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Source: (consider it)
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Thread: Was the 2008 financial crisis caused by state intervention?
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Makepiece
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# 10454
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Posted
The following quote is from Wikipedia on the crisis:
"In his dissent to the majority report of the Financial Crisis Inquiry Commission, American Enterprise Institute fellow Peter J. Wallison[57] stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the US Department of Housing and Urban Development (HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Later, based upon information in the SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion"
It seems ironic that Fannie Mae and Freddie Mac contributed to the crisis given that they ere originally set up during the great depression as part of the 'New Deal'. It was really the New Deal which legitimated government intervention. A further question arises as to whether the banks believed that the government would bail them out or take some other action that would mitigate against the risks that they were taking. If the government was less interventionist surely the banks would be forced to develop their own safety mechanisms in order to ensure their survival. Those that failed to do so would be allowed to fail and those that did not would survive- the golden rule of evolution. The question arises then as to whether governments have stultified the evolution of the bankng system by intervening too much. Any thoughts?
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Don't ask for whom the bell tolls...
Posts: 938 | From: Nottingham | Registered: Sep 2005
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lilBuddha
Shipmate
# 14333
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Posted
Yes. It was not affordable housing to blame, but those who used it to squeeze more out of a market that had petered out. There was not enough growth in real estate, so the new way were developed to include people who would not have qualified previously.
The fault belongs primarily to the creators of the system. The government agencies failed to properly regulate, so they have fault as well.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Enoch
Shipmate
# 14322
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Posted
If the cause was as you describe it, isn't your analysis the wrong way round?
Rather than having been caused by state intervention, a better description of what you've described as a failure in state intervention, would be that two entities that were originally set up by state intervention went wild, and the state did not intervene to rein them in.
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Brexit wrexit - Sir Graham Watson
Posts: 7610 | From: Bristol UK(was European Green Capital 2015, now Ljubljana) | Registered: Nov 2008
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mousethief
Ship's Thieving Rodent
# 953
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Posted
Um, consider the source.
"The American Enterprise Institute for Public Policy Research (AEI) is an influential right-wing think tank that advocates for lower taxes, fewer protections for consumers and the environment, and cuts to the social safety net." --Sourcewatch
You go to the right wing, you will get an explanation that exonerates the right wing. Simples.
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This is the last sig I'll ever write for you...
Posts: 63536 | From: Washington | Registered: Jul 2001
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rolyn
Shipmate
# 16840
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Posted
My memory of Spring 08 is one whereby every time I put fuel in the van it had gone up by 2 or 3p a litre. It went up by about 20 or 30p a litre over the space of 6 months and then mysteriously peaked once the Bank crash had blown.
Not saying this wasn't a coincidence but one wonders if strings weren't being pulled by the Great and the Good in order to deliberately trigger the Crash. It was said that had borrowing gone on unchecked on that scale, even for 2 more years, the end result would have been far worse.
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Change is the only certainty of existence
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Dafyd
Shipmate
# 5549
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Posted
Modern right-wing economic models are based on the assumption that the markets always work unless the government intervenes.
Therefore, if the markets do not work it must be because the government intervened somehow.
Fortunately for the model a government-interventionless market is impossible, if only because the government back the currency and enforce property rights, and therefore some government intervention can always be found on which to blame the failure of reality to fit the model.
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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams
Posts: 10567 | From: Edinburgh | Registered: Feb 2004
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mousethief
Ship's Thieving Rodent
# 953
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Posted
quote:
Originally posted by Dafyd:
Modern right-wing economic models are based on the assumption that the markets always work unless the government intervenes.
Therefore, if the markets do not work it must be because the government intervened somehow.
Fortunately for the model a government-interventionless market is impossible, if only because the government back the currency and enforce property rights, and therefore some government intervention can always be found on which to blame the failure of reality to fit the model.
So in other words the theories are neither falsifiable nor verifiable. They're eggs in moonshine. Wishful-thinking wordwank for people who want a pseudoscientific justification for the all-too-predictable results of their cupidity and titanic greed.
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This is the last sig I'll ever write for you...
Posts: 63536 | From: Washington | Registered: Jul 2001
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chris stiles
Shipmate
# 12641
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Posted
quote:
Originally posted by rolyn:
My memory of Spring 08 is one whereby every time I put fuel in the van it had gone up by 2 or 3p a litre. It went up by about 20 or 30p a litre over the space of 6 months and then mysteriously peaked once the Bank crash had blown.
There was a general commodities boom through the 2000s as rising demand, and expectations of demand by the growth of the BRIC countries caused prices to rise. That they fell ('mysteriously peaked') after the crash was simply the result of a change in expectations - a recession was going to bring about a fall in demand.
There were a number of people who were warning of a crash, and a number of financial institutions that acted in expectation that a crash was about to occur. Which is completely different from saying that they deliberately crashed the economy - it was a credit fuelled rise, it couldn't continue forever.
Posts: 4035 | From: Berkshire | Registered: May 2007
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romanlion
editorial comment
# 10325
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Posted
Short answer...Yes.
The initial intervention was the establishment of the Fed.
Beyond that was the CRA, and then Bill Clinton...
See here...
Bankers were doing what was demanded of them by the Federal authorities...they did not generate the free money themselves.
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"You can't get rich in politics unless you're a crook" - Harry S. Truman
Posts: 1486 | From: White Rose City | Registered: Sep 2005
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Gee D
Shipmate
# 13815
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Posted
While we here in Oz managed to avoid the worst of the GFC by the application by the Labor federal government of good old-fashioned Keynesian theories; in other words, state intervention alleviating the crisis.
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Not every Anglican in Sydney is Sydney Anglican
Posts: 7028 | From: Warrawee NSW Australia | Registered: Jun 2008
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Pangolin Guerre
Shipmate
# 18686
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Posted
Mouse Thief - Eggs in moonshine? I'm unfamiliar with that one.
If "the state" was guilty of something, it was making irresponsible borrowing the rule of the day, abdicated its responsibility. The economic spinoffs were built on shifting sand. The lenders were usually quite happy to go along for the ride, making a lot of cash on the way, largely through mortgage-backed instruments. This is a story with many villains.
In Canada we avoided the worst of it because of a banking culture that is by nature conservative and a government that was not afraid to say no to bank mergers. Lest I sound smug, we might be facing a similar problem, albeit for reasons different from the 2008 scenario.
And what Chris Stiles said.
The thing about the free economy, is that, epistemologically, most people treat it as a logical conclusion, when, in fact, it's an article of faith. Like all such things, it can take you some distance, and it can bite you on the ass.
Posts: 758 | From: 30 arpents de neige | Registered: Nov 2016
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by chris stiles:
Which is completely different from saying that they deliberately crashed the economy - it was a credit fuelled rise, it couldn't continue forever.
I think the best you could say is that those that caused the collapse did not care. Whether because they would make enough money or because they knew they would be bailed out. Or both.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Sipech
Shipmate
# 16870
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Posted
Economic theories/models are always un-verifiable and pretty much always un-falsifiable. That's what makes them so great/terrible (delete as suits your point of view).
For free market fundamentals who think of any intervention as a bad thing, then when things are set to go their way and they fail, the sheer complexity of the economy, with its interacting moving parts and human decisions & motivations that drive it, any failure can be readily attributable to somebody not playing by their rules, attempting to intervene in the market.
To a communist, the past failures of the Eastern bloc in Europe can be attributed to human corruption where not everyone played the rules and some tried to profiteer from a highly controlled market, which was inherently in a delicate balance and so could readily be toppled.
In the UK, perspectives around the impact of 2008 can be very partisan. Most of my Conservative supporting colleagues cite the election of a Labour government in 1997 as the seed of the crisis, selling the narrative that it was all Labour's fault and so they can't be trusted with the economy.
Yet at the same time, those who are opposed to the Conservatives look back at the deregulation of the markets under Thatcher as seed of the crisis, which was then watered by years of under-regulation, allowing the most foolish and unstable elements of the market to grow quickly, but which was ultimately unstable.
It's a case of first pick your narrative and then choose your data to suit, because there's no one, clear answer that jumps out of the mass of economic data that everyone can agree upon. So those who like a hermeneutic of eisegesis can have a field day!
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Twitter: http://twitter.com/TheAlethiophile
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Curiosity killed ...
Ship's Mug
# 11770
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Posted
When I studied accountancy back in the mid 1980s, I had to learn a whole section on bank regulation, which was in place to ensure the safety of the banking system and had rules on liquidity and reserves. Most of which had been place since the Wall Street Crash of the 1929.
In 2012, the then Governor of the Bank of England, Sir Mervyn King said of the various crashes:
quote:
"With the benefit of hindsight," he said, "we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called 'light touch' regulation hadn't prevented any of this."
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Mugs - Keep the Ship afloat
Posts: 13794 | From: outiside the outer ring road | Registered: Aug 2006
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rolyn
Shipmate
# 16840
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Posted
quote:
Originally posted by chris stiles:
There were a number of people who were warning of a crash, and a number of financial institutions that acted in expectation that a crash was about to occur. Which is completely different from saying that they deliberately crashed the economy - it was a credit fuelled rise, it couldn't continue forever.
There were murmurings, the usual It'll all be over by Christmas thing. The humble experts talked of a shallow, temporary blip. Turned out a bit more than that.
However, here we are 9 years later with unemployment at lowest levels since 1975, (not sure how they cooked that one up). A few dreams and lives shattered, the ship sails on til the next bump.
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Change is the only certainty of existence
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Dafyd
Shipmate
# 5549
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Posted
quote:
Originally posted by mousethief:
quote:
Originally posted by Dafyd:
Modern right-wing economic models are based on the assumption that the markets always work unless the government intervenes.
So in other words the theories are neither falsifiable nor verifiable. They're eggs in moonshine. Wishful-thinking wordwank for people who want a pseudoscientific justification for the all-too-predictable results of their cupidity and titanic greed.
I think it's a bit like using only Newtonian physics at a scale where quantum effects or Einsteinian relativity start to have a significant influence.
Some of the time it is indeed better than no model at all but if you start insisting that reality conforms to the model then you have problems.
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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams
Posts: 10567 | From: Edinburgh | Registered: Feb 2004
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Kwesi
Shipmate
# 10274
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Posted
Don't we have to ask ourselves how the rules were made regarding financial regulation, and what values inspired the administration of those rules? I suspect that the financial interests had a great deal of influence over how government would exercise its regulatory role and the culture of how the various agency exercised their powers. In other words the financial lobby is deeply embedded in determining how its paymasters are regulated. To represent the market and government as somehow opposing interests is more about shifting joint culpability for a joint venture (conspiracy?)
Posts: 1641 | From: South Ofankor | Registered: Sep 2005
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by Kwesi:
Don't we have to ask ourselves how the rules were made regarding financial regulation, and what values inspired the administration of those rules? I suspect that the financial interests had a great deal of influence over how government would exercise its regulatory role and the culture of how the various agency exercised their powers. In other words the financial lobby is deeply embedded in determining how its paymasters are regulated. To represent the market and government as somehow opposing interests is more about shifting joint culpability for a joint venture (conspiracy?)
I think it more fair to say parts of the market and parts of government collude.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Arethosemyfeet
Shipmate
# 17047
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Posted
quote:
Originally posted by Gee D:
While we here in Oz managed to avoid the worst of the GFC by the application by the Labor federal government of good old-fashioned Keynesian theories; in other words, state intervention alleviating the crisis.
The huge natural resources boom fuelled by Chinese demand certainly didn't hurt.
Posts: 2933 | From: Hebrides | Registered: Apr 2012
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Gee D
Shipmate
# 13815
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Posted
quote:
Originally posted by Arethosemyfeet:
quote:
Originally posted by Gee D:
While we here in Oz managed to avoid the worst of the GFC by the application by the Labor federal government of good old-fashioned Keynesian theories; in other words, state intervention alleviating the crisis.
The huge natural resources boom fuelled by Chinese demand certainly didn't hurt.
Helped enormously, but had the then opposition been in power these would have been squandered away in no time at all.
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Not every Anglican in Sydney is Sydney Anglican
Posts: 7028 | From: Warrawee NSW Australia | Registered: Jun 2008
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simontoad
Ship's Amphibian
# 18096
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Posted
I thought that the mining boom in Australia created a tax boom, and instead of spending it all, the Howard Liberal Govt used some of it for strategic pork-barreling and socked the rest away in a future fund. Under the Rudd Labor Govt the future came in the form of the GFC, and it spent up big on job-creating programmes. I understand that they didn't spend all of the Future Fund, but that Peter Costello still sits on it like the Dragon Under the Mountain.
My understanding is that we didn't have the easy credit issues that they did in the States, because our banking regulations were tighter. For us, the GFC was a matter of riding out the ripple effects of bad decisions by bankers elsewhere.
To my mind, responsibility for the GFC lies with the individuals who knowingly wrote shite loans, and the people who allowed their organisations to profit from that immorality. I believe everyone has a responsibility to act in a moral manner irrespective of the law. Their primary culpability is not in any way diminished by the separate failure of regulators to stop their behavior or make it unlawful.
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Human
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by simontoad:
To my mind, responsibility for the GFC lies with the individuals who knowingly wrote shite loans, and the people who allowed their organisations to profit from that immorality.
Yeah, not exactly how it worked. The loan industry, not individuals created instruments which bundled these bad loans, hiding them amongst good ones to raise their ratings. Then more and more bad, bundled with fewer and fewer good. Like stacks of money in a movie with good notes covering plain paper.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Dark Knight
Super Zero
# 9415
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Posted
quote:
Was the 2008 financial crisis caused by state intervention?
No.
The OP has conflated two different things - what caused the crisis, and the bailout after the crisis. The first was caused by a lot of things, but the repeal of crucial legislation (such as the Glass-Steagall act, repealed by Clinton, which protected ordinary savings from being exploited by the Gordon Gecko type predatory lenders of the world) played a significant part. In line with neoliberal "rationality," the governments leading up to the crisis had started to see themselves as existing primarily to support the market, rather than having a role to wider society (of course, for the neoliberals, as per Maggie Thatcher, there is no society - only an economy).
The bailout was a demonstration of the one thing we must never forget - the neoliberals never play by their own rules. "Too big to fail" is a nonsense, as it removes from banks all of the austerity measures that neoliberals would love to impose on the rest of us. As Phil Mirowski argued convincingly in "Never let a good crisis go to waste", the crisis should have been the end of neoliberal rationality, as it had failed completely - but it led to strengthening of this rationality, as seen by the loaded question posed in the OP.
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So don't ever call me lucky
You don't know what I done, what it was, who I lost, or what it cost me - A B Original: I C U
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Love is as strong as death (Song of Solomon 8:6).
Posts: 2958 | From: Beyond the Yellow Brick Road | Registered: Apr 2005
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chris stiles
Shipmate
# 12641
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Posted
quote:
Originally posted by Makepiece:
(HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Later, based upon information in the SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion"
The investment manager Barry Ritholtz (who is no fan of Fannie and Freddie) has addressed such claims directly
http://ritholtz.com/2010/05/rewriting-the-causes-of-the-credit-crisis/
As he points out, to the extent that Freddie/Fannie were involved in the secondary market it was mainly after 2005 and only then as followers. Furthermore if the CRA had been responsible, then the boom would have been distributed quite differently geographically.
Posts: 4035 | From: Berkshire | Registered: May 2007
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Dafyd
Shipmate
# 5549
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Posted
quote:
Originally posted by lilBuddha:
The loan industry, not individuals created instruments which bundled these bad loans, hiding them amongst good ones to raise their ratings. Then more and more bad, bundled with fewer and fewer good. Like stacks of money in a movie with good notes covering plain paper.
The way I understood it was that the loans were entirely high risk mortgages. However, each individual mortgage was chopped up into ten (or so) pieces and bundled up with pieces from nine (or so) other mortgages.
The thinking was that it was likely that one out of ten mortgages would default. However, each bundle contained a little bit of ten mortgages and the chance of all ten defaulting was tiny. Meanwhile because the mortgages were high risk they'd each been loaned out at high interest rates so the overall return on each mortgage was sufficient to give a good return on each bundle even if two or three defaulted.
Of course the thinking assumed that the chance of any given mortgage defaulting is independent. It assumes that the mortgager defaults because they are individually feckless or unlucky. But that's not the case. If there was a slight economic downturn, then all the mortgagers became more likely to lose their jobs or get into financial trouble simultaneously. Financial trouble wasn't each economic actor's individual fault; it was the result of systemic issues. So a majority of mortgages in each bundle all defaulted.
So basically the problem was not realising that the economy is not just the sum of individual independent economic agents. The economy is a system. If someone is in financial trouble that is not merely their individual bad luck or fecklessness.
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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams
Posts: 10567 | From: Edinburgh | Registered: Feb 2004
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quetzalcoatl
Shipmate
# 16740
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Posted
quote:
Originally posted by Dark Knight:
quote:
Was the 2008 financial crisis caused by state intervention?
No.
The OP has conflated two different things - what caused the crisis, and the bailout after the crisis. The first was caused by a lot of things, but the repeal of crucial legislation (such as the Glass-Steagall act, repealed by Clinton, which protected ordinary savings from being exploited by the Gordon Gecko type predatory lenders of the world) played a significant part. In line with neoliberal "rationality," the governments leading up to the crisis had started to see themselves as existing primarily to support the market, rather than having a role to wider society (of course, for the neoliberals, as per Maggie Thatcher, there is no society - only an economy).
The bailout was a demonstration of the one thing we must never forget - the neoliberals never play by their own rules. "Too big to fail" is a nonsense, as it removes from banks all of the austerity measures that neoliberals would love to impose on the rest of us. As Phil Mirowski argued convincingly in "Never let a good crisis go to waste", the crisis should have been the end of neoliberal rationality, as it had failed completely - but it led to strengthening of this rationality, as seen by the loaded question posed in the OP.
The problems caused by deregulation are going to be solved - by more deregulation. This would be black comedy, except that millions of lives are affected by it.
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I can't talk to you today; I talked to two people yesterday.
Posts: 9878 | From: UK | Registered: Oct 2011
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Crœsos
Shipmate
# 238
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Posted
quote:
Originally posted by Dafyd:
Of course the thinking assumed that the chance of any given mortgage defaulting is independent. It assumes that the mortgager defaults because they are individually feckless or unlucky. But that's not the case. If there was a slight economic downturn, then all the mortgagers became more likely to lose their jobs or get into financial trouble simultaneously. Financial trouble wasn't each economic actor's individual fault; it was the result of systemic issues. So a majority of mortgages in each bundle all defaulted.
This was even more the case with the types of adjustable rate mortgages that became popular during the housing bubble. There have been economic downturns in the past that did not cause a meltdown of the financial sector largely because, while unemployment increased it was more or less generally distributed. With an adjustable rate mortgage, on the other hand, any increase in interest rates will put pressure on all adjustable rate mortgage holders at the same time. In other words, instead of randomly-distributed economic hardship which wouldn't effect everyone, all (adjustable rate) mortgage holders would have economic hardship inflicted on them at the same time. That was the chief source of non-independent default risk during the recent financial crisis.
It should be noted that Fannie Mae and Freddy Mac actually had significantly fewer sub-prime and otherwise non-conforming home loans in their portfolios (as a proportion of the whole) than commercial mortgage companies. Trying to pitch the 2008 financial meltdown as government profligacy is at variance with the facts. It also, in an American context, has a vaguely racist subtext; the idea that HUD regulations on affordable housing and non-discrimination (which most Americans hear as handout to help "those people") led to a bunch of lazy, shiftless homebuyers taking advantage of innocent, naïve banking professionals that's being pushed in Mr. Wallison's dissent from the opinion of the majority of his peers.
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Humani nil a me alienum puto
Posts: 10706 | From: Sardis, Lydia | Registered: May 2001
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chris stiles
Shipmate
# 12641
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Posted
quote:
Originally posted by Crœsos:
It should be noted that Fannie Mae and Freddy Mac actually had significantly fewer sub-prime and otherwise non-conforming home loans in their portfolios (as a proportion of the whole) than commercial mortgage companies.
On this note see the link I posted above:
"-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;-The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders
-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie"
As he says, if CRA had been a cause, the bubbles wouldn't have been in Florida, California, Arizona etc.
Posts: 4035 | From: Berkshire | Registered: May 2007
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by Dafyd:
quote:
Originally posted by lilBuddha:
The loan industry, not individuals created instruments which bundled these bad loans, hiding them amongst good ones to raise their ratings. Then more and more bad, bundled with fewer and fewer good. Like stacks of money in a movie with good notes covering plain paper.
The way I understood it was that the loans were entirely high risk mortgages. However, each individual mortgage was chopped up into ten (or so) pieces and bundled up with pieces from nine (or so) other mortgages.
The thinking was that it was likely that one out of ten mortgages would default. eir individual bad luck or fecklessness.
My understanding is this is the way it started. But as time went on, the bundles contained more of the high risk bits. SO not only were many failing at once, the bundles did not contain enough "good" debt to buffer the bad.
The markets were strongly invested in mortgages. As the prices of homes rose, fewer people qualified, risking collapse. More risky types of loans were used and "creative" qualifications for borrowers. This kept the market moving, but every hill must have its valley.
The idea that the individual issuers and signers of loans were at fault is ludicrous political posturing.
The underlying real problem is that financial markets are based on financial gain without consideration of long-term stability.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Dark Knight
Super Zero
# 9415
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Posted
quote:
Originally posted by simontoad:
My understanding is that we didn't have the easy credit issues that they did in the States, because our banking regulations were tighter. For us, the GFC was a matter of riding out the ripple effects of bad decisions by bankers elsewhere.
I don't know why that's your understanding, but it's not accurate. Our banks were in just as much trouble. They just kinda hope that we've forgotten.
Posts: 2958 | From: Beyond the Yellow Brick Road | Registered: Apr 2005
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Dafyd
Shipmate
# 5549
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Posted
quote:
Originally posted by lilBuddha:
quote:
Originally posted by Dafyd:
The way I understood it was that the loans were entirely high risk mortgages. However, each individual mortgage was chopped up into ten (or so) pieces and bundled up with pieces from nine (or so) other mortgages.
My understanding is this is the way it started. But as time went on, the bundles contained more of the high risk bits. SO not only were many failing at once, the bundles did not contain enough "good" debt to buffer the bad.
No. The point is the bundles were always all high risk from the very beginning. They didn't bundle any 'good' debt in. They thought they'd come up with a clever way to get round the high risk so they didn't need any 'good' debt.
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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams
Posts: 10567 | From: Edinburgh | Registered: Feb 2004
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Leorning Cniht
Shipmate
# 17564
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Posted
quote:
Originally posted by Dafyd:
No. The point is the bundles were always all high risk from the very beginning. They didn't bundle any 'good' debt in. They thought they'd come up with a clever way to get round the high risk so they didn't need any 'good' debt.
Yes. It's a common failing in people who don't understand correlations (and almost nobody understands correlations).
If you have a loan with a 10% default risk, and lump it in with a large number of other loans with a 10% default risk, then if the risks are all independent, you can more or less guarantee that almost exactly 10% of the loans will fail, and as long as you charged enough interest on the other loans to make up for that, you're in the money. That's how banking, and insurance, works.
But if most of your 10% is correlated risk (for example, an economic slump causes people to lose their jobs, and they have no equity to tide them over, and all your people are like that (and they're correlated because they're in the same economy)) then what you have when you combine a whole lot of them is a 10% chance of losing everything.
That's a rather different proposition, and is the one in which the holders of sub-prime mortgage instruments found themselves.
[ 22. May 2017, 18:56: Message edited by: Leorning Cniht ]
Posts: 5026 | From: USA | Registered: Feb 2013
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simontoad
Ship's Amphibian
# 18096
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Posted
lil buddha, I reckon that we need to strip back those institutions you talk about to discover the individuals making the choices necessary for institutions to act. It's kind of like lifting the lid off your compost bin and counting the worms.
Dark Knight, sure. We guaranteed the banks and gave them cash during the GFC, and they absolutely should stop whining about this new impost. But it wasn't like the early 1990's when Pyramid went under, and the State Bank of Victoria had to be purchased by the CTH Bank. In fact that earlier crisis and Keating's use of it to beat bank executives into submission was instrumental in the banks not really being at much risk during the GFC. HOWEVER, I say that with hindsight, and the Govt. was rightly concerned with steadying everyone's nerves in 2008: the public's, the sharemarket's, the bank's, and their own.
For an excellent outline of Australia's recent political and economic history, I recommend George Megologenis' Making Australia Great: Inside Our Longest Boom. There are a few episodes so I've just linked this promo to give you a taste.
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Human
Posts: 1571 | From: Romsey, Vic, AU | Registered: May 2014
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by simontoad:
lil buddha, I reckon that we need to strip back those institutions you talk about to discover the individuals making the choices necessary for institutions to act. It's kind of like lifting the lid off your compost bin and counting the worms.
Individuals may offer a high risk loan, but they do not create them.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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simontoad
Ship's Amphibian
# 18096
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Posted
so which human or humans create them? Institutions can't act, other than by a legal fiction.
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Human
Posts: 1571 | From: Romsey, Vic, AU | Registered: May 2014
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lilBuddha
Shipmate
# 14333
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Posted
quote:
Originally posted by simontoad:
so which human or humans create them? Institutions can't act, other than by a legal fiction.
The point is that pointing to individuals misses the point.
The institutions need reform.
The process needs to change.
People need to be held accountable for their own actions, yes. But unless the framework in which they operate is fixed, the problems will more easily repeat.
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I put on my rockin' shoes in the morning
Hallellou, hallellou
Posts: 17627 | From: the round earth's imagined corners | Registered: Dec 2008
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Leorning Cniht
Shipmate
# 17564
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Posted
quote:
Originally posted by lilBuddha:
The point is that pointing to individuals misses the point.
The institutions need reform.
The process needs to change.
This.
It is indeed a process problem. I'm tempted to say that most things are.
People are human. They make mistakes. They have bias. They have bad days because they fought with their spouse / their dog was sick / whatever else. Some people are scrupulously honest, other people are not so scrupulous.
A good process works with the fact that people are fallible in all these ways, and is robust against the inevitable errors. A bad process assumes that people are perfect, and hangs them out to dry when they aren't.
Posts: 5026 | From: USA | Registered: Feb 2013
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simontoad
Ship's Amphibian
# 18096
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Posted
But surely institutions and processes are nothing more than tools in the exercise of power by individuals. I agree that the GFC was caused by systemic problems and the exploitation of those problems by individuals for gain. Indeed, reforming those systems and institutions is a political problem requiring the intervention, or not, of particular individuals.
It's not looking good, as I'm sure everyone is aware. One of Trump's 'achievements' in his first hundred days was to loosen regulation of America's banking system.
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Human
Posts: 1571 | From: Romsey, Vic, AU | Registered: May 2014
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Leorning Cniht
Shipmate
# 17564
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Posted
quote:
Originally posted by simontoad:
But surely institutions and processes are nothing more than tools in the exercise of power by individuals.
Ultimately, processes are designed and reviewed by a collection of individuals, of course. But that's true at the ridiculously trivial level.
The point of a good process is that you reduce your vulnerability to bad decisions by individuals. Sometimes it's as simple as "if I make these two connections different, nobody can put it in backwards by mistake". Sometimes it's more complicated.
That's why we have appeals processes in the legal system, for benefit claims, and so on - so that one bad decision isn't irrevocable.
Posts: 5026 | From: USA | Registered: Feb 2013
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Dark Knight
Super Zero
# 9415
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Posted
Simontoad- I just provided an article indicating to you very clearly that our banks WERE at enormous risk during the GFC. That was the point of linking to it. You are simply wrong to assert they were not.
As Gee said earlier, one of the things that helped ease Australia's passage through the GFC was Rudd's application of Keynesian ecominc stimulus. And the mining boom really helped. But the banks were out of control. They learned nothing from WA Inc.
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So don't ever call me lucky
You don't know what I done, what it was, who I lost, or what it cost me - A B Original: I C U
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Love is as strong as death (Song of Solomon 8:6).
Posts: 2958 | From: Beyond the Yellow Brick Road | Registered: Apr 2005
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Dark Knight
Super Zero
# 9415
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Posted
quote:
Originally posted by lilBuddha:
quote:
Originally posted by simontoad:
so which human or humans create them? Institutions can't act, other than by a legal fiction.
The point is that pointing to individuals misses the point.
The institutions need reform.
The process needs to change.
People need to be held accountable for their own actions, yes. But unless the framework in which they operate is fixed, the problems will more easily repeat.
Well said.
Devolving to individuals is the neoliberal way of thinking. It is never the ideas, or the markets themselves that are to blame, because these are flawless. No, it is the actions of individual people that are at fault. Hence, someone can even ask (as per the OP) if the GFC was caused by state intervention. The GFC happened, and now austerity is happening, because the plutocrats need everyone to continue to have unquestioned faith in the sovereignty of the market, when this has failed us catastrophically. And will again.
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So don't ever call me lucky
You don't know what I done, what it was, who I lost, or what it cost me - A B Original: I C U
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Love is as strong as death (Song of Solomon 8:6).
Posts: 2958 | From: Beyond the Yellow Brick Road | Registered: Apr 2005
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simontoad
Ship's Amphibian
# 18096
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Posted
quote:
Originally posted by Dark Knight:
Simontoad- I just provided an article indicating to you very clearly that our banks WERE at enormous risk during the GFC. That was the point of linking to it. You are simply wrong to assert they were not.
As Gee said earlier, one of the things that helped ease Australia's passage through the GFC was Rudd's application of Keynesian ecominc stimulus. And the mining boom really helped. But the banks were out of control. They learned nothing from WA Inc.
Look, I do this as a pastime. I Trump read. Please, show me where the article says that the banks were in as much trouble as they were in the early 1990's. What I saw in my Trump-read was a piece that was having a go at the banks for whinging in 2017 over a tax impost in the budget because of the help they got during the GFC.
Bank bashing is a good example of where it's good to separate out the individuals pulling in multi-million dollar salaries from the institutions that shield them from criticism and personal liability. If the bank culpably fails to pass on an interest rate cut, are the people who took that decision to blame (the board and management of the bank), or is the economic system to blame because that culpable failure was the best way to get the share price of the bank up in the short term. I think that if we blame the economic system, we give the board and management team of the bank carte blanche to ram raid the nation any time they see fit.
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Human
Posts: 1571 | From: Romsey, Vic, AU | Registered: May 2014
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Palimpsest
Shipmate
# 16772
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Posted
There was an interesting article in the New Yorker a few years back (sorry to be so vague) that talked about a cause of the bubble. There was a vast amount of global money looking for safe investment in the American economy. That caused a lot of dubious investment to look more attractive than it should have been.
Posts: 2990 | From: Seattle WA. US | Registered: Nov 2011
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Dark Knight
Super Zero
# 9415
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Posted
quote:
Originally posted by simontoad:
quote:
Originally posted by Dark Knight:
Simontoad- I just provided an article indicating to you very clearly that our banks WERE at enormous risk during the GFC. That was the point of linking to it. You are simply wrong to assert they were not.
As Gee said earlier, one of the things that helped ease Australia's passage through the GFC was Rudd's application of Keynesian ecominc stimulus. And the mining boom really helped. But the banks were out of control. They learned nothing from WA Inc.
Look, I do this as a pastime. I Trump read. Please, show me where the article says that the banks were in as much trouble as they were in the early 1990's. What I saw in my Trump-read was a piece that was having a go at the banks for whinging in 2017 over a tax impost in the budget because of the help they got during the GFC.
Bank bashing is a good example of where it's good to separate out the individuals pulling in multi-million dollar salaries from the institutions that shield them from criticism and personal liability. If the bank culpably fails to pass on an interest rate cut, are the people who took that decision to blame (the board and management of the bank), or is the economic system to blame because that culpable failure was the best way to get the share price of the bank up in the short term. I think that if we blame the economic system, we give the board and management team of the bank carte blanche to ram raid the nation any time they see fit.
I have no idea what Trump reading is. I've never made the claim that Australian banks were in as much trouble in the GFC as they were in the early nineties. I have made no reference to the early nineties at all. You have.
You have claimed the banks were not in Australia were not in trouble in the GFC, compared to other places. This is wrong.
As to your last point - the truth is exactly the opposite. As long as economic rationality is the only game in town, a new Gordon Gecko or Goldman Sachs (or the old one) will rise up and do this again. The problem is systemic, not individual. Governments must stop protecting markets, and plutocrats, and start protecting us.
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So don't ever call me lucky
You don't know what I done, what it was, who I lost, or what it cost me - A B Original: I C U
----
Love is as strong as death (Song of Solomon 8:6).
Posts: 2958 | From: Beyond the Yellow Brick Road | Registered: Apr 2005
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Kwesi
Shipmate
# 10274
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Posted
Simontoad [QUOTEIf the bank culpably fails to pass on an interest rate cut, are the people who took that decision to blame (the board and management of the bank), or is the economic system to blame because that culpable failure was the best way to get the share price of the bank up in the short term] [/QUOTE]
Isn't there a danger of discussing "the system" as if it were something apart from the people who operate it, because individual actors are part of "the system"? It is the values of powerful individuals who design the system, whose relations with government officials (often through a revolving door) who determine how things are to be regulated, it is the values of individuals who determine who gets loans etc.etc.. To my mind both government and finance have become so enmeshed in a common culture and assumption of a common interest (both corporate and personal), that Chinese walls have been breached or are so porous that regulation in the interests of those outside the financial, political and administrative elite(s?) have too little purchase on the debate. What is for sure is that "the system" needs to a be demystified. It is not some metaphysical construct but an instrument fashioned by individuals for specific purposes: IMO, of course!
Posts: 1641 | From: South Ofankor | Registered: Sep 2005
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Gee D
Shipmate
# 13815
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Posted
Simontoad, can you explain what you mean by "culpably" please?
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Not every Anglican in Sydney is Sydney Anglican
Posts: 7028 | From: Warrawee NSW Australia | Registered: Jun 2008
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Dafyd
Shipmate
# 5549
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Posted
quote:
Originally posted by Kwesi:
Isn't there a danger of discussing "the system" as if it were something apart from the people who operate it, because individual actors are part of "the system"? It is the values of powerful individuals who design the system, whose relations with government officials
As with many things there are emergent properties. What people do is more than just the sum total of all the individual actions. When you have lots of people behaving in coordinated or competitive ways or just taking each other's actions into account, that affects what each person thinks is reasonable or permissible to do. People who think certain behaviour is expected of them act in that way. People take on the values of the people around them. If they have a job they act up to the responsibilities of the job and don't act up to responsibilities that aren't part of the job.
I don't think even powerful people are able to design systems from scratch. There are unintended consequences, and unacknowledged constraints upon what people can do.
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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams
Posts: 10567 | From: Edinburgh | Registered: Feb 2004
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Leorning Cniht
Shipmate
# 17564
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Posted
quote:
Originally posted by simontoad:
If the bank culpably fails to pass on an interest rate cut,
What on earth does "culpably fail to pass on an interest rate cut" mean?
Obviously there tends to be a relation between the price the bank pays to borrow money and the price the bank changes its customers to borrow money, but you're talking as though there's some kind of obligation for banks to maintain a particular fixed relationship between the two for all time.
There isn't.
Posts: 5026 | From: USA | Registered: Feb 2013
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simontoad
Ship's Amphibian
# 18096
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Posted
I mean deserving of censure. In the hypothetical I posited, I wanted the wrongness of the decision to be assumed. I didn't want an argument about the issue that Leorn (if I might call you that) raised.
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Human
Posts: 1571 | From: Romsey, Vic, AU | Registered: May 2014
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