The Cause of the Financial Crisis (dart)

[_Pokatator]

I think all of Washington is guilty. Both parties. They are guilty of trying to use finances to rewrite and correct social injustice and inequity. It is nice to give everyone a new house but the bottom line is if you can't afford it, you can't afford it and the country can't afford it either. In other words, this world of finance became a means of social and welfare engineering.

Now to tie this to Mormonism so we can keep this thread here, DCP is guilty all this,too and more.

[_antishock8]

Here's FOX News' take on the timeline:

http://www.foxbusiness.com/story/market ... al-crisis/

[_TAK]

Analytics

The Federal Reserve keeping interest rates too low for too long

I think there is plenty of blame and cause to go around but low interest rates I don’t see as one of them. Beyond affordable mortgages – low interest rates allow people top borrow and business to grow. It gives people more money to save or spend.

How would a 10-15% mortgage be good for anybody? I see it as driving up costs to all housing and everything else.

[_Black Moclips]

I would take issue in the opening post that states we have an "unregulated free market". This statement is ridiculous at best. From a financial statement perspective, as a CPA, I can tell you that the rules surrounding financial statements are stifling and almost impossible to keep up with as they multiply every year. Go pull open the tax codes, the SEC guidance, and all of the various accounting agencies that make up GAAP that cover every industry. You couldn't read it all in a lifetime. That doesn't even include all of the other regulatory type agencies that affect operations such as the EPA, OSHA, the FDA, etc etc. They you have State agencies on top of all of those. Unregulated? LMAO.

The problem here is that the credit and mortgage industries have not been "free" for a long time. Goverment has been deeply involved for many many years, from Freddie Mac and Fannie May to legislation such as the Community Reinvesment Act. It is an undisputed fact that the federal government pressured and incentivized banks to give money to people who in a real "unregulated free market" would never have received the money. These loans are now going bad (surprise) and people want to blame capitalism and the "unregulated free market". No, lay the blame where it is due. At the feet of government for interfering with the "free market". The market will fix itself if the goverment just leaves it alone and stays out of trying to influence it. Some companies will fail, and some people will lose jobs and homes. But other companies will rise to take their place and in the end the economy will be stronger for it. Continued meddling by idiots in Washington will only cost more taxpayer money and delay the reckoning.

[_Analytics]

Analytics

The Federal Reserve keeping interest rates too low for too long

I think there is plenty of blame and cause to go around but low interest rates I don’t see as one of them. Beyond affordable mortgages – low interest rates allow people top borrow and business to grow. It gives people more money to save or spend.

How would a 10-15% mortgage be good for anybody? I see it as driving up costs to all housing and everything else.

I’d suggest that low interest rates have the following negative effects:

1- Increases the price of houses without increasing its real value; since people typically buy houses in monthly payments, their demand function is driven by the monthly payment more than the total price (e.g. a $1,500 payment will borrow $280,000 and 5%, but only $171,000 at 10%. When the interest rate goes from 10% to 5%, the price of the house goes from $171,000 to $280,000, for the same house).

2- Discourages savings.

3- Encourages borrowing.

4- Encourages leverage and speculation. If you want to make a half-decent return, you need to find something other than an investment-grade bond.

The housing bubble was the prices of houses getting too high, and the problem was exacerbated by people saving too little and borrowing too much. Low interest rates had a lot to do with this.

[_harmony]

Analytics

The Federal Reserve keeping interest rates too low for too long

I think there is plenty of blame and cause to go around but low interest rates I don’t see as one of them. Beyond affordable mortgages – low interest rates allow people top borrow and business to grow. It gives people more money to save or spend.

That's all very well and good... until the bubble bursts and people who shouldn't have qualified, never save, and bought too much house now can't pay their mortgage. And the tax payer is paying the price.

How would a 10-15% mortgage be good for anybody? I see it as driving up costs to all housing and everything else.

People who have shown a history of not paying their bills have to lie in the bed they've created.

[_antishock8]

http://online.wsj.com/article/SB122273257698488295.html

[_Who Knows]

His [Kevin's] position is that the underlying cause of this is democrats literally forcing banks to loan money to unqualified buyers.

Wow, that's pretty dumb. Though I'll wait to see if he actually said this, before passing judgement. ;)

1- the Federal Reserve keeping interest rates too low for too long

I think this played a huge part. But it was a culmination of a number of things:

- Dot-com boom then bust
- Changing presidencies
- Lowering interest rates
- 9/11
- Lowering interest rates further
- The 'war' with iraq
- The boom of the internet (reaching billions across the globe)
- Lack of regulations for mortgage lenders. Not all (not even most) mortgage lenders were subject to the laws forcing banks to lend to low-income/minorities. In fact, I believe the worst 'culprits' of predatory/sub-prime lending were those unregulated companies.

It just all snowballed together, creating the perfect storm.

[_Who Knows]

The problem here is that the credit and mortgage industries have not been "free" for a long time. Goverment has been deeply involved for many many years, from Freddie Mac and Fannie May to legislation such as the Community Reinvesment Act. It is an undisputed fact that the federal government pressured and incentivized banks to give money to people who in a real "unregulated free market" would never have received the money. These loans are now going bad (surprise) and people want to blame capitalism and the "unregulated free market".

You're drinking the kool-aid as well, i see. Do some research. CRA had minimal, if any, impact on this whole mess. You're taking the easy way out...

[_Who Knows]

I think there is plenty of blame and cause to go around but low interest rates I don’t see as one of them. Beyond affordable mortgages – low interest rates allow people top borrow and business to grow. It gives people more money to save or spend.

How would a 10-15% mortgage be good for anybody? I see it as driving up costs to all housing and everything else.

I’d suggest that low interest rates have the following negative effects:

1- Increases the price of houses without increasing its real value; since people typically buy houses in monthly payments, their demand function is driven by the monthly payment more than the total price (e.g. a $1,500 payment will borrow $280,000 and 5%, but only $171,000 at 10%. When the interest rate goes from 10% to 5%, the price of the house goes from $171,000 to $280,000, for the same house).

It's economics 101. Interest rates are lowered to 'spur' economic growth, which leads to inflation. Rates are raised to stem growth, and curb inflation.

If rates are too low, for too long, it'll be bad for the economy. And vice-versa.