NPR - The origins of the financial crisis

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    May 25, 2011 11:45 PM GMT
    I just listened to this on stitcher. Good listen

    http://www.npr.org/2011/05/24/136496032/how-reckless-greed-contributed-to-financial-crisis
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    May 26, 2011 2:55 AM GMT
    This is very consistent with what several of us have been saying on RJ for quite some time. But it contradicts a few left-wingers who twist history to put nearly 100% blame on the Bush administration and 0% blame on Fannie and Freddie and the Democratic recipients of their lobbying generosity.
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    May 26, 2011 3:06 AM GMT
    Socal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.
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    May 26, 2011 3:09 AM GMT
    socalfitness saidThis is very consistent with what several of us have been saying on RJ for quite some time. But it contradicts a few left-wingers who twist history to put nearly 100% blame on the Bush administration and 0% blame on Fannie and Freddie and the Democratic recipients of their lobbying generosity.


    I que up a bunch of stuff on stitcher before I go walk to keep me going for two hours and stumbled on this by accident.

    Yeah it sounds like james johnson was big cause of much of this. I found it interesting that johnson was wally's campaign manager in 84. Sounds like he got a big bunch of help from BJ Barney and his J/O buddies.
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    May 26, 2011 3:25 AM GMT
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.

    I wasn't referring to you; I don't recall your specific position on this. My representation of the position of others is quite accurate, but I will not name them because I don't like to refer to others not involved with the particular thread.

    Fannie and Freddie were not the sole factor, but their role includes cooking the books, lobbying very actively some members of Congress who actively resisted needed oversight of them, and greed on the part of certain politicians as well as the financial industry.
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    May 26, 2011 3:38 AM GMT
    Fannie and Freddie definately had a role in the crash but the primary reason was the big banks and wall street gambling (so to speak) on nearly worthless paper. Nothing about Fannie and Freddie's role came even close to the losses of the above.
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    May 26, 2011 1:56 PM GMT
    Just a bump so this will be seen along with the other thread same topic.
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    May 26, 2011 2:02 PM GMT
    This is why it's so dangerous for governments to be so connected and have their hands so deeply in financial institutions. It causes so much corruption because politicians will become involved with them make sure that these people running these institutions can pursue their wanton greed without any real consequences or responsibilities, and all at taxpayer expense.

    Look at what happened to Iceland! Almost all of the people running the largest bank were politicians!

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    May 26, 2011 2:04 PM GMT
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.
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    May 26, 2011 2:05 PM GMT
    riddler78 said
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.


    Booyah!
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    May 26, 2011 3:00 PM GMT
    mocktwinkie said
    riddler78 said
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.


    Booyah!


    Ridiculous. How exactly did the federal government allow the unregulated derivatives market to become distorted? Your problem is that you view business uber ales, so you can't engage in a rational discussion.
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    May 26, 2011 3:13 PM GMT
    Christian73 said
    mocktwinkie said
    riddler78 said
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.


    Booyah!


    Ridiculous. How exactly did the federal government allow the unregulated derivatives market to become distorted? Your problem is that you view business uber ales, so you can't engage in a rational discussion.


    But they were "regulated" by the manipulations set forth to begin with. i.e. You won't make a profit unless the loans you are selling conform with the standards the buyer (mostly fannie) has set forth in their criteria as ordered by congress.
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    May 26, 2011 3:23 PM GMT
    Christian73 said
    mocktwinkie said
    riddler78 said
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.


    Booyah!


    Ridiculous. How exactly did the federal government allow the unregulated derivatives market to become distorted? Your problem is that you view business uber ales, so you can't engage in a rational discussion.


    I'm guessing you didn't realize that derivatives tend to magnify small differences into large ones. Given that the underlying assets were distorted in value (in this case, CDOs and underlying mortgages whose assets were not saleable because of the uncertainty as a result of opacity, suspected fraud and valuations), the derivatives (which are derived) from these assets created substantially more losses.

    As for rational discussions? Coming from you, that's a bit rich. Perhaps if you had more knowledge on these issues, you'd come across a bit more credibly instead of parroting extremist views that base their opinions on conspiracy and ignorance.

    I think liberals (and statists) like to use the "greed" meme and markets because they believe that markets are based on greed. The reality is that that if you look at the crisis and why the markets failed, it was the lack of trust. Buyers did not trust that the assets they were being sold were as valuable as suggested. It's not greed that drives markets - it's trust. What is even more galling is that for many liberals, greed only exists for capitalists (and conservatives) - not for government bureaucrats, politicians and government institutions.
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    May 26, 2011 3:30 PM GMT
    mocktwinkie said

    But they were "regulated" by the manipulations set forth to begin with. i.e. You won't make a profit unless the loans you are selling conform with the standards the buyer (mostly fannie) has set forth in their criteria as ordered by congress.


    And you STILL don't understand how this market works.
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    May 26, 2011 3:34 PM GMT
    riddler78 said

    I'm guessing you didn't realize that derivatives tend to magnify small differences into large ones. Given that the underlying assets were distorted in value (in this case, CDOs and underlying mortgages whose assets were not saleable because of the uncertainty as a result of opacity, suspected fraud and valuations), the derivatives (which are derived) from these assets created substantially more losses.

    As for rational discussions? Coming from you, that's a bit rich. Perhaps if you had more knowledge on these issues, you'd come across a bit more credibly instead of parroting extremist views that base their opinions on conspiracy and ignorance.

    I think liberals (and statists) like to use the "greed" meme and markets because they believe that markets are based on greed. The reality is that that if you look at the crisis and why the markets failed, it was the lack of trust. Buyers did not trust that the assets they were being sold were as valuable as suggested. It's not greed that drives markets - it's trust. What is even more galling is that for liberals, greed only exists for capitalists (and conservatives) - not for government bureaucrats, politicians and government institutions.



    Basically, good post. I am one of those "liberals" but this is pretty balanced. The woes of Fannie and Freddie were part and parcel of the bad stuff that was going on everywhere in the crisis, private sector and quasi-public. You are right, the thing that tipped everything over the edge was that loss of trust - at the end of a huge bubble, driven by (yes) greed - which I don't think is generally a bad thing.

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    May 26, 2011 3:44 PM GMT
    More on that "greed":

    Barney Frank who had oversight over Fannie Mae, helps his lover get hired by Fannie Mae and claims that there was no conflict at all. If he were straight (and a conservative), wouldn't this be more of an issue?

    http://www.bostonherald.com/news/politics/view.bg?articleid=1340643
    U.S. Rep. Barney Frank admitted he helped his ex-lover land a lucrative post with Fannie Mae in the early 1990s while the Newton Democrat was on a committee that regulated the lending giant — but he called questions of a potential ethical conflict “nonsense.”
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    May 26, 2011 3:52 PM GMT
    riddler78 saidMore on that "greed":

    Barney Frank who had oversight over Fannie Mae, helps his lover get hired by Fannie Mae and claims that there was no conflict at all. If he were straight (and a conservative), wouldn't this be more of an issue?

    http://www.bostonherald.com/news/politics/view.bg?articleid=1340643
    U.S. Rep. Barney Frank admitted he helped his ex-lover land a lucrative post with Fannie Mae in the early 1990s while the Newton Democrat was on a committee that regulated the lending giant — but he called questions of a potential ethical conflict “nonsense.”


    I can't believe he got reelected!
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    May 26, 2011 3:53 PM GMT
    showme said
    mocktwinkie said

    But they were "regulated" by the manipulations set forth to begin with. i.e. You won't make a profit unless the loans you are selling conform with the standards the buyer (mostly fannie) has set forth in their criteria as ordered by congress.


    And you STILL don't understand how this market works.


    I wasn't exactly referring to his comment on derivatives, if that's what you think you're getting at.
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    May 26, 2011 3:56 PM GMT
    riddler78 said
    Christian73 said
    mocktwinkie said
    riddler78 said
    Christian73 saidSocal - You're welcome to continue misrepresenting that actual positions of many of us on here, if that makes you feel better.

    The reality is that Fannie and Freddie did contribute but where not the cause of the financial crisis. I've read Morgenstern's reporting throughout (in addition to other sources) and it's very clear that Fannie and Freddie were instruments of the overall push for deregulation and the greed of the financial services industry.


    It was federal institutions that enabled the cronyism, provided incentives for cheating, allowed the markets to become as distorted as they did.


    Booyah!


    Ridiculous. How exactly did the federal government allow the unregulated derivatives market to become distorted? Your problem is that you view business uber ales, so you can't engage in a rational discussion.


    I'm guessing you didn't realize that derivatives tend to magnify small differences into large ones. Given that the underlying assets were distorted in value (in this case, CDOs and underlying mortgages whose assets were not saleable because of the uncertainty as a result of opacity, suspected fraud and valuations), the derivatives (which are derived) from these assets created substantially more losses.

    As for rational discussions? Coming from you, that's a bit rich. Perhaps if you had more knowledge on these issues, you'd come across a bit more credibly instead of parroting extremist views that base their opinions on conspiracy and ignorance.

    I think liberals (and statists) like to use the "greed" meme and markets because they believe that markets are based on greed. The reality is that that if you look at the crisis and why the markets failed, it was the lack of trust. Buyers did not trust that the assets they were being sold were as valuable as suggested. It's not greed that drives markets - it's trust. What is even more galling is that for many liberals, greed only exists for capitalists (and conservatives) - not for government bureaucrats, politicians and government institutions.


    Very well said.
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    May 26, 2011 4:09 PM GMT
    I thought the source of the financial crisis is the Federal Reserve, we have specifically Greenspan and Bernanke to thank for that. icon_razz.gif

    Oh, greed too, absolutely. There are toxic assets everywhere! What's even more concerning is that the government (not just the USA) keeps absorbing these toxic assets by pumping money into the fragile economic system in an attempt to solve the liquidity problem. I have a bad feeling that Greece is going to default and that will drag down Ireland, Portugal, Spain, and Italy. If Spain, the 10th largest economic entity, goes down the entire EU gets dragged down. I'm scared of the domino effect will be similar to when Bear Stern went down, who knew that there were so many hidden problems in the financial system? I blame it on the overpackaging of the financial derivatives. They shouldn't exist in the first place.
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    May 26, 2011 4:24 PM GMT
    cityaznguy saidI thought the source of the financial crisis is the Federal Reserve, we have specifically Greenspan and Bernanke to thank for that. icon_razz.gif

    Oh, greed too, absolutely. There are toxic assets everywhere! What's even more concerning is that the government (not just the USA) keeps absorbing these toxic assets by pumping money into the fragile economic system in an attempt to solve the liquidity problem. I have a bad feeling that Greece is going to default and that will drag down Ireland, Portugal, Spain, and Italy. If Spain, the 10th largest economic entity, goes down the entire EU gets dragged down. I'm scared of the domino effect will be similar to when Bear Stern went down, who knew that there were so many hidden problems in the financial system? I blame it on the overpackaging of the financial derivatives. They shouldn't exist in the first place.


    I don't think the problem is with the financial derivatives and I'd be concerned about who the arbiters of "overpackaging" are. Instead I think if there are interventions, it should be ones made to encourage further disclosure/transparency and let buyers themselves decide if the assets are worth buying.

    Derivatives have their place - it's effectively an insurance product but also one that allows institutions to both take on and unload risk. It was pointed out by Greenspan after the telecom crash that before derivatives, the failure of the funded telecoms would have also resulted in a financial crisis. Instead, in that case, derivatives helped move risk and losses off the balance sheets of banks onto those of insurers, hedgefunds while ensuring liquidity. What made this market crisis different was that no one was sure what to believe and therefore buyers effectively froze the market unwilling to buy at any price because of they had no idea what the specific underlying assets were. In many cases, even the sellers had no idea - given the complexity and lack of transparency of the instruments.
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    May 26, 2011 4:57 PM GMT
    riddler78 said
    cityaznguy saidI thought the source of the financial crisis is the Federal Reserve, we have specifically Greenspan and Bernanke to thank for that. icon_razz.gif

    Oh, greed too, absolutely. There are toxic assets everywhere! What's even more concerning is that the government (not just the USA) keeps absorbing these toxic assets by pumping money into the fragile economic system in an attempt to solve the liquidity problem. I have a bad feeling that Greece is going to default and that will drag down Ireland, Portugal, Spain, and Italy. If Spain, the 10th largest economic entity, goes down the entire EU gets dragged down. I'm scared of the domino effect will be similar to when Bear Stern went down, who knew that there were so many hidden problems in the financial system? I blame it on the overpackaging of the financial derivatives. They shouldn't exist in the first place.


    I don't think the problem is with the financial derivatives and I'd be concerned about who the arbiters of "overpackaging" are. Instead I think if there are interventions, it should be ones made to encourage further disclosure/transparency and let buyers themselves decide if the assets are worth buying.

    Derivatives have their place - it's effectively an insurance product but also one that allows institutions to both take on and unload risk. It was pointed out by Greenspan after the telecom crash that before derivatives, the failure of the funded telecoms would have also resulted in a financial crisis. Instead, in that case, derivatives helped move risk and losses off the balance sheets of banks onto those of insurers, hedgefunds while ensuring liquidity. What made this market crisis different was that no one was sure what to believe and therefore buyers effectively froze the market unwilling to buy at any price because of they had no idea what the specific underlying assets were. In many cases, even the sellers had no idea - given the complexity and lack of transparency of the instruments.


    I agree with your view on confidence icon_biggrin.gif. Ultimately the market always boils down to the confidence of investors. It's the same thing with currency. It only costs like 20 cents to create a $100 federal reserve note, but what people believe in is the purchasing power of what that piece of paper represents.

    I guess disclosure/transparency of the derivatives would help the confidence of investors. But what I don't understand are these:

    1. Regardless of being transparent or not, won't these create more leveraging in the market? And when the money supply dwindles and deleveraging starts then it creates the liquidity problem? But I guess it's true for all financial investments if you don't play with your own money 100%.

    2. Increasing transparency of these derivatives would perhaps decrease the the attractiveness of them, especially if the underlying assets are toxic ones. Then it will not draw longterm buyers, because who wants to hold potentially toxic assets for the long run. People would want to hit it hard and short and leave.

    I'd like to hear your thoughts on that icon_smile.gif
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    May 26, 2011 5:45 PM GMT
    cityaznguy said
    riddler78 said
    cityaznguy saidI thought the source of the financial crisis is the Federal Reserve, we have specifically Greenspan and Bernanke to thank for that. icon_razz.gif

    Oh, greed too, absolutely. There are toxic assets everywhere! What's even more concerning is that the government (not just the USA) keeps absorbing these toxic assets by pumping money into the fragile economic system in an attempt to solve the liquidity problem. I have a bad feeling that Greece is going to default and that will drag down Ireland, Portugal, Spain, and Italy. If Spain, the 10th largest economic entity, goes down the entire EU gets dragged down. I'm scared of the domino effect will be similar to when Bear Stern went down, who knew that there were so many hidden problems in the financial system? I blame it on the overpackaging of the financial derivatives. They shouldn't exist in the first place.


    I don't think the problem is with the financial derivatives and I'd be concerned about who the arbiters of "overpackaging" are. Instead I think if there are interventions, it should be ones made to encourage further disclosure/transparency and let buyers themselves decide if the assets are worth buying.

    Derivatives have their place - it's effectively an insurance product but also one that allows institutions to both take on and unload risk. It was pointed out by Greenspan after the telecom crash that before derivatives, the failure of the funded telecoms would have also resulted in a financial crisis. Instead, in that case, derivatives helped move risk and losses off the balance sheets of banks onto those of insurers, hedgefunds while ensuring liquidity. What made this market crisis different was that no one was sure what to believe and therefore buyers effectively froze the market unwilling to buy at any price because of they had no idea what the specific underlying assets were. In many cases, even the sellers had no idea - given the complexity and lack of transparency of the instruments.


    I agree with your view on confidence icon_biggrin.gif. Ultimately the market always boils down to the confidence of investors. It's the same thing with currency. It only costs like 20 cents to create a $100 federal reserve note, but what people believe in is the purchasing power of what that piece of paper represents.

    I guess disclosure/transparency of the derivatives would help the confidence of investors. But what I don't understand are these:

    1. Regardless of being transparent or not, won't these create more leveraging in the market? And when the money supply dwindles and deleveraging starts then it creates the liquidity problem? But I guess it's true for all financial investments if you don't play with your own money 100%.

    2. Increasing transparency of these derivatives would perhaps decrease the the attractiveness of them, especially if the underlying assets are toxic ones. Then it will not draw longterm buyers, because who wants to hold potentially toxic assets for the long run. People would want to hit it hard and short and leave.

    I'd like to hear your thoughts on that icon_smile.gif


    Yep I definitely agree with you here. I mean the idea is that if buyers and sellers knew what they were buying and selling in this case, the markets would presumably not have been inflated to the point that it was. What added to the asset/real estate bubble though was a credit bubble - that interest rates were unsustainably low - and this in part was driven by policy. Banks were too willing to lend because they could just unload these mortgages without risk onto the markets and markets were in search of higher returns than treasuries. As you point out though, you can't get leverage unless someone is out there willing to lend you the money or let you take on that risk.

    Theoretically, I'm not sure it's the purview of governments to regulate leverage but I can take the point that the markets can be inefficient in the short run and that in the short run the average joe isn't able to appropriately determine if a bank that provides mortgages for instance is financially secure.
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    May 26, 2011 6:26 PM GMT
    Worth another read:

    http://hotair.com/archives/2008/09/17/mccains-attempt-to-fix-fannie-mae-freddie-mac-in-2005/
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    May 26, 2011 7:45 PM GMT
    Well, all these charts and all this right-wing spin doesn't meant a thing.
    A majority of Americans blame Bush for the recession.

    The recession hit, in December 2007, almost 7 years into Bush's presidency.
    It hit on Bush's watch.
    Nothing will ever change that simple fact.
    And Americans will pin the blame based on that simple fact, and not on all this more complicated theorizing and partisan spinning.

    That's just the way it is.
    Whether you like it or not.