to disagree. I have no faith whatsoever that the government could have contained bank failures had they let the market run its course. The way the current reserve system is structured, it would have been impossible to limit the fallout to JUST investment banks, when traditional institutions were the biggest creditors to the investment banks.

What is your point? I understand what you are saying and that is why I advocate for a gold standard, the banks wouldn't be able to create so much debt that way. Also, American banks can lend at a 10:1 ratio, not 15:1 ratio, Canadian banks don't even have to have a reserve to create debt.

[dre]

The effects of letting these reckless institutions fail have been direly overstated and people bought into it hook, line, and sinker. It would not have "brought down the financial system". Far from it, it would have improved the system, as we flushed out the garbage. Prudent companies would have remained and come out much stronger after acquiring their old competitors at major discounts. The bailouts were a horrible horrible mistake.

The fact that many companies that were acting recklessly were about to get destroyed is indeed proof the market works, as Pliny said. These companies were getting what was coming to them. Then the government decided to bail them out. To prop up worthless garbage companies so that they could continue to spam the financial system with their junk. That's not the market anymore, that's politics interfering with it to no good end.

The fact that many companies that were acting recklessly were about to get destroyed is indeed proof the market works, as Pliny said. These companies were getting what was coming to them.

The problem is these were just a few isolated companies. It was a whole sector of the financial industry and all the players in it, and they were going to take a lot of responsible companies and people down with them as well as a whole genre of credit products.

To prop up worthless garbage companies

They didnt just prop up worthless companies they propped up ALL of them. Every company that carries debt and uses credit products, every company that has pension or investment funds, or sells products or services to people that do.

The effects of letting these reckless institutions fail have been direly overstated and people bought into it hook, line, and sinker. It would not have "brought down the financial system".

Well thats just a wild guess. Booms and busts are natural in the economy but you cant really predict how much damage a bust will cause, or when a serious recession might degenerate into a full blown depression. Government will always try to keep the bottom from getting too low, and there will never be consensus on what the actual effect was, or how much worse things would have gotten without it.

Far from it, it would have improved the system, as we flushed out the garbage.

You would have flushed the garbage, the question is what else would have gotten flushed along with it? Who had exposure if they had just let asset backed securities collapse? Just about everyone. This wasnt one little corner of the economy that was broken it was one of the principle economic vehicles in the system... the asset backed security, and all the systems used to manage risk around it. Theres about 60 trillion dollars tied up in that racket. The shadow banking system and derivatives became one of the basic vehicles that funds the system and all the players in it.

Putting your prediction aside though, Im sympathetic to your other concerns. In the long term we might wish we let the system collapse and built something better.

[dre]

The way the investment banks work is, like you said, not necessarily like a traditional bank. That being said, investment banks USE traditional banks as their lender. For every dollar an investment bank had on the books, JP Morgan and Wells Fargo would loan, say, 5 dollars to said investment bank.

No. Investment banks fund themselves by selling securities to investors. The money comes from private investors, mutual fund managers, retirement fund managers, and just about any other entity likely to have to an investment portfolio.

Heres a basic introduction of the diference between a marchant or commercial bank, and an investment bank from investopedia.

Over time, two somewhat distinct models arose from this. The old merchant banking model was largely a private affair conducted among the privileged denizens of the clubby world of old European wealth. The merchant bank typically put up sizable amounts of its own (family-owned) capital along with that of other private interests that came into the deals as limited-liability partners. Over the 19th century, a new model came into popular use, particularly in the United States. Firms seeking to raise capital would issue securities to third-party investors, who would then have the ability to trade these securities in the organized securities exchanges of major financial centers such as London and New York. The role of the financial firm was that of underwriter - representing the issuer to the investing public, obtaining interest from investors and facilitating the details of the issuance. Firms engaged in this business became known as investment banks

Read more: http://www.investopedia.com/articles/08/investment-banks.asp#ixzz1WSwUFdhU

Its really two totally diferent ways of funding enterprise and the similarity ends with the word "bank".

Edited August 30, 2011 by dre

[dre]

Your usual response.

I agree the creation of "moral hazard" was started in the late nineties with the revitalization of the Community Reinvestment Act by Bill Clinton. Bush, not being an economic whiz and being distracted with terrorism, allowed it to carry on, although he did express some concern before 2006 after which Barney Frank, Nasty Pelosi and Harry Reid more or less called the shots, easing any concerns others may have had.

No the fundamental change in the game was the explosion in asset backed securities and the instruments that manage their risk. The CRA is a relatively toothless piece of legislation (one that I have read, and you have not) that doesnt contain in it any rules around lending standards at all and only applies to banks that accept FDIC insured deposits. The investment banking system was completely exempt, as were all of the thrifts, trusts, and mortgage companies doing all the lending.

The problem is these vehicles made it easy for the companies origionating mortgages to offload their risk to other parties. Suddenly it was profitable to make loans to people you knew were going to default, because by the time they ever did your bad loans would be bundled into complicated asset backed securities with a few tranches of good loans, and insured in the new 50 trillion dollar default swap racket and sold to global investors.

Without these complicated and unregulated derivatives, the CDS, and oversecuritization, you would have seen a relatively unremarkable garden variety asset bubble instead of full blown recession.

Edited August 30, 2011 by dre

[maple_leafs182]

Well thats just a wild guess. Booms and busts are natural in the economy but you cant really predict how much damage a bust will cause, or when a serious recession might degenerate into a full blown depression. Government will always try to keep the bottom from getting too low, and there will never be consensus on what the actual effect was, or how much worse things would have gotten without it.

These booms and busts are not natural to the economy, they are created by central banks. You should really look into Austrian economics and the business cycle.

Do you think the problem was that there was not enough regulations, that the government wasn't involved enough in preventing the banks from being so reckless?

[dre]

These booms and busts are not natural to the economy, they are created by central banks. You should really look into Austrian economics and the business cycle.

Do you think the problem was that there was not enough regulations, that the government wasn't involved enough in preventing the banks from being so reckless?

Speculative bubbles can form out of nothing even in the absense of high liquidity. But even though excess liquidity can cause or amplify an asset bubble excess liquidity can come from other sources besides central banks. In the recent "economic catastrophuck" most of the liquidity came from investors all over the world buying asset backed securities and dozens of diferent securities that derived their value from the US housing market.

Do you think the problem was that there was not enough regulations, that the government wasn't involved enough in preventing the banks from being so reckless?

Well hindsight is always 20/20. But yeah. This whole thing could have been avoided if the agencies rating all of these financial products were better regulated. As we now know all of these crappy loans were being bundled into derivatives along with good loans, and the market makers coming up with all of these products were actually the ones paying the ratings agencies. They were giving triple A ratings to derivatives that were packed with loans to people who could never hope to repay them unless housing prices kept increasing. If you were a mortgage origionator in the year 2001... it made GOOD BUSINESS SENSE to loan rufus the stunt-bum 300K to buy a home EVEN IF you knew he would default, because by the time Rufus missed his first payment the loan would not even be on your books. It might be owned by a German hedgefund manager, or a private corporate pension fund. Who cares!

Its worth noting that the banks that WERE regulated by the government (banks that accepted FDIC insured deposits) played a relatively minor role in the crisis, and virtually all of the big sup-prime players were either pure mortgage companies like countrywide or realestate trusts and thrifts. A lot of these vehicles were set up for the sole purpose of skirting the regulations.

[joeblack]

No. Investment banks fund themselves by selling securities to investors. The money comes from private investors, mutual fund managers, retirement fund managers, and just about any other entity likely to have to an investment portfolio.

Heres a basic introduction of the diference between a marchant or commercial bank, and an investment bank from investopedia.

Its really two totally diferent ways of funding enterprise and the similarity ends with the word "bank".

Dig deeper than a quick browse at investopedia is all I can say. If you want to put your head in the sand, I can't stop you. Suffice it to say that while investment banks record REVENUE by selling securities (and via fees), financing between banks for purchases and capital is extremely common. Certainly I'm not implying that you go to Bear Sterns and ask for a car loan; the fact remains though that traditional banks and investment banks do lend to each other.

http://www.bloomberg.com/news/2010-06-01/interbank-lending-market-died-with-lehman-bankruptcy-chart-of-the-day.html

http://www.channelnewsasia.com/stories/afp_world_business/view/1147913/1/.html

Everything else you said regarding the sub-prime vehicles is spot on though.

Edited August 30, 2011 by joeblack

[Pliny]

No the fundamental change in the game was the explosion in asset backed securities and the instruments that manage their risk. The CRA is a relatively toothless piece of legislation (one that I have read, and you have not) that doesnt contain in it any rules around lending standards at all and only applies to banks that accept FDIC insured deposits. The investment banking system was completely exempt, as were all of the thrifts, trusts, and mortgage companies doing all the lending.

The problem is these vehicles made it easy for the companies origionating mortgages to offload their risk to other parties. Suddenly it was profitable to make loans to people you knew were going to default, because by the time they ever did your bad loans would be bundled into complicated asset backed securities with a few tranches of good loans, and insured in the new 50 trillion dollar default swap racket and sold to global investors.

Without these complicated and unregulated derivatives, the CDS, and oversecuritization, you would have seen a relatively unremarkable garden variety asset bubble instead of full blown recession.

You haven't said anything new. Just the same old same old. Read "Reckless Endangerment" by Gretchen Morgenson.

[dre]

You haven't said anything new. Just the same old same old.

Yeah well its objectively true so it bears repeating when this topic comes up.

[bush_cheney2004]

Yeah well its objectively true so it bears repeating when this topic comes up.

Yea....you have your repetitious schtick...and I have mine, regardless of topic.

[dre]

Yea....you have your repetitious schtick...and I have mine, regardless of topic.

Well... youre an OCD tripper, a troll, and a chronic thread derailer. See how you just spammed this topic by adding a post that had nothing at all to do with the topic at hand? Every single thread to you is a place to act out your bizzare Canuckaphobic fantasies.

I just comment on stuff.

[bush_cheney2004]

Well... youre an OCD tripper, a troll, and a chronic thread derailer. See how you just spammed this topic by adding a post that had nothing at all to do with the topic at hand? Every single thread to you is a place to act out your bizzare Canuckaphobic fantasies.

Who's acting? The least I can do is acknowledge your obsession with America and Americans.

I just comment on stuff.

Nothing special about your comments compared to mine or others. Didn't you just tell me that all opinions are welcomed here?

[dre]

Interesting...

http://money.cnn.com/2011/09/02/news/companies/government_mortgage/index.htm

This could shape up to be one of the largest financial lawsuits in history. The government is going after a bunch of the financial institutions that intentionally misrepresented the risk in their asset backed securities. If they win, then everyone else that lost money on derivatives will follow.

And more interestingly will be what the courts may ask these companies to turn over... all documents, emails, and other material related to these products can be sought by the plaintif, which could prompt further investigations or even criminal charges.

[Pliny]

Interesting...

http://money.cnn.com/2011/09/02/news/companies/government_mortgage/index.htm

This could shape up to be one of the largest financial lawsuits in history. The government is going after a bunch of the financial institutions that intentionally misrepresented the risk in their asset backed securities. If they win, then everyone else that lost money on derivatives will follow.

And more interestingly will be what the courts may ask these companies to turn over... all documents, emails, and other material related to these products can be sought by the plaintif, which could prompt further investigations or even criminal charges.

Another warm and fuzzy action to get business and protect the public.

So what happens is, the government encourages banks to make loans to people they wouldn't have even considered making loans to but will have Fannie an Freddie buy the mortgages from them to make it easy for them and then the government sues them for selling them questionable mortgages.

If anything the government should sue it's own regulatory agencies for not spotting these sloppily put together mortgages. But no, Barney Frank, in 2006 said everything was fine there was no need to reign in the banks.

The government created all the signals for the market to continue and the market does what the market is supposed to - respond to the signals.

I see GE is among those being sued, is nothing sacred? Will Jeff be able to talk to Obama about that and get a favour?

[Pliny]

Yeah well its objectively true so it bears repeating when this topic comes up.

Obvioulsy, I disagree. It is not objectively true. Stating something is objectively true simply because someone said it is true does not make it so. There are enough economists that will agree with you but I don't see how you can consider government policy didn't set the course.

The suit the governemnt has launched against the banks is just another attack on the private sector.

It is rather unsettling, and while the banks indeed didn't dot all the i's and cross all the t's, that was well known before. Did Freddie and Fannie not know what they were buying? Shameful! The fact is they did, and they continued to do so in favour of promoting CRA social policies.

It could have been just as bad in Canada if we had a similar banking structure to that of the U.S. THe CMHC after all has the objective of every family in Canada owning a home. Banks in Canada are less liberal and more conservative than those in the US and maintained a little more prudence, otherwise today we could have been in a similar situation to the US economically.

[dre]

Another warm and fuzzy action to get business and protect the public.

So what happens is, the government encourages banks to make loans to people they wouldn't have even considered making loans to but will have Fannie an Freddie buy the mortgages from them to make it easy for them and then the government sues them for selling them questionable mortgages.

If anything the government should sue it's own regulatory agencies for not spotting these sloppily put together mortgages. But no, Barney Frank, in 2006 said everything was fine there was no need to reign in the banks.

The government created all the signals for the market to continue and the market does what the market is supposed to - respond to the signals.

I see GE is among those being sued, is nothing sacred? Will Jeff be able to talk to Obama about that and get a favour?

The government did not encourage risky loans. Read the CRA you keep referencing. And Fanny and Freddy were buying triple AAA rated securities.

If anything the government should sue it's own regulatory agencies for not spotting these sloppily put together mortgages.

There was no regulatory agency. Private credit ratings firms were supposed to assess the risk in these products, but the problem is the same market makers whos products they were evaluating were the ones signing their paychecks. Investment banks were free to put whatever they wanted into these securities... its completely legal to sell securities packed full of likely defaults, but its a problem when ratings agencies are paid by the people putting the securities together to give them triple A ratings.

The government created all the signals for the market to continue and the market does what the market is supposed to - respond to the signals.

No sorry Pliny. These corporations did what they did because it was PROFITABLE. Between 1997 and 2006 they made an astronomical shitload of money doing it. THAT is what motivated this behavior PERIOD.

Thats not to say the government doesnt share some blame though. They should regulated the shadow banking system... they should have raised interest rates a full two years sooner than they did once it was obvious a massive bubble was forming. They should have been regulating the credit ratings agencies as well. And Fanny and Freddy should have been buying individual mortgages and keep them on their books instead of buying complexed securities.

[dre]

Obvioulsy, I disagree. It is not objectively true. Stating something is objectively true simply because someone said it is true does not make it so. There are enough economists that will agree with you but I don't see how you can consider government policy didn't set the course.

The suit the governemnt has launched against the banks is just another attack on the private sector.

It is rather unsettling, and while the banks indeed didn't dot all the i's and cross all the t's, that was well known before. Did Freddie and Fannie not know what they were buying? Shameful! The fact is they did, and they continued to do so in favour of promoting CRA social policies.

It could have been just as bad in Canada if we had a similar banking structure to that of the U.S. THe CMHC after all has the objective of every family in Canada owning a home. Banks in Canada are less liberal and more conservative than those in the US and maintained a little more prudence, otherwise today we could have been in a similar situation to the US economically.

Obvioulsy, I disagree. It is not objectively true. Stating something is objectively true simply because someone said it is true does not make it so.

Thats not what I did. In previous posts Iv shown you exactly what happened, taught you where the money that inflated the realestate bubble came from, and took you on a magical journey into the world of asset backed securities, credit default swaps, and credit rating agencies.

Like I said... none of this stuff is even contraversial. Its very well understood how the scam worked, and you can follow all the money. You claim to disagree, but when it gets right down to it you seem to basically accept that all this stuff was going on. Youre just looking for a way to pin it all on the government.

The suit the governemnt has launched against the banks is just another attack on the private sector.

No its an attack on institutions that defrauded investors. Both public and private investors, and these companies are facing law suits from both the public and private sectors.

It is rather unsettling, and while the banks indeed didn't dot all the i's and cross all the t's, that was well known before.

Its unsettling that companies who defrauded investors are getting sued by those investors? Wow.

Did Freddie and Fannie not know what they were buying? Shameful! The fact is they did, and they continued to do so in favour of promoting CRA social policies.

No. Fanny and Freddy were in the same boat as all of the private investors that got ripped off. They were buying triple AAA rated securities that the seller promised were safe. These were supposed to be the safest products on the market.

The fact is they did, and they continued to do so in favour of promoting CRA social policies.

No actually Fanny and Freddy had DECREASED their share of this market in the years prior to the meltdown. The vast majority of securitized loans were bought by the private sector, and those investors are lining up to sue as well.

And again... WILL YOU PLEASE READ THE GOD DAMN CRA? There is absolutely NOTHING in it that mandated mortgage origionators to relax their standards, and it DID NOT EVEN APPLY to the origionators making all the subprime loans.

Edited September 5, 2011 by dre

[maple_leafs182]

It was the banks, rating agencies, the government and Federal Reserves fault for creating the bubble...the whole disaster could of been avoided if the US was on a gold standard...too bad people think that honest money is a bad idea.

[dre]

It was the banks, rating agencies, the government and Federal Reserves fault for creating the bubble...the whole disaster could of been avoided if the US was on a gold standard...too bad people think that honest money is a bad idea.

the whole disaster could of been avoided if the US was on a gold standard

If the US had stayed on the gold standard a much much much bigger disaster would have happened by the mid seventies. Youre ignoring the REASON why the US ended the gold standard. They had printed too many gold certificates (us dollars) for the ammount of gold in their reserves, and a run on US gold was beginning. If it had continued then the treasury would have been emptied completely by people redeeming their dollars for gold and once the treasury was empty all remaining unredeemed dollars would be worth nothing.

Staying on the gold standard would not have averted a crisis, it would created a much larger one, much sooner. And moving back to the gold standard now is pretty much impossible, and commodity based currencies are an economic nightmare anyways and would not fix any of the problems youre worried about anyways.

[maple_leafs182]

If the US had stayed on the gold standard a much much much bigger disaster would have happened by the mid seventies. Youre ignoring the REASON why the US ended the gold standard. They had printed too many gold certificates (us dollars) for the ammount of gold in their reserves, and a run on US gold was beginning. If it had continued then the treasury would have been emptied completely by people redeeming their dollars for gold and once the treasury was empty all remaining unredeemed dollars would be worth nothing.

Staying on the gold standard would not have averted a crisis, it would created a much larger one, much sooner. And moving back to the gold standard now is pretty much impossible, and commodity based currencies are an economic nightmare anyways and would not fix any of the problems youre worried about anyways.

I get what your saying but if the government was on an actual gold standard and didn't cheat the system by printing too many dollars then this would of been adverted.

I am starting to think a gold standard may not be the best idea...chances are governments would start lying again and print more certificates then the actual amount of gold they have in reserve. Eventually we would probably end up back to where we are now. Maybe we should just let the market decide what money is and not let the government have any say in it. Based on our history I would assume we would flock to gold and silver and use that as money.

Edited September 5, 2011 by maple_leafs182