Read Andrew Sorkin's "Too Big to Fail" and you will get a good understanding of why the banks collapsed and who was behind the greed.

Capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy — through the manipulation of interest rates and the creation of money — caused the artificial boom in mortgage lending.

 

The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.

 

This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed's easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.

 

The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.

 

Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.

 

-Austrian School Economics

 

This post is on point. Corporatism is the problem, not Capitalism. The Federal Reserve is the underlying reason for so many of the monetary issues we face today.

Unregulated capitalism is a bad thing, see the industrial revolution.

Communism is a bad thing, see North Korea or the USSR.

 

A mixture is needed and I think we're on the right side of the equation. China's mixed economy (rather than true communism) is possibly more efficent in controlling an economy, but who would want to live in that kind of environment if you're used to the USA? I just do not see a better alternative than what we have.

Wrong.

There is very little doubt that the underlying cause of the current credit crisis was a housing bubble. But the collapse of the bubble would not have led to a worldwide recession and credit crisis if almost 40% of all U.S. mortgages--25 million loans--were not of the low quality known as subprime or Alt-A.

 

These loans were made to borrowers with blemished credit, or involved low or no down payments, negative amortization and limited documentation of income. The loans' unprecedentedly high rates of default are what is driving down housing prices and weakening the financial system.

 

The low interest rates of the early 2000s may explain the growth of the housing bubble, but they don't explain the poor quality of these mortgages. For that we have to look to the government's distortion of the mortgage finance system through the Community Reinvestment Act and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

 

http://www.forbes.com/2009/02/13/housing-bubble-subprime-opinions-contributors_0216_peter_wallison_edward_pinto.html

 

 

I didn’t find the article very convincing. It was an attempt at partisanship more so than it was informative. This argument has been adopted as the “conservative” response to the financial crisis, but I think it’s a stretch.

 

The article cites the Community Reinvestment Act, which has become something of a partisan boogeyman, as the reason for the rise of subprime mortgages, but does not account for precisely what the law requires or even what the obligations on the part of the banks were. I think anyone who wants to cite the CRA as the cause should have accounts of those two monumentally important details – it’s the crux of the case. Essentially, how many subprime loans were “mandated” by the government? These loans were also massively profitable, particularly after their securitization became en vogue in the early 2000s. The CRA does not explain that.

 

The meat of the article is that the government caused the housing bubble. Their main reasoning is that home ownership ticked up around three or four percent since the 1980s and they believe that there is no possible explanation for this other than the government. I can’t speak to the veracity of that, but the ipso facto logic is faulty and unconvincing. There have been much better criticisms written about the GSEs and their purpose (several executives there have recently been charged with fraud over some of their lending practices) and I imagine any government involvement would play a role in the bubble, but as the single overarching factor? I’m not convinced by what was presented here, particularly when they concede the GSEs had higher lending standards, and that they had to “assume” some of their data.

 

However, the main contention of the article is that the government caused the financial crisis. The article concludes:

Housing bubbles are nothing new. We and other countries have had them before. The reason that the most recent bubble created a worldwide financial crisis is that it was inflated with low-quality loans required by government mandate. The fact that the same government must now come to the rescue is no reason for gratitude.

 

This conclusion doesn’t mesh with the rest of the article which did not address mortgage securitization at all, even though they were criticizing Fannie and Freddie. The financial crisis was indeed started by the housing market collapse, but the culprit was the prolific mortgage-backed security which had weaved its way into the financial system. Once the housing bubble collapsed and mortgages began to be foreclosed en masse, these billions of dollars of securities became nearly worthless (the “toxic” assets we’ve heard so much about). Essentially, overnight these financial giants began to realize they didn’t have nearly as much money as they thought they were going to or found themselves suddenly owing money when they were flush. Due to both a lack of foresight and the utter complexity of these deals, no one anticipated it could happen or were even aware of how exposed their firms were to these assets. Some firms had more money invested in these than any other asset, while others were completely unaware they were involved in mortgages at all when they were tied up in them just the same. This is why firms (AIG, Lehman, Bear Stearns, for instance) were burned across the board, not just the original lending institutions (Countrywide Financial, for instance). This is all to say that the article’s implication that the financial crisis occurred simply because this housing bubble was “worse” than previous bubbles is wrong.

 

Subprime mortgages exploded in the 2000s. At the height of their reign over 80% of them were from private lending institutions, this is dismissed or ignored in the article. This rise also coincides with the rate at which these subprime and alt-A mortgages were being securitized (the infamous mortgage-backed security that crushed the banks). The chart below shows how massively they grew and how bad mortgages made up the majority of them. The short story here is that once banks and financial firms realized that they could bundle up these mortgages and sell them as securities (even have them graded as AAA), mortgages become doubly valuable. It incentivized bank lending across the board. (While the subprime mortgages targeted lower income borrowers, lending practices were more relaxed overall as well. One of the first signs of the housing collapse were foreclosures in vacation and retirement communities in Florida where many people had bought second homes they couldn’t afford once the market turned.) So, while the housing market collapse kicked off the financial crisis, it wouldn’t have occurred if it weren’t for the proliferation of these mortgage backed securities, thus I found the article and their argument deeply misleading.

 

 

 

Here is a link to a very thorough analysis of how this all happened: New York Fed

And I am for that. Make the top pay more and make the lower rung pay more as well. I do thik there is a floor income below which you don't pay but that needs to be as low as possible and right now it is too high.

 

Fair enough.

^ Well stated Habib. You are spot on that the right wing wants to blame CRA's but the facts don't back that up. Anyone who believes the government and/or CRA program caused this crisis needs to do more research.

I believe in capitalism. I really do. But I find myself questioning what shape it should take. As I watch the chasm between the haves and have nots in our nation get wider and wider, I begin to believe capitalism needs controls. When I think of a total free market society with the smallest government and least intervention, I think of the Middle Ages and feudal society. Not good. I think of our banks being left to their own and imploding in 2008. Not good. The United States had its greatest economic expansion when the tax rate on the wealthy was 91%. Our worst decade of growth has come when taxes are low and our government was focused on trying to stay out of the way. I believe the American Dream requires the haves being forced to share the fruits of that very American Dream. If we are going to ensure the American Dream to all citizens, a lot of the wealth generated by our society needs to be invested back into our society to improve infrastructure, education, job training, etc. I believe in capitalism. But I don't believe in the free market. We are greedy people. We all want our stuff. We need capitalism and the American Dream but we also need those who have achieved that American Dream to be willing to share the wealth and keep the dream alive for all of us.

 

So what should capitalism look like? How free can we let our markets be? Is totally unfettered growth best? Do low taxes help or hurt the American Dream?

The American Dream is alive for every single person in this country. Making the wealthy "share the wealth" will not change a thing. It will only give the feds more money to waste.

I don't think that the problem is an under- or over-regulation of banking. The problem is that there's just too much banking.

 

In 2007, over 50% of Harvard's graduating class that got jobs after graduation got them in the financial sector... twenty percent in investment banking alone. The most popular major at Princeton's engineering school: Operations Research and Financial Engineering. Meanwhile, students who actually graduate with science degrees find work, but at considerably lower-paying jobs than their friends who go on to finance or continue school to study medicine or law.

 

Wealth isn't energy; it can be created and destroyed. And right now, the best place to go make money is to figure out new ways of moving the money around, rather than finding the next great thing to help create more of it. It strikes me as a serious problem moving forward.

The American Dream is alive for every single person in this country. Making the wealthy "share the wealth" will not change a thing. It will only give the feds more money to waste.

 

No it is not. For people to really assert that is naive at best and perhaps intentionally disingenuous. Wages have not kept up with the cost of living and manufacturing jobs are no longer plenty enough to guarantee an honest days pay for an honest days work for enough people. Not everyone is cut out to be a financial planner, entrepreneur, or engineer. Some are workers, and good honest workers and the American dream is disappearing for them because our corporations are multi-national and would rather pay a slave's wage in Asia and sit on the profit than pay a good wage in America. Before the economy was as global as it is now, I would have said that the dream is alive, it is not now.

No it is not. For people to really assert that is naive at best and perhaps intentionally disingenuous. Wages have not kept up with the cost of living and manufacturing jobs are no longer plenty enough to guarantee an honest days pay for an honest days work for enough people. Not everyone is cut out to be a financial planner, entrepreneur, or engineer. Some are workers, and good honest workers and the American dream is disappearing for them because our corporations are multi-national and would rather pay a slave's wage in Asia and sit on the profit than pay a good wage in America. Before the economy was as global as it is now, I would have said that the dream is alive, it is not now.

Yes it is. Apply yourself, get an education and quit waiting for someone else to give you your American Dream. Will everyone suceed? No, but no system...let me say it again, NO system will guarantee that everyone will. Now you are on the right track with the second part of your post about jobs. But taking more money for the wealthy will not create jobs. It may make you feel better to stick it to them but it will not change the current situation. Until something is done to make it cost effective for companies to manufacture here again it will be the same song and dance.

No it is not. For people to really assert that is naive at best and perhaps intentionally disingenuous. Wages have not kept up with the cost of living and manufacturing jobs are no longer plenty enough to guarantee an honest days pay for an honest days work for enough people. Not everyone is cut out to be a financial planner, entrepreneur, or engineer. Some are workers, and good honest workers and the American dream is disappearing for them because our corporations are multi-national and would rather pay a slave's wage in Asia and sit on the profit than pay a good wage in America. Before the economy was as global as it is now, I would have said that the dream is alive, it is not now.

 

What you're saying is that some of the American workforce has not planned properly or adapted to the economy. Isn't that on them?

No it is not. For people to really assert that is naive at best and perhaps intentionally disingenuous. Wages have not kept up with the cost of living and manufacturing jobs are no longer plenty enough to guarantee an honest days pay for an honest days work for enough people. Not everyone is cut out to be a financial planner, entrepreneur, or engineer. Some are workers, and good honest workers and the American dream is disappearing for them because our corporations are multi-national and would rather pay a slave's wage in Asia and sit on the profit than pay a good wage in America. Before the economy was as global as it is now, I would have said that the dream is alive, it is not now.

 

Exactly. But everyone has the opportunity to become what they want, hence The American Dream. It's still alive, us Americans are so use to our laid back style of living that we don't realize how easy we have it when compared to other countries. Nonetheless, we still have a HUGE crisis that needs dealt with before we are completely screwed.

^ Well stated Habib. You are spot on that the right wing wants to blame CRA's but the facts don't back that up. Anyone who believes the government and/or CRA program caused this crisis needs to do more research.

 

What?

 

You are pointing toward the free market and capitalism as the failure. However, do you not realize that we have not enjoyed the freedom and productivity of a free market for nearly 100 years.

 

Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

 

After considering this definition, you may realize that America does not have a true capitalist system, nor has it for many decades. What we have in America is a centrally planned economy. Many do not want to think about the American economy in that way, because it conjures up visions of the USSR or even China. However, our economy is in fact centrally planned and it has been responsible for the “boom and bust” cycle since the inception of the Federal Reserve, which is the main source of economic planning in the American economy. These cycles are made worse by further intervention from the Federal Government in the form of restrictive legislation and forceful mandates.

What?

 

You are pointing toward the free market and capitalism as the failure. However, do you not realize that we have not enjoyed the freedom and productivity of a free market for nearly 100 years.

 

Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

 

After considering this definition, you may realize that America does not have a true capitalist system, nor has it for many decades. What we have in America is a centrally planned economy. Many do not want to think about the American economy in that way, because it conjures up visions of the USSR or even China. However, our economy is in fact centrally planned and it has been responsible for the “boom and bust” cycle since the inception of the Federal Reserve, which is the main source of economic planning in the American economy. These cycles are made worse by further intervention from the Federal Government in the form of restrictive legislation and forceful mandates.

 

We have a mixed market economy.

I believe in capitalism. I really do. But I find myself questioning what shape it should take. As I watch the chasm between the haves and have nots in our nation get wider and wider, I begin to believe capitalism needs controls. When I think of a total free market society with the smallest government and least intervention, I think of the Middle Ages and feudal society. Not good. I think of our banks being left to their own and imploding in 2008. Not good. The United States had its greatest economic expansion when the tax rate on the wealthy was 91%. Our worst decade of growth has come when taxes are low and our government was focused on trying to stay out of the way. I believe the American Dream requires the haves being forced to share the fruits of that very American Dream. If we are going to ensure the American Dream to all citizens, a lot of the wealth generated by our society needs to be invested back into our society to improve infrastructure, education, job training, etc. I believe in capitalism. But I don't believe in the free market. We are greedy people. We all want our stuff. We need capitalism and the American Dream but we also need those who have achieved that American Dream to be willing to share the wealth and keep the dream alive for all of us.

 

So what should capitalism look like? How free can we let our markets be? Is totally unfettered growth best? Do low taxes help or hurt the American Dream?

 

You are exactly correct. And so why exactly do you believe that when "greedy people" are elected to political office they will somehow loose this greediness and do what's best for the country (take only the "right" amount of money from people in the form of taxes)? You must believe this, because I know you wouldn't purposely give "greedy people" more control over the money that you, your children and all of those that you love work hard every day to earn.

 

The best thing that anyone can do for this economy is to work hard for their & their family's own best interest, and let God be their guide as to what "best" is. Sometimes your best interest will be in partnering with other groups of people to allow all of you to make money (companies), other times it will be to take matters in your own hands & develop a product that other people will give you their money for. Other times it will be to work towards the betterment of other less fortunate groups of people because you realize the more money they have, the more of your product they'll be able to buy. The bottom line is, only you know what's best for you. The "greedy people" in Washington sure don't.

 

There is no utopia. Men are inherently flawed, and there's way too many of us to think small groups of us can determine the best way for all of us to live. The sooner we all realize this, stop chasing an impossible utopia, and remember the true laws that have been given us by our creator - many of which have directly & indirectly inspired the original governing documents of our country - the better off we'll be.