The Governments Forgotten Role in The Financial Crisis

[squatz1]

I've been researching the 2008 financial crisis in the last couple weeks, and one of the things that I keep noticing is that people are ONLY blaming greedy businesspeople, corporations, capitalism, free markets, and so on and so forth for the (almost) destruction of our financial system. They fail to mention the significant role that government played in this financial crisis, and then the role that they played in trying to fix a crisis that they caused.

Interest Rates

Shortly after 9/11, the current Federal Reserve Chairman, Alan Greenspan, lowered the interest rate for which banks can lend to each other to 1.75 percent, this action is done to avoid a recession and to ensure that people are borrowing and investing in the economy. Not a bad idea at first glance, though this causes a complete domino effect.

Mortgages cost less; people are borrowing more and more money to start businesses and buy homes at historic low interest rates. People who couldn't afford homes (before this rate cut), now can, and people who are in homes now feel as if they're ready to upgrade their style of living as they can now afford bigger ones. (make sure you note this is all being financed) Obviously, home values soared, which attracts more and more investment in the home market -- people are buying homes for themselves, buying houses and apartments to rent, flipping homes, etc.

People couldn't see this then, but this sort of massive increase is unsustainable. Home prices can't rise forever, and interest rates must go up at some point.

A 'truly' free market doesn't have a central bank that raises rates when they want to foster growth, interest rates would be determined by the supply of savings and demand for loans in the marketplace.

Housing Policy

A free market system doesn't have advantages to owning a home; you don't get tax credits if you want to own a home or if you rent. But in our system, there are massive tax advantages to owning a home

1. Interest Payments on mortgage debt is tax deductible.
2. Borrowing against the equity in one's homes is tax deductible
3. Starting in 1998, home sellers could make 500k in profit from selling their primary residence and not be subject to capital gains tax.

All of this creates additional incentives to speculate in real estate.

But that's not all, because people who wanted to own homes still couldn't qualify for loans. Lenders (profit-minded ones) had sought to manage risk and put some real standards in place which included a sizeable down payment, strong credit history, and a strict ratio regarding mortgage payment to income.

Here comes Fannie Mae and Freddie Mac! Under the direction of HUD and Congress, affordable housing efforts were extended. They began to redefine creditworthiness, which allowed low-income people (those who would never have never qualified for a mortgage before) were now able to get mortgages from the US government under Mae and Mac. By early 2008,  Mae and Mac owned (or guaranteed through other lenders) nearly half of the American mortgage market. By late 2008 though, Fannie and Freddie were on the verge of collapse and had to be fully taken over by the US government.

The Financial Regulations

With all of this in mind, some people think that this crisis was only made by greed on Wall Street. I'm not saying that Greed on wall street played no part because it did, but it wasn't the only reason this crisis happened. Though people don't notice that the banking/finance industry is one of the most regulated industry in America

All of the financial instruments that led to the crisis of 2008 -- such as mortgage-backed securities, collateralized debt obligations, credit default swaps, etc. -- weren't unregulated securities, they were regulated by the alphabet agencies in the US government. These securities received the blessing from the SEC (and co) to continue.

Do you want to know why the government didn't stop the bankers? The government didn't stop the bankers from lending to those that couldn't afford it, because they approved of what they were doing. They were improving homeownership rates, and the government wanted that.

The government also shielded these banks from any real trouble, as they failed to let the banks that took the most risk fail when they should have. Risk (in a free market economy) carried an upside and a downside -- though when the government doesn't let the downside happen, business is just going to continue risking and risking and risking. They see no reason to care about the risk they take because they know what they're 'too big to fail' and that they're never going to be allowed to go bankrupt.

The Lessons We Didn't Learn

Why do we have particular regulations in the finance industry? It's because people don't trust the 'greedy' bankers, they think that the Federal Government is going to be able to look out for them compared to a greedy bank like JP Morgan, Citibank, Capital One, etc.

Why do we cut interest rates when a recession happens? Morality. We want to give people a 'soft landing' instead of pain and suffering during a recession.

Why do people need to own homes? Because it's popular, and that's what gets politicians reelected. Popular government policy.

We shouldn't allow the government to be complicit in creating a crisis, and then failing to own up to the fact that they played a role in it. The government also shouldn't intervene in the economy to curtail 'greed' and serve those in 'need' A free market didn't fail in the 2008 crisis, an unfree market (one that was created by government policy) failed.

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[PrimeNumber7]

Having a central bank set short term interest rates helps keep inflation in line with a healthy economy (not too high but also not negative).

Banks being forced to lend to "poor" zip codes via the CRA played an outsized role in the Financial Crisis. In order to remain complaint with the CRA, banks lowered their lending standards for lower income neighborhoods. 

[tvbcof]

2008 was very nearly the crisis they said it was (or worse.)  The failure mode was failing 'letters of credit' and we probably were days or maybe hours from just that scenario.

The event was, like so many before it, a well engineered extortion racket by the international banking cartel (a private entity), and there was a genuinely loaded gun pointed at the world's temple.

Were the same thing to happen today it seems likely to me that at least some transactors would use Bitcoin transactions in lu of 'letters of credit.'  Bitcoin probably really has given the world some bullet-proof armor against certain forms of extortion.

---

BTW, it would be interesting to see the valuations of Bitcoin if the 2008 heist was attempted again.  I've never even bothered to read the arguments for million-dollar per Bitcoin so I don't know if this justification was one of them.  One way or another, I think that it well might be an outcome of the exercise of a similar extortion operation attempted by the private banking cartel.

[squatz1]

2008 was very nearly the crisis they said it was (or worse.)  The failure mode was failing 'letters of credit' and we probably were days or maybe hours from just that scenario.

The event was, like so many before it, a well engineered extortion racket by the international banking cartel (a private entity), and there was a genuinely loaded gun pointed at the world's temple.

Were the same thing to happen today it seems likely to me that at least some transactors would use Bitcoin transactions in lu of 'letters of credit.'  Bitcoin probably really has given the world some bullet-proof armor against certain forms of extortion.

---

BTW, it would be interesting to see the valuations of Bitcoin if the 2008 heist was attempted again.  I've never even bothered to read the arguments for million-dollar per Bitcoin so I don't know if this justification was one of them.  One way or another, I think that it well might be an outcome of the exercise of a similar extortion operation attempted by the private banking cartel.

Commenting on just what you've said about Bitcoin, I think that the Bitcoin price would crash. People would be exiting from traditional asset classes (Stocks, Bonds, Real Estate, etc) so they would without a doubt be leaving speculative ones which are highly volatile like Bitcoin.

Bitcoin has only seen a bull stock market, who knows what will happen if we are to see a bear stock market/economy.

Having a central bank set short term interest rates helps keep inflation in line with a healthy economy (not too high but also not negative).

Banks being forced to lend to "poor" zip codes via the CRA played an outsized role in the Financial Crisis. In order to remain complaint with the CRA, banks lowered their lending standards for lower income neighborhoods. 

Very amazing point relating to the CRA (which is what I referenced when I stated that under the direction of HUD and Congress) Thanks for the individual act though, I missed the name in my research.

[tvbcof]

2008 was very nearly the crisis they said it was (or worse.)  The failure mode was failing 'letters of credit' and we probably were days or maybe hours from just that scenario.

The event was, like so many before it, a well engineered extortion racket by the international banking cartel (a private entity), and there was a genuinely loaded gun pointed at the world's temple.

Were the same thing to happen today it seems likely to me that at least some transactors would use Bitcoin transactions in lu of 'letters of credit.'  Bitcoin probably really has given the world some bullet-proof armor against certain forms of extortion.
...

Commenting on just what you've said about Bitcoin, I think that the Bitcoin price would crash. People would be exiting from traditional asset classes (Stocks, Bonds, Real Estate, etc) so they would without a doubt be leaving speculative ones which are highly volatile like Bitcoin.
...

I don't think you really did understand what I said.  There would be no 'stocks, bonds, ...'...they are confidence base and evaporated with the loss of confidence.  You cannot realistically use real estate to pay for a ship to be loaded, and especially not when governments (which maintain titles of ownership) are failing and changing their leadership several times per month.

On the other hand, you can now send $100,000,000 worth of value from New Orleans to Shanghai within minutes using Bitcoin.  That was not an option in 2008, and by 2019 it has been somewhat proven out.

The trouble is that you need liquidity to meet demand.  This can occur in two ways:  1) create more BTC (impossible)  or 2) increase the value  on a per-BTC basis.

[PrimeNumber7]

BTW, it would be interesting to see the valuations of Bitcoin if the 2008 heist was attempted again.  I've never even bothered to read the arguments for million-dollar per Bitcoin so I don't know if this justification was one of them.  One way or another, I think that it well might be an outcome of the exercise of a similar extortion operation attempted by the private banking cartel.

During a financial crisis, nearly all asset types get sold off/liquidated (this is what caused Madeoff's ponzi scheme to get exposed). Although far from a financial crisis, last December in the US, financial markets were selling off, and the crypto markets generally fell when US stocks fell, although there was also some separate issues in the crypto market causing declines.

In 2015/16, I might have had a different opinion, but today, there are many institutional investors that also invest and are affected by other assets and markets, and I believe many of these institutions would sell their crypto holdings to meet liquidity needs caused by turmoil elsewhere.

Very amazing point relating to the CRA (which is what I referenced when I stated that under the direction of HUD and Congress) Thanks for the individual act though, I missed the name in my research.

There are also other problems with Freddie/Fannie("GSE") outside of the issues caused by the CRA. The GSEs were trying to compete with lenders who were packaging loans and selling them into MBS (mortgage backed securities), further reducing their standards than the CRA required.

[tvbcof]

...

During a financial crisis, nearly all asset types get sold off/liquidated (this is what caused Madeoff's ponzi scheme to get exposed). Although far from a financial crisis, last December in the US, financial markets were selling off, and the crypto markets generally fell when US stocks fell, although there was also some separate issues in the crypto market causing declines.

As per my note to the last guy, we've not seen anything resembling a 'crisis'.  Comparing what is possible with any of the little blips we've seen in the last 80 years is futile.

I'm talking about an event where there is a real problem with supply chain stoppage (due to a failure of a monetary system able to support it) and consequent starvation and chaos.  You're trying to pick the pieces of paper which give the best return (or fewest losses) where I'm saying they will be shoveled into the fire for heat as happened in the various hyperinflations.  All of the pieces of paper!  What good is Boing stock if their manufacturing facilities have been burnt and looted?

Property is worth something if you have the means to defend it.  Precious metals similar.  But both of these are highly local survival type exchange mechanisms.

International commerce will persist (because the bankers will be doing fine in their hideouts in New Zealand or whatever) but they need something to exchange.  It won't be USD because it's worse than useless (unfunded liabilities.)  Could well be Bitcoin.  I actually don't see a more likely option at this point.

[squatz1]

2008 was very nearly the crisis they said it was (or worse.)  The failure mode was failing 'letters of credit' and we probably were days or maybe hours from just that scenario.

The event was, like so many before it, a well engineered extortion racket by the international banking cartel (a private entity), and there was a genuinely loaded gun pointed at the world's temple.

Were the same thing to happen today it seems likely to me that at least some transactors would use Bitcoin transactions in lu of 'letters of credit.'  Bitcoin probably really has given the world some bullet-proof armor against certain forms of extortion.
...

Commenting on just what you've said about Bitcoin, I think that the Bitcoin price would crash. People would be exiting from traditional asset classes (Stocks, Bonds, Real Estate, etc) so they would without a doubt be leaving speculative ones which are highly volatile like Bitcoin.
...

I don't think you really did understand what I said.  There would be no 'stocks, bonds, ...'...they are confidence base and evaporated with the loss of confidence.  You cannot realistically use real estate to pay for a ship to be loaded, and especially not when governments (which maintain titles of ownership) are failing and changing their leadership several times per month.

On the other hand, you can now send $100,000,000 worth of value from New Orleans to Shanghai within minutes using Bitcoin.  That was not an option in 2008, and by 2019 it has been somewhat proven out.

The trouble is that you need liquidity to meet demand.  This can occur in two ways:  1) create more BTC (impossible)  or 2) increase the value  on a per-BTC basis.

So what you're talking about is a complete and utter meltdown of the financial sector system, not a recession or a depression or anything along those lines. You're talking about all other means of traditional investments going to shit, and the governments of nations crumbling.

I don't see anything other than guns, bullets, and food helping in a circumstance like this. Yes, money which in your definition of it is Gold, BTC, etc may be helpful though I don't see how currency could help too much when everything around you is crumbling and we're just searching for stability.

BTW, it would be interesting to see the valuations of Bitcoin if the 2008 heist was attempted again.  I've never even bothered to read the arguments for million-dollar per Bitcoin so I don't know if this justification was one of them.  One way or another, I think that it well might be an outcome of the exercise of a similar extortion operation attempted by the private banking cartel.

During a financial crisis, nearly all asset types get sold off/liquidated (this is what caused Madeoff's ponzi scheme to get exposed). Although far from a financial crisis, last December in the US, financial markets were selling off, and the crypto markets generally fell when US stocks fell, although there was also some separate issues in the crypto market causing declines.

In 2015/16, I might have had a different opinion, but today, there are many institutional investors that also invest and are affected by other assets and markets, and I believe many of these institutions would sell their crypto holdings to meet liquidity needs caused by turmoil elsewhere.

Very amazing point relating to the CRA (which is what I referenced when I stated that under the direction of HUD and Congress) Thanks for the individual act though, I missed the name in my research.

There are also other problems with Freddie/Fannie("GSE") outside of the issues caused by the CRA. The GSEs were trying to compete with lenders who were packaging loans and selling them into MBS (mortgage backed securities), further reducing their standards than the CRA required.

This is my point, Crypto is going to be one of the first asset classes to be liquidated to ensure liquidity elsewhere. The Crypto market cap is nothing compared to traditional asset classes.

[sheenshane]

-just add my cents here.

The reason why a lot of corporations and businesspeople blame the government for our financial crisis is that they think that the main reason why we are having a financial crisis starts with the leadership. Truth but hurts, sometimes the leaders are the first one to cause the crisis. And the followers and subordinates will only follow their steps. It's really disappointing that the leader you are expecting to be the example and the regulator are the people who initiate those unacceptable actions.

[squatz1]

-just add my cents here.

The reason why a lot of corporations and businesspeople blame the government for our financial crisis is that they think that the main reason why we are having a financial crisis starts with the leadership. Truth but hurts, sometimes the leaders are the first one to cause the crisis. And the followers and subordinates will only follow their steps. It's really disappointing that the leader you are expecting to be the example and the regulator are the people who initiate those unacceptable actions.

I think that these are the people that blame the government because these are the people that truly know what the government (and themselves, the corporations) did to cause the crisis. I do think that Corporations are more guilty for causing the crisis and taking advantage of the 'too big to fail' label.

Though everyday people never hear this side, that government policy and intervention also PLAYED a role in the crisis. All they hear is that 'corporations bad, government good and they help'

[karen442]

Very amazing point relating to the CRA which is what I referenced when I stated that under the direction of HUD and Congress Thanks for the individual act though, I missed the name in my research.