Why did the 07-08 financial crisis even start?

Then big short

Inside job

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Read Veblens "The use of loan credit in modern business" from 1903 -- it describes credit fueled cycles pretty good:

https://archive.org/details/useofloancrediti00veblrich

(a) an extension of loan credit beyond that involved in the transference of productive goods from their owners to more competent users is unavoidable under the regime of competitive business ; (b) such a use of credit does not add to the aggregate of industrially productive equipment nor increase its material output of product, and therefore it does not add materially to the aggregate gross earnings obtained by the body of business-men engaged in industry, as counted in terms of material wealth or of permanent values; (c) it diminishes the aggregate net profits obtained by the business-men engaged in industry as counted in such terms, in that it requires them to pay interest, to creditors outside the industrial process proper, on funds which, taken as an aggregate, represent no productive goods and have no aggregate productive effect; (d) there results an overrating of the aggregate capital engaged in industry, compared with the value of the industrial equipment at the starting-point, by approximately the amount of the aggregate deposits and loans on collateral; (e) the overrating swells the business capital, thereby raises the valuation of collateral, and gives rise to a further extension of credit, with further results of a like nature;...

>>1103993
I can only say from the real estate side, but to my knowledge that's what started it. In a kind of loose, simplified order:

>banks make subprime mortgage loans
>people that really couldn't afford mortgages bought houses
>Banks sell debt to investors/bigger banks/etc as "performing assets"
>homeowners can't pay their mortgage, get foreclosed on
>not normally a problem, banks just take property and resell, hiccup, nbd
>too many subprime mortgages were sold, too many foreclosed houses are flooding the market.
>home prices begin to plummet
>banks can't recoup losses
>leveraged debt owners further up the chain are bleeding money, left holding the figurative hot potato
>banks end up with too much of their working capital tied up in dead end real estate at huge losses because of shady practices
>we all lose

basically.

>>1104035
(f) commonly beginning at some point where the extension of credit is exceptionally large in proportion to the material substratum of productive goods, or where the discrepancy between nominal capital and earning capacity is exceptionally wide, the overrating is presently recognized by the creditor and a settlement ensues ; (g) on the consequent withdrawal of credit a forced re-rating of the aggregate capital follows, bringing the nominal aggregate into approximate accord with the facts of earning capacity; (h) the shrinkage which takes place in reducing the aggregate rating of business capital from the basis of capital goods plus loans to the basis of capital goods alone, takes place at the expense of debtors and nominal owners of industrial equipment, in so far as they are solvent; (i) in the period of liquidation the gain represented by the credit inflation goes to the creditors and claimants of funds outside the industrial process proper, except that whatever is canceled in bad debts is written off; (j) apart from secondary effects, such as heightened efficiency of industry due to inflated values, changes of the rate of interest, insolvency, etc., the main final outcome is a redistribution of the ownership of property whereby the creditor class, including holders and claimants of funds, is benefited.

>>1104035
>>1104037
Thanks for posting that. I guess in theory, 08 would have multiplied the effects since banks were actively "over loaning"

>>1104036
>>people that really couldn't afford mortgages bought houses
I'm sure their realtor argued furiously against them assuming those mortgages, told them to GTFO of the real estate office and threw their shit out after them in the parking lot of the real estate office all the while shouting "You shouldn't be buying that house because you don't have the money/job stability to service the loan!!"

Simplest answer is that the ratings agencies gave AAA ratings to Synthetic Collateral Debt Obligations which means that they allowed people to place bets and then rated those bets so other people could bet on those bets. rinse and repeat. Bubble on bubble on bubble until the first bet went sour and a trillion dollars of gamble evaporated.

>>1104110
This is close to the best answer

I would add that the ratings agency were in cahoots with the banks. Moody's had Lehman brothers bonds rated AAA the day before they died. Also rated all those junk mortgage packages AAA so the banks could sell them easily. It was absolutely criminal conspiracy to commit fraud and people should have gone to jail. Instead it became a political talking point for faggots like Bernie Sanders to talk about "rigged systems" and "big banks" to make it appear like it's all hopelessly corrupt. It wasnt a rigged system, there were specific cases of fraud going on between a few ratings agency execs and a few investment bank execs that led to economic collapse and went entirely unprosecuted.

>>1103993
Do a little reading. I'm currently reading "The Big Short" and it pretty much explains everything.

Fed sharply increased interest rates and shrank the quantity of loanable funds. Around this time trust evaporated from the markets very sharply as well. The two ended up being a recipe for disaster as more and more sub-primes started to go down.

>>1103993
>I just want someone to explain to me fully why it even started
It mostly goes back to Lewis Ranieri. He was the first person to create mortgage bonds. Now, at the time, mortgages were not taken on by the majority of Americans, and the rates on them were higher. Bundling them made fairly attractive assets.

The problem came about when they ran out of mortgages. Not a large problem, though. Ranieri actually went before Congress and argued that home ownership should be available to every American family.

This outlines that setup fairly well
http://m.dailykos.com/story/2007/12/7/418981/-

After that the market for CDO's became very complicated. But the government was basically guaranteeing these investments. The collusion came later on when they needed shit mortgages to fill the CDO's with. The Big Short as a movie doesn't really go into enough detail for you to understand the whole thing. The books do, though.

>>1104122
>went entirely unprosecuted
That was the rigging. They knew they weren't going to be prosecuted and that the taxpayers will bail them out when they're too big to fail.

The SEC was a captured agency. Prosecutors don't want to go after them because they're looking to become corporate lawyers where the real money is at. All the top econ/finance positions in government are filled with Wall Street board members who then go back to their old jobs after a few years.

>>1104164
There are a lot of other ways to prosecute than the SEC. FBI investigators could have easily been called in. I'm sure they had buddies at the top calling off the dogs, but that in and of itself is a criminal act.

Democrats controlled both houses of Congress at the time and sat around twiddling their thumbs instead of calling in criminal investigations, since every one of them had been backed by Goldman Sachs during their campaigns for office.

>>1104172
Congress can call for hearings and issue subpoenas but Congress is neither an investigative body nor a court of law (separation of powers). Members of Congress did grill the bankers, often quite ruthlessly but no federal attorney sought to prosecute them.

>>1104183
Congress can absolutely act as an investigative body. What generally happens is Congress will form investigative comitees that hear testimonies and then hand their recommendation to the justice department to be considered for prosecution. There was never any recommendations for prosecution handed down, just a lot of yelling for show. Elections were in full swing and Democrats didnt want to lose Obama his Goldman Sachs/Citi Group funding

Thanks guys, informative information.

Now the question becomes, is this going to happen again in the future? We all know that the banks over stated these CDO assets in the 07-08 fall but its quite clear that we probably know some of their other assets are just as bad or 'maturing' to become just as bad.

As a New Zealander I randomly looked up how auditors are performing (regulated by government) and to my surprise the government FMA sector said that "46% of auditors need to make large improvements".

How is no one speaking about this? Or are New Zealanders just too stupid to realize? Everything is basically a monopoly here and not many people understand the idea about trading securities

>>1104789
Forgot to add;

If the biggest and most important rating agencies in America got corrupt and fell into greed, isnt this just inevitable? theyre the biggest market there is, how can we even trust rating agencies for anything desu?

Is the stock market just full of shit at its core?

>>1103993
The teaser rates expired and the new rate people were paying become unaffordable. People sold and that meant property prices were dropping and many were in negative equity. So everybody started defaulting on their mortgages.

The mortgages were held as assets on the balance sheets of several large banks and other financial institutions (they got securitised and sold on as CDOs). Basically mortgage originators would sell these worthless mortgages on and the ratings agencies gave them triple A rating (the safest type of fixed income investment). So billions and billions poured into these CDOs. That meant liquidity was high for mortgages since all a bank had to do was loan to any idiot because they knew a large financial institution would buy the loan later on.

So basically you had far too much money going into these CDOs, which were made of bad loans rated AAA by the credit agencies. When the shit hit the fan people started defaulting, everybody got fucked.

Yeah it's because they couldn't loan out anymore money

They stop loaning money -> people can't make payments -> CDOs with subprime mortgages eat shit -> investors stop being about it -> financial firms eat shit

Is another 2008 event possible? What could trigger it, bad loans to oil and mining companies?

>>1105031
housing bubble + squeeze in the shipping industry + low oil + stressed economies

we're on our way to one

Just took a test on this, actually. I'll attempt to sum it up briefly

>Lenders (i.e. banks, S&Ls, mortgage originating firms) put their mortgages into "pools" and sold the pools to securitizing firms, which were mainly special purpose vehicles (SPVs) of investment banks and GSEs like Fannie Mae/Freddie Mac
>The lenders sell the mortgage pools to get funds to make new home loans
>The securitizing firms now hold all the risk of these mortgages, so the people originally giving them out to homebuyers no longer give a shit if the person can actually afford it or not because they know the SPVs/GSEs will buy it
>However, the total risk of these securities hasn't changed. The securitizing firms don't want to hold onto them either
>Securitizers invent mortgage-backed securities (MBS) to sell to investors. MBS are pools of mortgages re-organized into 'tranches' which consist of mortgages from everywhere in the country, separated by level of risk.
>Normal investors buy MBS because they have a higher rate of return to compensate for the increased risk of default on the mortgages. People were essentially betting against the actual owners of the mortgages going bankrupt
>This goes on for so long that securitizers begin re-combining and re-dividing shares of MBS into specialized tranches that are priced according to the risk of holding them
>Under this system, there was unlimited incentive to sell people mortgages with little concern for risk, especially if you were at the bottom
>When in 2008 millions of people defaulted on their mortgages, shit hit the fan hard and caused a tremendous chain reaction through multiple levels of the financial world
>Everyone is trying to sell people housing
mortgages

>>1105076

ignore the last 2 lines, those are an error. i'll explain more if anyone is interested

>>1104036

good but
missing between step 3 and 4

>oil goes above 100 per barrel and causes all prices of goods and services to rise while wages remain the same

>>1104015
>>1104110
>>1104122
>>1104126
>>1104147
>>1104164
>>1104794
>everyone just regurgitating random bits of the big short like they're an expert after seeing a movie
I hate this board.

>>1105261
Yeah it's kinda disappointing. Until a movie is made that has stars (badly) explain the financial crisis, the average person knows shit.

And then they blame the guys who make money for the crisis despite having learned nothing.

>>1105261
So whats the right answer senpai?

>>1105292
Not saying they're wrong - I'm not an expert either - but I can recognize when people are just parroting things they've seen without any deeper understanding of the topic.

>>1105249

So then what does it need now when oil prices are tanking but the price of goods continue to rise?

What would this potential incoming recession be like?

>>1105292
The decades long price destortion of money and the government colluding with banks regarding frictional banking system and regulatory standards. Meaning banks and bankers are allowed shit, that any normal person would go to prison for.
Imagine getting infinite money and earn 0.01% on profit of that money. What would you do? Fucking gambling on any front. Fuck normal business and fuck long term investments, because I might be replaced, when the profit rolls in. And also fuck risk management.

>>1105305
They're just saying what they think is the reason for the collapse of the cardhouse, this is ofcourse speculation and shouldn't be taken as a hard truth.

Don't be grumpy, you probably also have an opinion and I would rather hear that instead.

>>1105078
pls do

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>>1106063

Sure then I will continue

>What was crucial to getting investors to buy MBS/CDOs was the rating agencies, which were often owned by the investment banks whose securities they were rating
>securities with very high risk were given AAA ratings left and right because the rating agencies had incentive to increase profits for their parent companies
>Investors buying these securities were told they were AAA and had big returns: a mix too good to be true, but they didn't understand the risk or what was happening between the investment banks and agencies
>When in 2008 mortgages reset and borrowers defaulted across the country, the value of all the MBS/CDOs plummeted seemingly overnight
>This caused the value of investments held by every link of the chain, from the mortgage owner to the guy who bought an MBS repackaged 3 times by 3 other investors, to all plummet simultaneously
>Over 10 enormous securitizer companies went bankrupt, including the Lehman Brothers, Merrill Lynch, and GSEs Fannie Mae and Freddie Mac
>Investment banks went bankrupt and had to be bailed out with the infamous stimulus package
>Finally, to drive the dildo up the average American's ass, the remaining banks all hoarded cash instead of lending it in order to cover their enormous losses, which dried up the capital market and caused the economy to ultimately fall into recession

2008 happened because of blatant irresponsibility and shady smoke-and-mirror financial tricks. This is why people call for the bankers to serve jail time, they seriously damaged the entire U.S. economy by convincing people to spend money they didn't have on houses they couldn't afford so they could sell the mortgages 4-7x down the line, making everyone involved at each step rich off commission fees and charges without accounting for the immense risk of the securities whatsoever beyond passing it off to someone else to deal with

>>1103993
>Why couldnt banks keep loaning money
Literally why 2006 occurred, gj retard

Some questions

How could MBS/CDOs be seen as "high reward" when interests rates, the only actual source of proft from these, were at all time lows which is what made such massive amounts of mortgages possible in the first place?

Were MBS/CDOs sold from the beginning with the expectation that they would fail (be worth less than its price) on the most part due to defaults and such? Why else would you sell them, because it's obvious you cannot sell them for a higher/equal price than what they're worth ie principal + interest of the underlying mortgages combined? To receive the profit immediately as opposed to later? But come on, it's banks we're talking about here. Their whole concept is to make money in the long run.

What's a mortgage reset?

>This caused the value of investments held by every link of the chain, from the mortgage owner to the guy who bought an MBS repackaged 3 times by 3 other investors, to all plummet simultaneously
So basically these were the derivatives of derivatives of derivatives that alltogether apparently far outscaled the underlying securities? How does that work exactly? How do you tie the value of a derivative to another underlying derivative? Or is there nothing connecting them other than the conditions of the "bet" both parties take? I mean there's no ownership involved, as opposed to the MBS/CDOs, which technically granted investors the ownership (of the % of profits of) of underlying mortgages.

>>1106127
My >>1106208 post was meant for you.

>>1105261
I have never seen The Big Short but please tell me where my post is wrong?

>>1106226
It's not wrong, it's just an obvious regurgitation of something you've seen or read elsewhere. All the more blatant because in your rush to sound smart by providing the underlying reasons for the crisis you somehow forgot to answer OP's question.

>>1103993
>Pass "affordable housing" legislation so Americans can own houses like god intended.
>Provide banks insurance so they loan money to people they would not loan to before
>Clever people exploit the fuck out of this system to get rich
>System fails.

Good intentions are the road to hell.

>>1103993
Because of greed.

Pretty much the reason anything happens ever.

>>1106689
>It's not wrong
So why not gtfo?

>>1106713
>Why did the credit crunch start?
>Mortgages.
>What?
>Mortgages.
>That doesn't answer my question.
>Am I wrong?
>No
>So why not GTFO?
Good point, really.

>>1106689
>regurgitation of something you've read elsewhere
So did you sit down and solve the fucking morgage crisis on your own or something? You must make a killing from all the interviews and TV apprearances... the guy who single handedly completely on his own figured it all out as it was happening without reading anything. Amazing

>>1106734
This. The Big Short explained it pretty well. Mortgages were given to people who probably couldn't afford them. Then people basically gambled on these mortgages. Then people gambled on those gambles.

Financial institutions went down, people lost their retirement money, shit went to shit. Then the corps got bailed out and are doing it again. Anything I'm missing?

I'm no finance major and I'm sure that's a pretty pleb way of explaining it, but it's correct isn't it?

>>1106734
There's a difference between reading, comprehending, and explaining something, and simply parroting it back whatever you read when prompted.

>>1106737
Wow, good job. You read The Big Short and can summarize the book. You still didn't answer the question in the OP, though. Want to take a shot at that?

>>1106734
There's a slight difference between regurgitating sources and regurgitating regurgitators. Especially if the goal of the regurgitators you're regurgitating is to entertain.

>>1106737
And all of physics/chemistry laws are true due to interactions between atoms and molecules.

Once you dumb something down to a low enough level anyone can understand it. But whether that kind of knowledge can ever serve anyone or anything is another question.

>>1106743
Why couldn't the banks loan out more money during the financial crisis? Were they not already in a crisis BECAUSE they were lending out way too much money. Right?

I really have no idea I'm just taking a stab at it. Once the mortgage bonds failed, investors pulled their money out. That's why bail outs were required or else things would have gotten much worse for everyone with a pension/retirement account.

>>1106743
Also, no one would have known it was a bubble because by definition, that's what bubbles are.

By the time people needed loans because they lost their jobs, there were no loans to give out.

I feel like when everything by the fan, it all came crashing down at once.

>>1106743
The question has been answered many times ITT. The only reason banks were lending so freely was they could turn around and sell their mortgage securities under fake credit ratings. Once the gig was up, why would they continue? Enter the Fed and nearzero forever...

>>1106768
>no one would have known it was a bubble because by definition, that's what bubbles are

That definition was invented by Alan Greenspan when people were saying there was a bubble in the stock market and he disagreed with them.

It later turned out that those people were right and there was, in fact, a bubble.

>>1106773
It's been answered once or twice but those answers have been drowned out by people like yourself answering questions that were not asked. As you just did again.

"Why couldnt banks keep loaning money to fuel consumption?"

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>>1103993

The thing people neglected to explain in this thread was the fact that the investment banks and hedge funds were essentially a shadow underground banking system. These entities were not subject to the same regulations as depository banking, so they had no FDIC protection or all that jazz. But what they did was essentially provide financial services similar to a bank, where they would provide capital via investments to use to buy up any type of debt instrument; loans, bonds, etc. Housing was big so essentially, most of the system was concentrated onto that area.They masked the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations, basically with MBS and CDOs.

So you couldn't really just say you can look at the the guys who caused the crash and say that you saw that they can lend this much money here or there since you looked at the "investments" or debt that they owned which were rated AAA by rating agencies so it would've been okay. If you ran the analysis with that limited information and not what we know today, they would've looked great. But essentially, the assets' risk were understated a lot and their performance was overstated, mainly due to the ratings, which other people have explained already.

The main thing was that no one besides a select few like Michael Burry from the Big Short went into the whole entire details with the MBSs and CDOs and saw that they were essentially junk after doing the analysis. It took some time after the crisis for people to unravel the whole scheme.

>>1106825

I forgot to add this, so I've made a mistake like many other people, but the question "Why couldn't banks keep loaning money to fuel consumption?"

The shadow banking system from the hedge funds and investment banks essentially, from the foreclosure of houses hitting critical mass and devaluing MBSs and CDOs, basically had a bank run on them. Because the "investments", MBSs and CDOs, lost value, investors pulled their money from them. This continued on and on, and essentially, they handed out the money until they essentially had no cash to give so they couldn't keep loading money without some huge fraud which would've been impossible to do since it was already clear by that point that the housing market was in trouble. So that's essentially why the taxpayer needed to bail them out.

>>1106776
The answer is "why would they?" I can ask, "why doesnt Michelin give away tires to boost auto sales?" Cause they arent in the business of giving away tires. It was a dumb question that we all answered and then moved on to bigger things that actually make sense

>>1106843
That's not the answer.

I hope you realize you just outed yourself as knowing nothing about this topic. Go back and watch The Big Short again, maybe you'll pick up on something you missed the first time.

>>1106849
Never seen that movie. But that is the answer.

>>1104789
>>1104791

A lot of your questions are opinionated so a lot of what I say will have my own opinions on the matter. I think the financial auditing system is flawed. You essentially can get the same auditor every time you get audited as a company with no repercussions. Everything after that is just building up a relationship with monetary incentives for people to look the other way on some things and not scrutinizing the numbers harder.

But isn't New Zealand basically a commodities country that depends on China to buy? I mean, there isn't a whole lot that would cause a crisis on the magnitude that 2007-2008 was.The US is kinda better regulated but it isn't.

I wouldn't trust rating agencies. If you want to invest in something, do the actual research and number crunching and make your own judgements, where you can use the ratings as a guide/check. If you don't want to do that, be prepared to face the reality that you can get lied to. The rating agencies proved they can't be trusted and they haven't still changed or have been regulated to do so here in the US.

The stock market is pretty much a lot of rumors/news and algorithms by computers trading these days based on that information, with some human trading, that drive the prices. I wouldn't say it's illogical but it's beyond our full comprehension to figure out the complete factors behind how the stock market goes up or down in price.

>>1106861
No, it's not.

>>1106866
Ok champ

>>1106871
Acting self-assured doesn't make you look cool when you're blatantly wrong.

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>>1106875
A more typical way of refuting a statement is, you know, actually refuting it.

>>1106886
Banks couldn't keep loaning money to fuel consumption because demand for debt plummeted when the foreclosure rate spiked.

See? It's not even a very difficult question to answer. Which makes it even more spectacular that you engaged in a lengthy pissing match with me before even attempting to answer, and when you finally did attempt you produce a nonsensical post and then tried to insist it was correct. Why would you compare loaning money to giving away tires?

>>1106891
You're putting the chicken before the egg. People who were already forclosed upon are not in the market for a home loan. I'm not sure why you would think this. The problem was that all of a sudden banks had to care whether or not their debtor could actually pay back the loan. Go try to get a home loan with a 650 credit score today.

QUESTION

Since synthetic CDOs were essentially bets, and they came to dominate the entire CDO market by 2006, does that mean that there actually were tons of people "in the know"?

Who were they? Just lucky investors who had somehow figured it out? Basically Big Shorters? Or were they some insiders? As in the same guys who gave out shit mortgages and knew how worthless they were? Making money both ways, issuing mortgages and shorting their CDOs?

>>1107536
bump