
How the U.S. Saved the World from Financial Ruin - chollida1
https://www.barrons.com/articles/how-the-u-s-saved-the-world-from-financial-ruin-1533328064
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notveryrational
Are we interpreting the bailout of a global US-created financial crisis
"saving the world" now?

Here's what happened: \- The international market, particularly the Asian
market, burst.

\- Investment went into the tech industry, which also burst.

\- To keep investment rates high, the Fed coordinated changes to regulations
so that private mortages could be sold as investments.

\- The Fed pushed for other countries to adopt the same practices.

\- This new regulation regime was inherently designed to push investment
earnings as much as possible, and new financial instruments were created to
centralize risk from individual risk toward systemic risk.

\- It started to become clear that there were inherent structural issues with
the investment scheme.

\- The Fed continuously lowered regulations to feed the market in an attempt
to prevent it from crashing.

\- When no more regulations could be cut, the entire global market crashed.

\- This was all based on a philosophy that investment is a key indicator of
economic health, and that driving up investment would drive up the health of
the overall economy.

\- Regulators decided to distribute the costs of the mistake, and loan tax
payer money to banks that had collapsed.

\- With rate exception, people in the financial sector made hand over fist.

\- Congress even evaluated making it legal to falsify accounting information
in an effort to save the banks.

\- The U.S. and European economy is still recovering.

~~~
news_to_me
Wasn't the bubble burst based on subprime loans in the housing market? That's
all I've been told, and I'd be surprised if that's incorrect. (Citations would
be appreciated)

~~~
joshAg
Subprime loans (all a subprime loan is is a loan that doesn't have the best
interest rate) were the murder weapon, but the murderers were the mortgage
industry approving those loans based on fraudulent data they created in order
to push the loan through (eg certifying the data in the loan application was
correct when they hadn't verified it or even when they had purposely lied in
filling it out) and then various financial industries bundling those loans up
into securities and then assessing them on that fraudulent data (knowing it
was fraudulent since they were the ones who audited or were supposed to have
audited it) and selling them to investors (ie pension funds, IRAs, 401ks, and
institutional investors) as being much much less risky than they actually
were.

~~~
mikestew
_Subprime loans (all a subprime loan is is a loan that doesn 't have the best
interest rate)_

That way over-simplifies, and misses a key point: the loans don't "have the
best interest rate" because they are assessed to be loans at higher risk of
default. The way you say, it sounds like the house buyers just didn't shop
around enough for mortgages.

~~~
joshAg
I left it off, because i don't think the higher assessed risk of default than
prime loans is relevant for explaining that the true cause is the fraud and
purposeful misstating of actual risk. The same thing could have happened with
prime loans as well. Yeah, subprime loans are riskier than prime, but that
doesn't matter when something is being repackaged as being less risky than it
actually is.

And even when we talk about why the loans defaulted, the issue isn't that the
loans were subprime instead of prime and that that was due to a higher risk of
default. It's that the loan was given based on falsified data to cover up
reasons that should have prevented the loan from being given (almost always
due to a debt:income ratio that was much too high), the borrower was advised
by fiduciaries to take more than they should have given their income, and the
preferred loan type was one where the the necessary payment ballooned
massively after a set time period, which meant that when the payment when up
the borrower would be unable to pay the higher payment because of how far they
were stretched by the base payment, because the borrower was advised that they
would be able to refinance at a lower rate due to an expected-by-their-
fiduciary rise in equity.

~~~
mikestew
_I left it off, because i don 't think the higher assessed risk of default
than prime loans is relevant for explaining that the true cause is the fraud
and purposeful misstating of actual risk._

So the already-risky loans were made more risky due to fraud and deceit on the
part of loan writers. Fair enough, I have no argument with that as a major
contributor, if not root cause.

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xeromal
This is the key part of the article for those that don't read.

``` In early October 2008, the Dutch had suggested pooling the collective
resources of the European Union’s economies to bail out their banks and
guarantee deposits. The French, British, and even the boss of Deutsche Bank
all supported the idea of a joint effort. This made sense, since most European
banks had significant operations in neighboring countries. Regardless of
whether their headquarters were in Paris or Amsterdam or Frankfurt, their
exposures were pan-European. National borders should have been irrelevant for
deciding who would bear the burden of saving a tightly integrated financial
system.

Then the German government and the ECB made one of the greatest policy
mistakes since the 1930s. They insisted on national solutions led by national
governments. French President Nicolas Sarkozy claimed German Chancellor Angela
Merkel had told him, “Chacun sa merde”—she would not clean up others’ messes.
This decision led directly to the European sovereign crises and to a lost
decade for hundreds of millions of people. ```

~~~
candiodari
You should not translate "Chacun sa merde" like that. That's hasn't got any of
the original French flavor at all !

"To each their shit" is a bit better. I wonder how you could really get the
feel for the statement though. It comes with a bit of "and you bloody well
ain't going to change my mind about this !" feeling.

~~~
anoncoward111
It's a fun statement. If I were to translate it non-literally but to convey
the mood intended, I would say something like "Everyone must lay down in the
grave they've dug for themselves"

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rado
The Onion, is this you?

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chriselles
I recall attending a lecture with Ed Lazear at Stanford GSB about his front
row seat to the GFC as chief economic advisor to the Bush White House.

Talk about an incredibly frightening description of events as they unfolded.

He even mentioned how Hank Paulson had been vomiting before having to front
the nation/world on TV with the plan to keep the wheels from falling off the
global economy.

One thing I recall from the lecture was how the White House and entire
government by extension were completely incapable of understanding the types
of insanely complex financial instruments that had been created and used.

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apo
At some point it will become painfully obvious that flooding the world with
cheap money has just been the setup for the next crisis, not a solution.

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Analemma_
"How the U.S. Saved the World from the Financial Ruin the U.S. Created"

The world could perhaps be pardoned for not being more grateful.

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onemoresoop
Is it relevant here that Barrons is owned by NEWSCORP?

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stuckinarut
Kinda an interesting take given how the collapse in 2008 occured.

