2008 Financial Crisis The Causes and Costs of the Worst Crisis Since the Great Depression

[SaxxyBlues]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

 

[LordBrownTrout]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

 

[SaxxyBlues]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Are you Republican?

 

[Dan Stubbs]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

 

[LordBrownTrout]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Are you Republican?

Nope.

 

[william the wie]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The Blue Wall has not recovered because housing prices are dropping again. CNBC/NBR gives the best coverage of the problem. Fox Business, Reuters and Bloomberg give relatively little free coverage to the Blue Wall problem because the worldwide problem is huge and Fox business doesn't want to lose its Blue state viewers.

 

[SaxxyBlues]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The Blue Wall has not recovered because housing prices are dropping again. CNBC/NBR gives the best coverage of the problem. Fox Business, Reuters and Bloomberg give relatively little free coverage to the Blue Wall problem because the worldwide problem is huge and Fox business doesn't want to lose its Blue state viewers.

Forgive me for picking your brain and thank for the information. What is the Blue Wall?

 

[william the wie]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The Blue Wall has not recovered because housing prices are dropping again. CNBC/NBR gives the best coverage of the problem. Fox Business, Reuters and Bloomberg give relatively little free coverage to the Blue Wall problem because the worldwide problem is huge and Fox business doesn't want to lose its Blue state viewers.

Forgive me for picking your brain and thank for the information. What is the Blue Wall?

states that are dependably Democratic in state wide and presidential elections.

 

[there4eyeM]

Derivatives must be understood first. This is insured gambling, something never seen before in the world, and its extent exceeds the comprehension and control of even the greatest financial firms. It is a delicate, vulnerable, disastrously complicated house of cards. The merest threat of its collapse brought the dogs to heel. 'Representatives', those elected to serve the people instead served the people up. Thus, they saved the few from the many.
Notice that the food supply did not change, energy supplies did not change, armies did not mobilize, invasion was not threatened. Yet, the world teetered on the brink of destruction; or so it was made to seem.
The brink was really of financial failure. So, economies were drafted into the service of saving speculation from itself. Some have more or less put it that central banking was socialized and put to use to redeem capitalism.

 

[Harpy Eagle]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Along those lines...https://www.amazon.com/dp/B00GMSUUVS/?tag=ff0d01-20

 

[NightFox]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain.

The Gramm-Rudman-(Hollings) Act was budgetary control legislation enacted back in the 1980's which, as far as I know, had nothing to do with derivatives, could be mistaken on that but I don't think so.

I would say that the easiest way to think about is this …. You had a situation where you had a glut of capital (globally) looking for low risk, fixed income investment, normally this type of capital gravitates to sovereign debt instruments (especially U.S. Treasury Bonds), however the U.S. Federal Reserve (in the form of Alan Greenspan) had been sending signals that the Fed anticipated that U.S. Treasury Yields would remain low and stagnant for the foreseeable future (making them less attractive investments).

This prompted Wall Street investment banks to begin looking for attractive alternatives to sell to these investors, what they found was a business that Fannie Mae and Freddie Mac had been in for over a decade, namely buying and securitizing (essentially slicing them up and combining them into risk tranche's) mortgages, then re-selling them to investors as MBS (Mortgage Backed Securities).

Once Wall Street got involved the demand for MBS products skyrocketed which in turn increased the demand for the underlying mortgages (they need mortgages to create MBS), so investment banks pushed mortgage brokers and lenders to create more and more loans. When they ran out of highly qualified mortgage borrowers, they had no choice but to start going down the chain and lending to less qualified buyers to meet the MBS demand.

This had predictable effects:
Less qualified borrowers = More risk
More competition in the MBS market = more market manipulation (i.e. investment banks and rating agencies lying about the real risk)
More home buyers competing for a limited supply of homes = Higher Home Prices

You combine these factors and what you get is a vicious cycle of reckless risk taking by financial institutions and borrowers, basically a big casino where the banks are playing with other peoples money while the little guy is footing the bill by getting loans they can't afford on houses that are overpriced.

That's a very simplified explanation but I think it paints a fairly accurate picture of the core of the problem, there were a host of other factors as well (Opaque Risk Chains (CDS), government created incentives and moral hazard, etc,,,) but hopefully you get the picture.

 

[william the wie]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain.

The Gramm-Rudman-(Hollings) Act was budgetary control legislation enacted back in the 1980's which, as far as I know, had nothing to do with derivatives, could be mistaken on that but I don't think so.

I would say that the easiest way to think about is this …. You had a situation where you had a glut of capital (globally) looking for low risk, fixed income investment, normally this type of capital gravitates to sovereign debt instruments (especially U.S. Treasury Bonds), however the U.S. Federal Reserve (in the form of Alan Greenspan) had been sending signals that the Fed anticipated that U.S. Treasury Yields would remain low and stagnant for the foreseeable future (making them less attractive investments).

This prompted Wall Street investment banks to begin looking for attractive alternatives to sell to these investors, what they found was a business that Fannie Mae and Freddie Mac had been in for over a decade, namely buying and securitizing (essentially slicing them up and combining them into risk tranche's) mortgages, then re-selling them to investors as MBS (Mortgage Backed Securities).

Once Wall Street got involved the demand for MBS products skyrocketed which in turn increased the demand for the underlying mortgages (they need mortgages to create MBS), so investment banks pushed mortgage brokers and lenders to create more and more loans. When they ran out of highly qualified mortgage borrowers, they had no choice but to start going down the chain and lending to less qualified buyers to meet the MBS demand.

This had predictable effects:
Less qualified borrowers = More risk
More competition in the MBS market = more market manipulation (i.e. investment banks and rating agencies lying about the real risk)
More home buyers competing for a limited supply of homes = Higher Home Prices

You combine these factors and what you get is a vicious cycle of reckless risk taking by financial institutions and borrowers, basically a big casino where the banks are playing with other peoples money while the little guy is footing the bill by getting loans they can't afford on houses that are overpriced.

That's a very simplified explanation but I think it paints a fairly accurate picture of the core of the problem, there were a host of other factors as well (Opaque Risk Chains (CDS), government created incentives and moral hazard, etc,,,) but hopefully you get the picture.

There were a host of other problems such as the S&L bubble, the Clinton bubble that popped in the aftermath of 9/11 and the PIIGS in the launch of the Euro.

Financial engineering is not a science.

 

[JWBooth]

2008 was mild compared to what is coming. Go ahead and blame it on Trump, though he'll only be a contributing factor and not be the cause. 18 years of the federal reserve pumping up Wall St with interest free money, inconceivably massive federal and consumer debt and no money in personal savings will be the cause.

 

[Aldo Raine]

2008 was mild compared to what is coming. Go ahead and blame it on Trump, though he'll only be a contributing factor and not be the cause. 18 years of the federal reserve pumping up Wall St with interest free money, inconceivably massive federal and consumer debt and no money in personal savings will be the cause.

Agreed, no single person is the cause of what is probably coming. But unquenchable breed will be the major cause and it applies to the multinationals and uber wealthy the most!

 

[NightFox]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain.

The Gramm-Rudman-(Hollings) Act was budgetary control legislation enacted back in the 1980's which, as far as I know, had nothing to do with derivatives, could be mistaken on that but I don't think so.

I would say that the easiest way to think about is this …. You had a situation where you had a glut of capital (globally) looking for low risk, fixed income investment, normally this type of capital gravitates to sovereign debt instruments (especially U.S. Treasury Bonds), however the U.S. Federal Reserve (in the form of Alan Greenspan) had been sending signals that the Fed anticipated that U.S. Treasury Yields would remain low and stagnant for the foreseeable future (making them less attractive investments).

This prompted Wall Street investment banks to begin looking for attractive alternatives to sell to these investors, what they found was a business that Fannie Mae and Freddie Mac had been in for over a decade, namely buying and securitizing (essentially slicing them up and combining them into risk tranche's) mortgages, then re-selling them to investors as MBS (Mortgage Backed Securities).

Once Wall Street got involved the demand for MBS products skyrocketed which in turn increased the demand for the underlying mortgages (they need mortgages to create MBS), so investment banks pushed mortgage brokers and lenders to create more and more loans. When they ran out of highly qualified mortgage borrowers, they had no choice but to start going down the chain and lending to less qualified buyers to meet the MBS demand.

This had predictable effects:
Less qualified borrowers = More risk
More competition in the MBS market = more market manipulation (i.e. investment banks and rating agencies lying about the real risk)
More home buyers competing for a limited supply of homes = Higher Home Prices

You combine these factors and what you get is a vicious cycle of reckless risk taking by financial institutions and borrowers, basically a big casino where the banks are playing with other peoples money while the little guy is footing the bill by getting loans they can't afford on houses that are overpriced.

That's a very simplified explanation but I think it paints a fairly accurate picture of the core of the problem, there were a host of other factors as well (Opaque Risk Chains (CDS), government created incentives and moral hazard, etc,,,) but hopefully you get the picture.

There were a host of other problems such as the S&L bubble, the Clinton bubble that popped in the aftermath of 9/11 and the PIIGS in the launch of the Euro.

As I pointed there were a host of other contributing factors to what happened in 2008 but I'm not inclined to write a book here, IMHO there is already plenty of sound analysis available on the Internet.

As far as those other asset bubbles you pointed out (S&L, .COM) those are not significant contributing factors those are just other examples of the same old thing... Speculative asset bubbles that eventually burst.

Greed and FOMO (Fear of Missing Out) overcomes Fear (of Loss) and Common Sense (risk management)

Since asset prices in relation to demand tend to work inversely to consumption market price-demand (i.e. demand for assets tends to increase when asset prices go higher, increased demand causes prices to go even higher, rinse, wash, repeat) the asset inflation feeds on itself until the last greater fool is found and someone(s) blinks (stops buying and starts selling), then Fear (of Loss) wrestles Greed and FOMO to the ground, takes over and pops the bubble.

Financial engineering is not a science.

IMHO It is when it's done with appropriate risk management, unfortunately the risk managers are the first ones to be ignored when the financial engineers dream up an asset class that "goes viral" (see MBS, CDO, Synthetic CDO) and risk becomes so opaque that even the engineers that designed the products don't understand them.

 

[g5000]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The explanation is long. Sit back, grab a tasty beverage, and follow along. There is a lot of bullshit put out about the causes of the crash, motivated by partisan hackery. I will do my best to provide you an accurate answer.

I will probably have to post in several parts.

PART I

In the beginning, a person who wanted to buy a house had to be connected to someone who had the necessary cash to buy that house. The person buying the house is the "borrower". The person with the money is an "investor" or a "lender".

How do these two people find each other? Well, one way is for the borrower to go to a bank for the money. Another way is for the borrower and investor to be connected to each other by a middle man, the "broker".

In reality, the bank is a broker, too. It is not their money they are lending. It is other people's money.

Let's say you are the investor. You have $200,000 you want to put to work. So you lend the money to a homebuyer for a 30 year mortgage. You will hold that mortgage, which I am going to call the "paper" for that loan.

Now you have to wait 30 years to garner the total profit from that loan. Over that 30 year period, let's say at current interest rates you would get back $400,000. That is the original $200,000 (the "principal"), and another $200,000 in interest payments.

You come out with $200,000 in profit.

One problem: You don't want to wait 30 years to get the principal and interest.

Along comes another "broker" who can sell the paper you are holding to another investor who is willing to receive monthly payments for 30 years. Maybe those investors are a group of retirees.

The total value of your paper is $400,000 but only if you wait 30 years. So you agree to sell the paper to these other investors for $250,000.

You have recouped your $200,000 and made an instant $50,000 profit, minus the small slice the broker takes for being the middle man. The investors will make a $150,000 profit over 30 years. That's because they paid you $250,000 and will get back $400,000.


Follow me so far?

All right.

The very root of the 2007-2009 crash is that little slice the broker received for being the middle man in this deal. His fees.

Remember that.

More later.

 

[william the wie]

Risk management is an oxymoron. There are always risks that cannot be calculated such as weather, seismic activity and political blunders.

 

[g5000]

Part II

What if the only money on the entire planet which was available for lending was $200,000? Whoever held that teeny bit of money would be able to charge an almost infinite amount of interest.

The more money that is sloshing around looking for work to do, the easier it is to access that cash for borrowing. Therefore, the lower interest rates get. Since there are a lot of people who want to throw their money at borrowers, the borrowers have a universe of options, and thus are able to borrow at bargain basement rates.

So guess how much money was sloshing around looking for work at the dawn of the Millennium?



A lot.



And I mean...a lot.






We're talking seventy trillion dollars of loose cash.


$70,000,000,000,000



And all that money was looking for hands to thrust itself into. All that money was looking for borrowers.


Who had all that money, you may be wondering.

Retirees, Middle Eastern princes, teachers unions, labor unions, firefighter unions, municipal funds, college endowment funds, trust fund kids, Donald Trump, George Soros, the Rockefellers, and so forth and so on.

Not just here. All over the world. Ireland had cash. Iceland had cash. Germany had cash. Sweden, Switzerland, Italy...you get the idea.

And some of that seventy trillion was YOURS. Your 401k, your IRA, your stock options, your whole life insurance policy. And so forth.

You wanted your money to be put to work and made bigger, right? Right?

But you don't know how to do that. So you hired a money manager to figure it out for you.

A funny thing about money managers. As they started to manage more and more of other people's money, the smarter they thought they were.

But they weren't that smart. Not really. They were pretty stupid, actually. They were bought off by the brokers for the price of some hookers and blow and box seats at the World Series and shit.

No, really. I am not kidding.

These guys took your money and gave it to some greedy brokers who swore they had the world's safest investments.

Because even a tiny slice of $70,000,000,000,000 in fees is still a shit ton of money.

The brokers were making a killing off fees moving all that sloshing cash around and putting it to work. That's all they cared about.

 

[g5000]

Risk management is an oxymoron.

It didn't use to be.

Unfortunately, the broker-dealers threw the underwriting laws of the universe out the window in order to keep the feeding frenzy going.

 

[caddo kid]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The question is NOT "will it happen again?" but is rather "WHEN will it happen next?"

It will happen during a Trump presidency; period.

Hang on to your nutz.