2 comments on “Lingering Questions about the Financial Crisis

  1. John: I worked for a mortgage company in 2007 & 2008. It was not the poor who were taking out these junk loans By and large it was the upper middle class borrowers who had the most egregious loans.

    There were two delusions that invaded the marketplace that i think lead to the most recent economic collapse

    1) Home Values would appreciate year over year.
    2) Foreign and Institutional Investors would continue to buy debt to no end, as long as yields remained high.

    There were no standards. $300k + mortgages with no documentation was very common. Negative Equity loans were allowed. Homeowners were refiniancing every 6 months, because sure enough, their appraisal would be higher. And they’d simply over borrow, pocket the money, and buy vacations, cars, and other unnecessary crap. The market became speculative, individuals with no experince got into house flipping and lost badly. But the lenders and brokers were making money hand over fist. They then just took all the debt, turned it into CDO’s and other derivatives and sold it off with high yields to insitutional and foreign investors. They then used this money not to keep a hedge against all the junk loans they gave out, but used it to write even more junk loans.

    In turn, Lenders set commissions to favor higher value mortgages with adjustable rates to keep the cycle going. A broker got more points for advising someone to take a bad loan then you did a good one. Because the lenders assumed”we’ll be able to sell this note in a matter of minutes”. Greed played a very big role.

    Both of those proved incorrect and thus, it all fell apart.

  2. If this phenomena was actually driven by debt-straddled middle class borrowers, this is particularly damning of our current system. This suggests that households floated by debt alone can only contribute meaningfully to a growing economy as long as unemployment remains low.

    Given that the past few recoveries have been “jobless” recoveries, this suggests that the debt was an enabling condition of a crises, but not the cause of it. The true cause would have to be the labor market and the rampant consumerism.

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