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The Real Cost of the 2008 Financial Crisis (newyorker.com)
301 points by okket 8 days ago | hide | past | web | favorite | 391 comments





Just a personal observation / data point as a lot of folks everywhere are saying "put bankers in prison" any time they recall 2008 crisis. This is from the US, no idea how things played out in other countries:

Government shares a significant portion of the blame for this crisis. It required raising affordability of homes (i.e., loans) for lower income families. They might as well legislate away entropy, friction or gravity. Banks cannot lower home selling prices, so instead they had to become "creative" with loans, for example lend at 0% for the first 5 years. And lend more than today's purchase price (creating strong demand for inflated assessments) so some of that extra cash can be used to pay mortgage for a few years. Five years later the music stops unless you can refinance again and kick that can down the road.

This insane game of musical chairs, where banks generate toxic loans, securitize them and throw them at someone else, had to end in tears. Everyone understood this. But faced with the regulation to raise affordability, what exactly should the lenders have done? They HAD to use at least X% of new loans to low income families.

Sadly, this is yet another case of good intentions (helping lower income families) implemented as a clumsy regulation that ends up hurting people you wanted to help. My 2c.


You’re forgetting that the fact that many ignored the law and their own banks policies, driven internally to give out more loans (to anyone, not just the poor), and then mislabeled the risk when repackaging and selling these to others.

https://www.housingwire.com/articles/46335-wells-fargo-to-pa...

I’d recommend watching this bbc documentary that gives a wider perspective on “risk”: https://topdocumentaryfilms.com/all-watched-over-by-machines...


the increase in mortgage originations was shared across the whole distribution of borrowers, and that middle- and high-income borrowers made up the majority of originations even at the peak of the boom. Compared to prior years, middle- and high-income borrowers (not the poor), as well as those with medium and high credit scores, made up a much larger share of delinquencies in the crisis relative to earlier years.

http://www.nber.org/papers/w20848


Once the framework was in place to give out garbage loans, people across all income levels leveraged the opportunity to get houses they shouldn't have.

This just shows how poisonous it is when the government screws up a market by essentially mandating that banks throw away their normal risk assessment process.


What law did the government pass that forced the banks to ignore their risk assessment processes? Particularly, supposing you can point to some law or intervention, why do you suppose the banks are so childish and naive that when a law forces them to do one thing they don't want to do (make dumb loans to low-income groups), they'll respond by over-generalising and doing a whole other bunch of things they hadn't up to that point wanted to do (make dumb loans to middle- and high-income groups).

Amazingly there wasn't even a requirement for basic income checks when issuing a mortgage - that came after the crisis.

If we look at the mortgage pipeline, the problems become obvious, but none of them have to do with the government, except in that the government should have regulated.

Start with the mortgage origination companies like Countrywide who could easily offload mortgages to the other banks to collateralize. Since these companies could completely offload their risk, they were highly incentivized to give a mortgage to everyone.

Move on to the rating companies and the big banks creating financial products of doom and you've got the whole mess. All without the government "creating the problem." I do agree, however, that the government giving these companies an implied put option via a bailout gave them every reason they needed to take huge risks.

Still amazes me that no one from the banks ended up in jail.


Exactly. The bankers that did this are still adults, and are still fully capable of taking responsibility for their actions. No one told them they had to make garbage loans.

I guess the following would be a good starting point of discussion: https://www.forbes.com/sites/norbertmichel/2015/01/26/govern...

It's really not. First of all, the affordable housing market isn't where the housing market was most inflated so the author's entire premise is wrong.

Secondly, the author of that article is pretty clearly shilling to privatize Fannie Mae.

Thirdly, nobody here seems to understand what the community lending standards actually were and just wants to use it as a post to rest their argument on.

This is a much better, though still critical of the CRA article that goes into actual detail on what the problems were: https://www.city-journal.org/html/financial-crisis-and-cra-1...

But it's still an overly reductive and misguided argument. As Noah Smith points out here: https://noahpinionblog.blogspot.com/2012/12/did-risky-mortga...


What government interventions caused the doubling of subprime lending from 2004 to 2006?

FDIC insurance. A private insurance market for bank accounts sends a price signal about reliability. Subsidizing that insurance in a way that doesn't eliminate the price signal and the customer risk, like requiring 20% private insurance for 90% of the account face value and the govt providing the remaining 80% insurance at the same price or at a discount, could make sense if insuring more accounts was a policy goal. Having the government ensure everything for free with no internal price differentiation just tells banks they might as well go wild.

FDIC only ensures bank deposits, such as checking or savings accounts, not mortgages. It's not at all clear what that has to do with the proliferation of subprime lending.

It's a root cause of bank irresponsibility. If not for free FDIC insurance, a bank making risky loans would cause the cost of insuring an account at that bank to rise. Securitization does change this, but all the CDSs on AIG's mispriced insurance on CDOs were ultimately taking place against a background of too-big-to-fail and flat-priced government insurance.

Why would a bank spend any money on insurance to cover accounts in the event that they run out of money? That's just the end of the bank, they don't care at that point. It's not like the executive officers would have a chance of going to jail over it.

What laws did the government pass which "screwed up" the market?

Don't forget another thing the government did: previous bailouts. When large banks were told they were "too big to fail", they heard "your risks will be subsidized by taxpayers", so of course they took on more risk. We should have let the banks fail, if they really were going to.

Another thing: monetary policy causing business cycles, or making them much worse. The recent money-printing by the fed is super scary to me, because it created a new bubble in the stock market.


> Don't forget another thing the government did: previous bailouts. When large banks were told they were "too big to fail", they heard "your risks will be subsidized by taxpayers", so of course they took on more risk. We should have let the banks fail, if they really were going to.

Why couldn't the stockholders get wiped out when a TBTF bank gets bailed out?

To me, that seems like a fair compromise that protects the economy but still punished excessive risk taking.


Bear Stearns and Washington Mutual shareholders got wiped out. I know this because I lost tens of thousands of dollars, unfortunately.

AIG stock declined something like 98%, which isn't great either.

You don't need to bail out banks to protect the economy.

There’s no law of nature that says this is always required, no. But I’m afraid in the situation the Fed found itself in back in 2008, there really was no other option without a much, much more severe recession. Governments had been massively over spending and actively promoting reckless lending, even legally mandating it in some cases with required ratios of low grade mortgages, for years.

I personally know two people that cashed out tens of thousands of pounds here in the UK by remortgaging and spent it. Plenty of consumers were behaving ridiculously recklessly too. It was a crazy time, and businesses need banks. People need banks. Should your bank holding you accounts and mortgage have been allowed to fail? How about the bank financing your employer? How about both at the same time?


Yes, you do. If they are by definition too big to fail, then them shutting down could cause runs on banks. When people's confidence in banks crashes, then very bad things happen to our financial system which is predicated on the idea of people keeping their money in banks and bank accounts.

Even people pulling their money out of money market mutual funds almost caused a collapse of the monetary system, which is why the Fed had to secure those.


Instead of bailing out the banks, they could easily have simply been put in receivership, with Treasury as the recevier in control. Simply re-capitalize them from the federal reserve, and they don't have to miss a single hour's worth of operation.

Unwinding the mess of CDOs, etc. would have been long and tiresome but, with a little help from a convenient executive order or two perfectly do-able.


Because there's no law allowing that currently, and Constitutionally you can't just make it up after the fact

Sure, there were plenty of laws allowing that. Bankruptcies happen every day, with plenty of legal framework. The depositors were all protected by FDIC.

> "too big to fail"

I guess we're doomed to repeat history, since this was upheld again in 2008.


Not entirely true. We let one of the massive banks fail. Lehman brothers is no more...

There was an attempt to impose regulation on banks that qualify for this designation, with some (limited) success. Republicans have mostly dismantled it by this point though.

I think this began earlier with the S&L scandal decades(?) earlier. Some fave saving but not much happened to the guilty parties... A sad state of affairs.

What about the people that didn't have good intentions?

How do you feel about Lehman's Repo 105 maneuver where they intentionally used a Tobashi scheme to hide their losses from their investors?

The state of New York went after Ernst and Young on fraud charges for helping facilitate the scam and E&Y ended up paying a $10mil fine.

Is this justice? It doesn't feel like it.


Lehman went bankrupt. It seems they got precisely what they deserved.

If the only problem were the bad actors it wouldn't have been a systemic collapse.


A company going bankrupt does not mean any decision makers were negatively influenced enough to not repeat the actions. I doubt THEY went bankrupt.

I don't know enough to say if your conclusion is true or false, but I dont follow your logic. Why can't bad actors, if they are pervasive, cause a systemic collapse? From what I heard, incomes were fabricated, risks downplayed, and policies ignored. The insurance against the risk was priced on false premises. How can these bad acts (by bad actors) not cause a risk of systemic collapse?


I never understood why Dick Fuld wasn't put in jail. He deliberately misled investors on the amount of leverage they were operating under. I thought Sarbox, which required the CEO and CFO to sign off on their public financial statements, would have caught this.

Nah you’re throwing the baby out with the bath water.

Poor people can’t afford homes and in many cases don’t have proper identification even to buy a home. That’s where the whole NINJA subprime thing came in.

But the actual problem was that those loans were being rated AAA when repackaged into a CDO.

From that point forward is where the problem began. Tha is, if they were properly rated ‘08 would not have happened.

The swaps and derivatives that nearly brought down AIG then took that bug in the system(the bad improperly rated mortgages repacackaged is high quality shit) and nearly collapsed the world economy.

There’s nothing wrong with helping poor people buy homes but don’t call those mortgages AAA otherwise you’re basically operating under false information from there on out and should expect unpredictable results.


I agree completely with you, but I remember during the crisis that a large part of the outrage was directed at banks "taking advantage" of the poor by lending them sums that they couldn't hope to pay back.

I can remember a couple years later trying to buy a house and being surprised that the formula for loan size was so concrete. They didn't care what you actually spent your money on, just that your payments be no larger than 30% of your income. Because we're frugal, we could have afforded quite a bit more house than they were willing to lend to us for. Indeed, we paid way more in rent than we could get for a monthly mortgage payment. We ended up wishing that the banks had tried to "take advantage" of us because that would have meant giving us more latitude to manage our own affairs.


>But the actual problem was that those loans were being rated AAA when repackaged into a CDO.

I was under the impression that the CDO as a whole was being rated well - and the junk loans still maintained their rating when they were packaged. In other words, both parties were aware that the highly rated CDO contained bad loans. Is this not the case?


The junk stuff was repackaged many times over and sold as separate financial products. That was where the whole rocket scientist quant bs came in as it required made-up math to make it work. So it was re-rated from crap to AAA. And then AIG started offering insurance against those products and things really started heating up.

So it took taking some good bonds and some bad bonds and throwing them into the same CDO to get a good rating.


>Government shares a significant portion of the blame for this crisis.

Agreed, I think the sheer size of the crisis relates back to deliberate policies to support sub-prime lending. The idea was to help people to afford homes even though they would not normally be considered a good risk.

But opening this up created a vast new market, like adding a wider bottom tier to an already giant pyramid. Along with the vast size came even higher risk, since all these people would be more liable to default if the economy tanked.

Even still because we are accepting more sub-prime liability, it goes beyond poor people to others with better incomes but are buying into a more expensive neighborhood. Now people of all incomes are getting sub-prime loans, and this feed into rising housing prices.


This talking point has been debunked for years. It's a special favorite of Barry Ritholtz at 'The Big Picture' blog. He observes, empirically, that most sub-prime lending during the crisis was done by banks that weren't required to do so.

EDIT: To substantiate and cite, "Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law (CRA)." [0]

[0] http://ritholtz.com/2009/06/most-subprime-lenders-werent-cov...


This was a vast potential market and Fannie Mae proved you could get away with serving it, the sky didn't fall for a number of years.

So other banks jumped on board. Are you saying they would have taken on this risk if the federal government hadn't moved first? I think there is a clear cause and affect.


If they'd taken the same risks that Fannie and Freddie took, they'd have had similar results, and the market may well have gone on functioning as it had before. "Similarly, the total credit losses incurred by the GSEs are about one-fourth those incurred about by private label mortgage securitizations, which are packaged and sold by Wall Street." [0]

The private banks took greater risks and wound up with worse performance.

[0] http://ritholtz.com/2013/03/the-big-lie-annotated-an-aei-his...


You, along with very many other people, are assuming the banks were convinced by the government to do something they didn't want to do. You mustn't forget that giving loans to people you know won't be able to pay them back, and lying about their ability to do so, is an absolutely classic form of fraud. Bankers lie their asses off, make big bucks in bonuses, and their banks in the long run are fucked, or not (perhaps the taxpayer will bear the burden). The disgustingly simple explanation is that bonus money doesn't get clawed back. If these poor little bankers were getting bullied by the government into doing something against their interests, why the hell did they lie their asses off about their borrowers' financial prospects. Why wouldn't they say, 'sorry guv, you gotta look at these numbers, the black and brown folk coming to us for house loans simply aren't viable'

It was Fannie Mae, the large semi-government housing lender, that was strong-armed into supporting sub-prime lending in a big way. Again for good reasons. This normalized sub-prime lending for others.

Not everything has an evil agenda behind it. Sometimes the reasons are fairly ordinary and boring.


Citation?

In saying that the government shares the blame you overlook the fact that it was a cabal across both banks and government, separated only by a revolving door, that both created then coordinated the response to the crisis. Allocation of blame in this scenario is difficult.

It also drove house prices crazy, a process that continues to this day and has ironically made housing permanently unaffordable for huge numbers of people. The housing bubble created a "new normal" for house prices that's frankly absurd when considered as a fraction of median income.

It's very similar to the story with student loans. Easy student loans have driven tuition costs as crazy as housing costs.


A similar thing is happening with auto loans. There's a ton of bad car debt out there, and easy credit has inflated car prices and (I believe) helped disincentivize auto makers from building cars that are actually affordable. There's no market for simple and cheap if you can get something nicer on credit and not look poor.

There's a reason the Dodge Journey retails for 4k+ off msrp. With the inflated mspr they can get the bank to write a bigger loan. That way you can buy a journey at a "discount" with room to roll your existing bad loan into a new, even worse one.


To be fair though, safety regulations requiring heavier vehicles on top of requirements for better fuel economies have cut the margins a bit, but the prices have not raised much if at all. The 1995 Honda Civic LX was $14,160 in MSRP, which is ~$22k in 2018 dollars. There are plenty of vehicles for less than that.

You might be referring to the higher margins that SUVs get, which are getting more and more popular in the US... but TBH I'm not sure where you get the idea that car prices have been inflated.


This got me to dig into historical prices a little, and turns out I was even more wrong than that. Looks like car prices were pegged to inflation until about 1997, where they level off while overall CPI keeps growing:

https://fred.stlouisfed.org/series/CPIAUCNS

https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source...

That said, loan terms are lengthening and subprime loans are a large and growing part of the market. That has to be buttressing prices. I really can't back this up, but my suspicion is that over the long term, available credit has helped discourage auto makers from simply making cheaper cars.

Today you can buy a cheap appliance computer for a price that would've been unimaginable in 1995. And you can buy a cheap appliance car... for about the same price as in 1995. Obviously the two markets don't work the same way, but there's still something odd about that.


Wasn't this a predicted result of offering cheap loans? And if so,why was this the route chosen?

Americans (even some center-left ones) hate the idea of directly supporting anything, so cheap loans were used as a substitute for directly operating and funding public colleges. Same with housing.

Directly supporting people is "socialism," a handout, and is seen as supporting laziness and vice. A loan must be paid back, which allows many Americans to view it as something encouraging responsibility and virtue. It all comes down to the puritan work ethic.

The problem is that government backed loans are just an indirect way of giving welfare, and a monstrously perverse and inefficient way to boot. It drives price inflation which gets captured by the vendors of the products/services in question (existing home owners, builders, universities, etc.) instead of those you're trying to help and it creates debt bubbles that represent a danger to the overall health of the economy.

Overall it's probably worse than doing nothing due to the price inflation it generates. Housing was reasonable across much of the USA prior to the 'oughts. The housing bubble destroyed home affordability, an effect which as I said persists to this day.


Wouldn't directly supporting people also produce price inflation?

Yep, what the parent commenter didn't say was that pumping money into any system almost always results in prices going wayyy up to absorb the new demand. This happens regardless or whether it's loans or direct subsidies.

I believe the way laws generally deal with this is to only allow subsidies when the price is under some cap. Sadly we (or the US) don't do this for education it would seem

What was the vehicle by which US gov't 'required raising affordability of homes'?

Yeah, I want to know that, also. My understanding is that anything explicitly backed by the government (Fannie Mae) was your standard 30-year mortgage with the normal requirements. The interest-only loans, variable-rate loans, etc. were all originated through the brokers like Countrywide and packaged/sold as securities.

"In 2006, Fannie and Freddie insured 70% of all subprime loans so they needed to keep these loans viable"

https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...


Are you having us all on? The only citation for the claim you are highlighting comes from a mcclatchley article titled "Private sector loans, not Fannie or Freddie, triggered crisis" (https://www.mcclatchydc.com/news/politics-government/article...) whose thesis is the EXACT OPPOSITE of what you've been arguing in this thread

> As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

> Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

> Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Furthermore:

> Federal Reserve Board data show that:

> More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

FURTHERMORE

> But these loans, and those to low- and moderate-income families represent a small portion of overall lending....Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent...During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market.

And then we get to the only 70% in the article:

> fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market. About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.

I mean what the hell is going on here? You link to a wikipedia quote which points to an article methodically dismantaling the case you are making, which flatly contradicts the wikipedian citing the article, and whose only connection to your comment is that they both have a "70%" in them, though referring to different things (secondary market dominated by investment banks VS fannie and freddie, NOT THE SAME THING)

> in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market...mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans... only one-third of all CRA loans had interest rates high enough to be considered sub-prime

This is honestly the first time on hackernews I've felt like I'm talking to a shill.


"rolling the dice" on taking on more subprime loans in Fannie Mae/Freddy Mac.

https://www.theatlantic.com/business/archive/2011/12/hey-bar...


Your view is popular, simplistic, and wrong. https://www.thisamericanlife.org/355/transcript

Here's a simple hypothetical question: If you or I were to steal a pack of gum from a store and were caught we would have been charged with a misdemeanor. And it would remain in our background record for 10 years.

What does a banker have to do before he/she can be charged with at least a misdemeanor? You're right about the government having a hand in the crisis, but this is ridiculous that no banker was charged.


I think it's important to note that given the revolving doors and deep material connections between financial institutions and the government (and the resultant regulatory capture), there isn't that much meaningful daylight between "government" and "banks".

It did help out some families though. We were able to get into our home using a 5 year 0% interest loan. It was the only way we could afford it. Later we refinanced it to a normal 30 year loan, but there is no way we could have afforded that when we were first getting started. I'm not sure how people just starting out are able to afford homes now. Our home's theoretical value has doubled in price in the last few years and there is no way we could afford to rebuy it now, even with a 0% 5 year mortgage.

I apologize if this is insensitive in some way but I genuinely am hoping to understand and learn. Why is allowing families to buy a home they otherwise can not afford a positive thing?

If a family can not afford a house then they can choose not to own a house. I can understand the point of increasing access to affordable housing, but allowing more people to buy homes seems to have the opposite effect.


I think you assume, and rightfully so based on how people discuss this topic, that 'afford' is a black and white numbers game when it comes to mortgages. It's not. I can clearly 'afford' a home mortgage worth the amount I spend in rent each month, but I cannot get a mortgage for that right now. So really the discussion is/was/should be about easing the mortgage qualifications and restrictions. It was not as if people were giving mortgages for million dollar homes to minimum wage workers, and no one would sanely suggest that is a good idea.

The other side is renting -- where the landlord can raise rents to almost any arbitrary level (well to the market rate, but if you're not making bank it might as well be arbitrary). My understanding is 5-year ARMs where also subject to the whims of the bond market (LIBOR or whatever), so really the difference between renting and mortgaging in this case are just semantics.

I'm curious about your situation. Can you provide additional financial information? Price of the home, area of the country, salary at date of purchase.

I'm wondering why this was downvoted - I'm really curious, too. In particular, what they mean by "first getting started", and whether "home" means a house or something like an apartment/condo.

From my perspective they skipped a step or two and some of the difficulty came from that. I started by renting an apartment with a friend and saved up enough for a down-payment on a normal loan in a condo over two years. It's been five more years since then, and only now would I consider a house (though don't really want to move yet).


The loans of a bank are its product. The forced loans to poor are just a lost leader product. These loans will have negative profits and must be compensated by having loans that are profitable. This is just a government wealth transfer program and at worst would cut into the profits of the banks.

If the banks were profitable leading up to the crash then its still the banks responsibility. The government is allowed to force these rules because the banks are allowed to create money out of thin air.


This is an inevitable consequence of the commodification of housing.

You see a similar thing with student loans. You can't make any reasonable system work when you set the requirements to be that everyone should be able to afford to go to college and free market lenders are the ones responsible for making that happen. I imagine that the first condition is one that most people agree one. So instead of making college cheaper for those people who can't afford it, we decided that we need to entice more lenders to make loans that are financially unsustainable. The end result is we need to guarantee the loans that private businesses give 18 year olds. You see it time and time again where there is a easier and more logical solution that the US refuses to implement because it is a little bit socialist. Instead we go with a more complicated and less practical solution that is more pro-business.

We haven't guaranteed student loans since 2010 when the government started directly issuing student loans.

Today 91% of student loan disbursements are public loans that are funded directly from the treasury. The remaining new private loans aren't federally guaranteed (although we still make it difficult to discharge them in bankruptcy).


Undergrad students are limited to $31k or $57.5k in federal loans (including only $23k of subsidized loans) depending on whether they are a dependent or not. [1] That is still not enough for many students to attend their college of choice.

I will admit I chose the wrong word in my prior comment when I said guaranteed since that has a very specific meaning in this context. I was using that phrase more colloquially because there are other ways that the government protects the lender beyond a literal guarantee. For example, student loan debt cannot be discharged in a bankruptcy like mortgages, medical debt, or credit card debt. This was done because a private lender is normally heavily disincentivized from loaning money to someone with no credit history, no collateral, no income, and no expectation to start making payments on the loan for years.

[1] - https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsid...


It's enough that only a small percentage of students are taking out private loans. New private loans are a very small part of the problem.

I'm not really concerned with whether or not students are able to attend their "college of choice."

If government loans provide enough to go to a state school, or even enough to live at home or off campus and go to a community college for the first 2 years, I'm fine with that.

Also you'll notice that I mentioned bankruptcy in my comment.


What is the easier, little-bit socialist solution to home ownership?

The answer is to create laws that allow developers to build more housing.

The price of housing in many high cost of living is completely unrelated to how much it cost to build the apartment building.

Or in other words, the actual construction of the building is the easy part. It is the government that is getting in the way of reduced prices


> The answer is to create laws that allow developers to build more housing

I didn't know reducing regulation on businesses was the socialist solution. But yeah, sounds good to me.


Well, presumably socialists care as much about allowing people to give cheaply as do free market advocates.

I am not sure why a socialist would be opposed to lower living expenses for poor people.


Taxes and tax incentives.

But not the current ones.

We should, if we want to use tax policy to promote home ownership outside of the wealthy, be subsidizing principal payments for owner-occupied primary residences meeting certain local and personal affordability standards, and possibly tax-favoring sale proceeds for sales of property when, after sale, it will be owner-occupied primary residence meeting affordability standards.


The U.S. does that. Loan interest and capital gains are treated much differently by the U.S. tax system if they are on a primary residence rather than on other assets.

(More often than not, I see criticism of this on HN.)


Those benefits are regressive which results in the them barely moving the needle for working or middle class families. It goes back to the original comment in this thread that it is implemented in such a way that it has a nearly opposite result to its supposed intended effect.

I agree. That is often the case with taxes and tax incentives.

In a lot of ways, the current expression of the tech sector (certainly from a valuation standpoint) and the startup scene particularly feels like a consequence of the response to the financial crisis. Critics of the Fed spent years loudly worrying about how the various QE programs were going to drive up inflation. Of course, this didn't materialize, at least as measured in the usual basket of goods and services. What did happen was a broad and sustained inflation in financial assets / collapse in yields that drove everyone further out along the risk curve, with VC being the furthest point out.

The tie in to inflation is darkly amusing the because the classic precursor to inflation is wage growth. Broadly, there hasn't been any--except in the tech sector, which has seen a veritable explosion in pay from where it was a decade ago.


Business Cycle Theory explains exactly this. When interest rates are too low, people go elsewhere for returns, resulting in malinvestment. What it doesn't do is predict when the crash will happen, or say how to spot which investments are bad.

I'd just like to point out that the tech pay explosion likely has a lot to do with this: https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_L...

No question that played a role, but it's not like the settlement happened in 2011 and then salaries immediately corrected to the current levels and stayed. This has been a steady climb upwards.

Ray Dalio just published an excellent free book on this. You can download it here

https://www.principles.com/A-Template-For-Understanding-Big-...


But what was the alternative to the bailouts? Another depression? I feel we made it across fairly well.

The bailouts are controversial, but it's the bailouts AND the complete absence of criminal responsibility that's inexcusable.

It is well known and documented that the financial crisis was no accident; everybody who headed the financial services industry to the state it was in did so knowingly, knowing full well the inevitable consequences, but not giving a damn because the arrangement let them to become handsomely wealthy, beyond our imagination. They masked everything with a mixture of stacking the regulators with their ilk, stacking the universities with their ilk (economics as a field has zero credibility to me since I discovered how many theses "greenlighting" CDOs were written in clear conflict of interest), stacking the government with their ilk.

Then while we (working class) were dealing with the fallout, tithing part of our work to reimburse their losses, not ONE of those criminals (with the blood of millions across the globe on their hands, make no mistake) was prosecuted or in any way made to answer for their actions. Much to the contrary, they went on enjoying the same mind-boggling luxurious elite lifestyle they always did.

It's feudalism with extra steps.


Confidence in the market, and preventing panic was the highest priority, which is why no bank executive was punished in any meaningful way.

Frontline did a great piece on this, which I watched years ago. Not sure if this is it: https://www.pbs.org/wgbh/frontline/film/meltdown/

I believe it also explains why the election hacking of 2016 wasn't and isn't being addressed fully. If the US were to admit actual votes were changed it would create panic and instability. It also doesn't help that one side literally invited the hacking, and refused to investigate because it helped them. I'm sure there were tons of people who made good money in 2008, who weren't eager for investigation or actual reform.


It degrades the rule of law when lawbreakers not only don't even get a slap on the wrist, but in fact get rewarded for their lawbreaking.

Since the confidence in the markets only exists because people believe the laws governing it will be enforced, not punishing anyone degrades the confidence in the market.


Throwing the bad guys in jail would have spurred even more confidence in the market. The same guys are still in charge.

"The same guys are still in charge"

The problem is, there are no "other guys".


There are shit tons of other "guys". The industry is making new "guys" every year.

Maybe they don't have as much experience as the current guys, but does that matter when those people use their experience to rush after profit for themselves when they know it will cause problems like this?


There are always other guys.

That’s not true

When people who know what they're talking about talk about "election hacking," they know that no actual hacking took place. They were Facebook ads. That's it.

"They were Facebook ads. That's it."

If you think Russian "election interference" (does that term make you feel better?) was limited to "Facebook ads" you either haven't been paying attention, or are just trolling. I'm going to guess the latter.


I've been checked out for a bit. Did they finally come up with concrete evidence? Are you saying they actually altered vote tallies?

I agree that we shouldn't claim votes were changed without evidence, but you are forgetting about the DNC hack and subsequent email leaks.

You're kidding, right? There is an unsealed speaking indictment from the Department of Justice [1] that details the GRU hacking operation that released the DNC emails.

[1] https://www.justice.gov/file/1080281/download


We do have evidence that the voter databases of at least 20 states were targeted and a few successfully accessed. At least publicly, it is uncertain as to whether data was changed in any way.

That's a straight up lie.

And not only is there absence of criminal responsibility, but the regulation that made banking stable for 100 years and was taken away in 90s (like the Glass-Steagall Act) cannot be put back in place. Seems like people that caused the GFC are the ones in charge of 'fixing' it.

Glass Steagal didn’t make banking stable. Most countries (including those who weathered the storm much better than the US) don’t have a similar law.

In fact, marrying investment and commercial banks during the crisis was a key part of stopping a banking collapse.

And the whole crash started by investment only banks failing.


I hope this doesn't come across as me trying to justify what happened but can anyone be explicitly about what laws were broken and who should have gone to jail? I know there was a bunch of outrage but want to cut through all that and get at exactly the issue.

The credit rating agencies knowingly and fraudulently mislabelled the loans as "AAA" when they were in fact, junk:

https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...

[Edited to add] also perjury:

https://www.rollingstone.com/politics/politics-news/the-peop...


A lot of lower level mortgage brokers clearly committed fraud in the applications they processed. There may be some criminal or civil negligence by middle management by ignoring the fraud in an attempt to meet quotas. Unfortunately, it's hard to pin much of anything on the higher level executives.

There was a time when fractional reserve banking [0] was considered simple fraud (it wasn't called "fractional reserve banking" at the time, it was "bankers using for personal gain assets that were owned by another and stored for safe keeping at their bank.")

So, as banking gets complex, the laws get complex. Once we decide fraudulent (fractional reserve) banking is legal, most of the rest can be whitewashed with enough handwaving.

[0] https://en.wikipedia.org/wiki/Fractional-reserve_banking [1] https://www.mises.ca/the-economic-benefits-of-ending-the-fra...

I know the assertion that fractional reserve banking == fraud is extremely contentions, and most disagree with me. Feel free to explain why you disagree!


It's pretty obvious, actually. If you tell people you're doing it, and they still choose to give you money in exchange for the good or service you're actually performing, it cannot possibly be fraud.

Banks are very up-front about the fact that they're doing fractional reserve banking. You set up accounts in full knowledge of the fact that some of your deposit will be used for investments and that - if too many people try to withdraw the full value of their account at once - the bank may run out of reserves and you will be unable to withdraw.

Even an outright Ponzi scheme wouldn't be fraud in any moral sense if it specifically and openly said you would be investing in a Ponzi scheme and that any returns entirely depended on the extremely unlikely gamble that you would be among the first, rather than last, people to invest. (In fact, there are quite a lot of Ponzi schemes like this in cryptocurrency; at one point they made up a fairly significant proportion of all Ethereum transactions. They were treated - correctly, I think - as basically just a form of gambling for entertainment.)

And whatever your opinion of fractional reserve banking, even if you do think it's fraud you have to admit that it's clearly much less fraudulent than an outright Ponzi scheme.


I challenge the relevance of your point of view. Always bringing up federal reserve banking is not relevant.

World has changed and narrow money under fractional reserve is less relevant today. Crypto or gold coin can't change the system when the system does not run on narrow money. That's why federal banks have less control today than ever before.

Capital ratio requirements limit banking more than reserve requirements. Do you agree or disagree?

Swiss people had a change to quit fractional reserve banking few months ago using popular vote. When the facts were presented, many people were surprised to learn that only 20% of the money assets in Swiss banks were under fractional reserve banking system and only thing abandoning it would do is that normal people would have to have to keep more cash in their account. Massive financial industry in Switzerland is not running on narrow money.

Financial crises don't start with narrow money. There are more and more assets that are almost as liquid as money under normal circumstances[1] but they are not money. Within just few hours you can turn them into cash [1].

----

[1]: Normally very money-like liquid assets separate from broad and narrow only during crisis. Other asset types stop being liquid but central banks provide money so that shops can stack their shelves and people can buy food and gas and not to loot to survive.


You seem to be defining fractional reserve banking to be fraudulent (in your second paragraph). That's not a useful perspective for trying to get real answers to your questions.

When banking was "I'll store your money for you in a safe place for a small fee", fractional reserve banking was fraud, because it was not doing what you told people you were doing, and in a way that could cost them their money. Once fractional reserve banking became the normal way banks operated (that is, became both legal and expected), it's no longer fraud. It may still be immoral and/or unwise, but it's not fraud.

Now, there was plenty of fraud in the run-up to the 2008 crisis. ("Liar loans", anyone?) But that's distinct from fractional reserve banking itself being fraud.


By that logic anyone who gave out a loan should be thrown in jail. After all there was a time when charging interest of any kind was considered usury and was illegal. Once we decided that usury banking is legal, most of the rest can be whitewashed with enough handwaving.

Well that's an argument between the letter of the law and the spirit of the law it sounds like.

Those who repackaged toxic assets while misrepresenting the contents and the risk.

> They masked everything with a mixture of stacking the regulators with their ilk, stacking the universities with their ilk (economics as a field has zero credibility to me since I discovered how many theses "greenlighting" CDOs were written in clear conflict of interest), stacking the government with their ilk.

I understand that you're angry, but this is several steps beyond "tinfoil hat" territory.


complete absence of criminal responsibility that's inexcusable

This is what gets me- and they were even given relative anonymity in the press so they could duck some social repercussions of their horrid behavior. I want Brad Pitt to carve a dollar sign on their foreheads.

tithing part of our work to reimburse their losses

I'm stealing this.


> not ONE of those criminals (with the blood of millions across the globe on their hands, make no mistake) was prosecuted or in any way made to answer for their actions

I found this yesterday and it shows there were many convictions in Europe and North America: https://www.channel4.com/news/factcheck/factcheck-how-many-b...

Here's a direct quote from that page for the U.S.: "The US: Hundreds of criminal and civil cases brought against people and banks, with over 200 leading to prison sentences"

Do you have alternative evidence that supports none of them were prosecuted?


That article talks about charging bankers for LIBOR rigging (a European index) and fining Europeon banks for MBS fraud. The only US charges are for TARP fraud, which was after the crisis started.

The article does not show any US banker or US Bank was charged for MBS fraud done before the crisis.


This times 100 - in my mind it is the major failure of the Obama administration. There should have been heads on pikes - then maybe we'd see better behavior.

Could you dig up a few of those CDO washing theses?

The Inside Job documentary showcased a few economists that had conflict of interest, but haven't mentioned anything concrete about CDOs.

> Much to the contrary, they went on enjoying the same mind-boggling luxurious elite lifestyle they always did.

The culprits had money and they will have money. They own the banks, and of course they opposed regulation.

But they are not the same as those who know what's going on.

"It is well known and documented that the financial crisis was no accident; everybody who headed the financial services industry to the state it was in did so knowingly, knowing full well the inevitable consequences, but not giving a damn because the arrangement let them to become handsomely wealthy, beyond our imagination."

This is incorrect. Some knew and bet on it. (See the Big Short for example.) Some knew and exploited it. (See Goldman Sachs selling shit to clients, for which it paid 550M USD, and the guy got charged with fraud, etc.)

It was an emergent phenomenon. It's not an accident as a car accident, where you look away for a sec and you rear end someone because someone stepped before the car before you, but it's very much not a conspiracy.

It was a systemic breakdown, fueled by the very much gutted oversight and misaligned incentives created by money in politics. And that's something very hard to escape.

The lack of jail-time verdicts is not surprising, after all the laws are very much set by those who have the most money, and they usually don't like to go to jail if caught.

So we're left with DPAs ( https://www.penningtons.co.uk/news-publications/latest-news/... ) and they are pretty effective from time to time ( https://www.osler.com/en/blogs/risk/december-2017/the-long-a... ) but it needs investigators, staffing, and cooperating legislators.

Banks (and the financial industry) listen to incentives. Jail time is meaningless if all you can get is some middle manager. For that the reporting and compliance regulations help - as higher ups have to sign off on certain stuff, so they can't deny knowing this or that - but this means that really shady things will turn into compliance issues, and into fines. (Which is a lot better than remaining in the dark without any consequences, as it was before compliance regulations.)

> It's feudalism with extra steps.

Agreed.


https://www.theguardian.com/business/2012/aug/06/financial-c...

>"Let's hope we're all wealthy and retired by the time this house of cards falters."

Thats just what people put in email. Given that being told to not talk about certain topics via any recorded medium is not unheard of in companies, there is likely far more than this one notable example.

Even if there's not, the fact that even this person, who outright stated that this was going to collapse and kept at it anyway, has not gone to jail is just an extreme breakdown of the rule of law.

When you start making rules for thee and different rules for me, then people start wondering why they follow the law to begin with. It's a basic tenant of political science


>Then while we (working class) were dealing with the fallout

On the ground, parts of the financial services and the "working class" were responsible.

This story that it was simply a bunch of innocent people trying to fulfill the American Dream of owning a home is hogwash. People were knowingly buying property beyond what they could afford because prices would "always go up" and they could flip it to a greater fool. Greed, pure and simple, and both parties were complicit.

Don't believe me? Go watch one of the multitude of flipping shows from the era.

>Much to the contrary, they went on enjoying the same mind-boggling luxurious elite lifestyle they always did.

Let me guess, you don't work in the financial industry? Would it surprise you to learn that not everyone in it (and responsible) is a CEO? The industry was gutted, and many in it paid the price with their jobs. Why do you desire a pound of flesh?


I really feel like this is just victim blaming. When financial advisors are telling people they can afford something because prices will always go up and will give them those loans, working out a payment plan they say that is affordable, how on _earth_ is it the fault of the people who believed financial experts on financial matters?

credentialed or not, if somebody told you you could afford something because "prices will always go up", would you believe them?

Do you have a pension? A lot of us do, and a lot of them are just specifically structured investment schemes with some tax incentives, which means they're a seventy year bet that the stock market will "always go up". Historically, that's been broadly true, given decent time scales - just as it was with house prices.

I suppose it would be logically consistent to then say that people with pensions are "asking for it", too, but you get to a certain point where we cannot blame the layman for not looking at a field where all the experts are saying the same thing and not believing them.

In financial markets, the idea that "prices will always go up" is not just reasonable, but one of the founding principles of our economy. Everything must grow, all of the time. If prices _aren't_ going up, then something is wrong, and if prices are going _down_ we call it a recession, give it a grand name with capital letters, and try to make it not happen again.


in the context of an investment strategy, it is reasonable to assume that the overall market will always eventually rebound after a crash. it might not sometime in the future, but if the entire world market collapses and never recovers, we have bigger problems on our hands than asset allocation for retirement.

that said, there's really no reason to assume that a specific type of asset will continue to appreciate indefinitely, even if it has done so for a very long time.

but we're not even talking about betting hard on a particular asset class. we are talking about massively levered loans whose viability depends on the value of a single building. literally zero diversification. I honestly don't know how anyone could see this as anything but wishful thinking.


Never trust someone who's trying to sell you something.

One person asks for the loan, another person approves and gives it.

Lenders were giving NINJA loans left and right, and stacked credit rating agencies to give them fake scores to sell off bad mortgages before the grenade went off.


Being able to find shady people on one side of the fence doesn't absolve, in any way, the behavior of people on the other side of the fence.

Whataboutism is not a proper argument or defense.


I haven't a clue about the whether the bailouts were important or not. What I feel like I would have liked is for the bailouts to happen AND the top 20 to 100 people from every financial institution to have gone to prison for at least 10 years. The president of Goldman Sachs, the president (or ex-President) of Lehman, etc... etc...

What it seems like from the outside is they screwed the world over and completely got away with it on our dime.

I don't know if my impression is right or what would convince me the fact that there seemed to be no repercussions for their actions is somehow the right thing. Just saying that's how it seems.

I don't believe for a second those people were irreplaceable as some have suggested. People are replaced at giant companies all the time and the companies keep on functioning. If we need one example Steve Jobs death certainly shows that. Could pick any other CEO that left or was shoved out or past away.


Is it their failure you believe they should be jailed for or something else?

Do you believe that the CEO of any company that fails should be jailed or just banks?

There was undoubtedly plenty of hubris, greed and incompetence to go round. I also believe that some of what occurred should, in hindsight, have been illegal. But having some sort of sacrifice to appease the gods is a little outdated.

Oh, and yes, all the CEOs were replaceable. Irreplaceability is a very silly argument.


> I also believe that some of what occurred should, in hindsight, have been illegal.

That is the main issue. Nothing you can do against individuals that acted legally.

However hindsight happened very quickly, almost from day 1. There is no excuse that the bailouts didn't come with extremely punitive string attached only loosened after the law had been updated.

That did not happen. There is no moral to the story, no happy ending. Worse, hindsight works both ways. Maybe the current generation of financial company executives have learned their lesson, but the next one will have no such reserve.


>That is the main issue. Nothing you can do against individuals that acted legally.

We can punish them for actions deemed wrong even if legal. We do it to the poorest of criminals all the time, through creative legal maneuvers that judges have decided don't violate ex post facto. It is telling that we never do this for white collar crime.


No new laws are needed. The credit ratings agencies fraudulently mislabeled loans. This was criminal behavior and was not prosecuted.

https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...


Regardless of whether that's true, the posters above were talking about employees of investment banks, which are not the same thing as credit rating agencies.


The companies didn't just "fail", which implies accident or even incompetence but not malice. What happened was that the elite of the financial services industry arranged a nice little cash cow for themselves, enabling them personally to live lavish lifestyles, knowing perfectly well the consequences in the end (which, for them, due to their complicity with the regulators and governments, were none).

"Do you believe that the CEO of any company that fails should be jailed or just banks?"

At a minimum they should have lost all their money and not walk away with hundreds of millions of dollars.


As to CEOs being irreplaceable sure, but they're also very focused on not going to jail. Personal liability for top execs which might actually result in jail time is a powerful incentive for those execs to ensure their companies don't engage in that kind of behaviour.

No. It's an incentive to change the corporate structure.

Sorry, but it's simply not that simple.


It was not failure. It was at the very least gross negligence, if not outright theft and fraud.

Civil society decided that retroactive application of laws is a very bad idea.

So prevention is the name of the game. But that requires competent regulators and oversight. Compliance and reporting laws, and so on. Investigators with staff and time, prosecutors willing to chase a case, and of course independent judges.

The SEC and DoJ could have tried to bring more charges, and they got billions in deferred prosecution agreements, maybe not enough though. (They - I mean DPAs - are not shiny like a jail time verdict, but they do work pretty well https://www.justice.gov/opa/pr/soci-t-g-n-rale-sa-agrees-pay... see also https://scholarship.law.unc.edu/cgi/viewcontent.cgi?httpsred... )

If we want to make up for the money lost by the innocent, then we can chose to tax those we think benefited. But that's completely different than blind vengeance.


It would not have to be retroactive. I don't believe that there weren't existing laws violated that could have been pursued. For instance, there's a documentary called "Small Enough To Jail" about Abacus bank - a small family run bank that was the only one to be prosecuted for mortgage fraud due to NINJA loans, although practically every bank was doing this at the time. That's just one example.

>Do you believe that the CEO of any company that fails should be jailed or just banks?

Watch Silicon Valley scramble to adjust their moral compass if Tesla fails in the same manner.


Sending people to prison involves prosecuting people for breaking laws somehow, which isn’t easy. You can’t just send them to jail on a whim. Even if what they did was wrong, unless there was a law against it the government didn’t really have many options here. They could make up some laws after the fact to prevent future abuse, but cannot make them retroactive.

Even if you subscribe to the idea that there weren't correct laws in place to ensure that those who should have been criminally responsible, you then have to contend with the the corollary. Which is that instead of prosecuting those responsible, legislation should have been brought forward so that this couldn't happen legally in the future. That didn't even begin to happen- and it's not difficult to see how that has fundamentally poisoned the well in the US.

> legislation should have been brought forward so that this couldn't happen legally in the future

What couldn't happen legally?


A repeat of 2008. The idea being that there wasn't sufficient laws in protections in place to prevent this sort of thing from happening again, or that people most directly involved can't just skate.

Problem is though, even if laws were passed, once 2008 fades far enough into the past you'll get someone with a really bright idea, "Hey there's too much regulation stifling our economy. If we just got rid of all those pesky laws the free market would create a utopia!" Because every tom, dick and harry wants their chance to repeat history after the last tom, dick and harry have died.


I’m all for that, and some new civil laws were introduced. Trump is busy trying to undo them ATM, but there we go. The problem criminal laws, however, is that they should be really well defined without being overly restricting. Being greedy can’t be made a crime; it has to be fraud, racketeering, or something obvious.

I think it's fairly safe to say, the conspiracy that created the collapse amounted to financial terrorism, and then (to fix things) extortion.

We have the laws. What we lack if the will and the power to apply them.

Economist had calculated a significant number of deaths (worldwide) resulted from the 2007 / 2008 crisis. I believe the number was approx 30,000 (but it may be higher).

Editorial: If we don't have laws for such things then the elected should be shackled for their neglect and failure.


Financial terrorism isn’t even defined as a crime. It would have to racketeering or something, not easy things to prove even in gang/mob cases.

Legislative neglect also isn’t a crime that lawmakers can be prosecuted under. You can, however, not vote for them during their reelection campaign. You can also vote for lawmakers that would bother to push for such laws.

For better or worse, western countries are generally strong rule of law ones. If this was a country like China that practiced rule by law instead, I’m sure they could find something to throw them in jail on, but it isn’t.


Perhaps. Not being snarky but how do you establish precedent if you don't try? In the context of justice, I find it troubling the (US) gov made no effort.

You can’t just go up to a grand jury and say: we don’t know what we can get them for, but I’m sure we will find something along the way.

What does “effort” mean here? Even an investigation requires some kind of suspicion of foul play. They can’t just investigate someone because they are out to get them (well, at least they shouldn’t).


> how do you establish precedent if you don't try

It's unclear whether you know what "precedent" means in a legal context.


Manslaughter as a result of gross criminal negligence.

Could have prosecuted and imprisoned for perjury dozens if not hundreds hundreds of people offering false affidavits claiming personal knowledge of loans they knew nothing about in support of foreclosures.

You could have prosecuted and imprisoned all of MERS's officers for racketeering.

The first happened in teensy numbers, the second, not at all.

(copyedited)


What crime did each of those executives commit? That’s what needs to be answered. Otherwise your comment reads like a mob chanting “We want blood!

Being greedy is not a crime. Taking advantage of lax regulations is not a crime. Being bailed out with tax dollars for risks that paid you off privately if they won is not a crime.


> Being greedy is not a crime. Taking advantage of lax regulations is not a crime. Being bailed out with tax dollars for risks that paid you off privately if they won is not a crime.

Maybe that's your point, but therein lies the problem. Doing all these things has an upside but no downside, therefore we're encouraging antisocial behaviour.


Some would probably settle for blood.

However, plenty of others aren't interested in that. What they seek is simply what we are told the republic promises us and the rest of the world.

That is, justice.

Instead, per the article, there was no justice and no closure. __And__ the voice(s) of the mob(s) - in the absence of justice - are raising louder and louder. The impact from 2008 is far from over.


The crime was massive fraud by the credit rating agencies:

https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...


As I commented elsewhere credit rating agencies are not the same things as banks. Why should bank executives be prosecuted for something credit rating agencies did?

I see this sentiment fairly regularly on HN. It's the idea that laws can sufficiently encapsulate ethical behavior (the rules) when they're strictly enforced, that they're the best thing we got, so live with it.

But there are many behaviors which aren't "crimes" but which are morally repulsive.

The danger of not reacting, one way or another, to such inequities is that people lose faith in the system. Already, the election of Trump and rise of fascist sentiments everywhere are like a giant "fuck you" to politics as usual.

It can get much worse. At some point, as one billionaire said, "the pitchforks are coming". I don't think we'll be able to avoid it the way things are going.


> I see this sentiment fairly regularly on HN. It's the idea that laws can sufficiently encapsulate ethical behavior (the rules) when they're strictly enforced, that they're the best thing we got, so live with it.

> But there are many behaviors which aren't "crimes" but which are morally repulsive.

I don't agree with that concept. I don't think it's possible to legislate morality and the entire concept is downright scary. What's even more scary though is metering out justice based on perceived morality. Justice needs to be impartial, otherwise you're literally putting people in jail because your dislike them.

> The danger of not reacting, one way or another, to such inequities is that people lose faith in the system. Already, the election of Trump and rise of fascist sentiments everywhere are like a giant "fuck you" to politics as usual.

On the contrary, I see the election of Trump as a demonstration of people's faith in the system. It worked as intended and they got what they (electorally speaking) asked for.

> It can get much worse. At some point, as one billionaire said, "the pitchforks are coming". I don't think we'll be able to avoid it the way things are going.

I really doubt that. I've got significantly more faith in our shared humanity and the rule of law. I do find it disturbing how a lot of the politics on the left has shifted from policy disagreement to directly stoking violence. But it'll eventually pass.

Unemployment and immigration policy is at a tipping point where the only choice for employers is going to be rising wages. The left is going to have a hard time arguing that's a bad thing.


> The left is going to have a hard time arguing [rising wages are] a bad thing.

Why would the left argue that rising wages is a bad thing anyway? It seems that a significant subset of the left has been beating the “we need higher minimum wages and more wage growth overall" drum for a while.

Is it just because they strictly prefer a governmental rather than a natural market solution? Or something else?


I believe that koolba's point was about rising wages in relation to immigration policy. That is, wages rise further if we let fewer immigrants in. But that's a problem for the left, which wants rising wages, but also wants a liberal immigration policy.

     > I don't agree with that concept. I don't think it's possible to legislate morality...
We don't have to "legislate" the morality but we do have a responsibility for doing _something_. "Rule of law" means nothing if one class of people has subverted the law, enforcement and governance to their benefit at the expense of everyone else.

> We don't have to "legislate" the morality but we do have a responsibility for doing _something_.

If the government, or specifically the justice system, is going to be involved in that "_something_" then we need laws that can be enforced by prosecutors and interpreted by judges. If you want that to include actions that is currently legal but which you find morally reprehensible (ex: the actions of these finance executives) then that needs to be codified in law before you can go after them. And that's literally legislating morality.

> "Rule of law" means nothing if one class of people has subverted the law, enforcement and governance to their benefit at the expense of everyone else.

They haven't subverted anything. They've taken advantage of a system that is available to them. Ditto for veterans who get subsidized school or home loans, Tesla drivers who get $7,500 in EV credits, small business owners who get SBA loans, or anyone else that takes a dime from the pool of money we call public spending. You could argue that anyone of those programs is to the benefit of only the receiver and the detriment of the rest of us[1].

And there's already a system in place to change it. Elect politicians that will make the changes you want and understand the positions of the ones that are currently in power.

With all the demonizing of wall street in regards to the 2008 crisis, most fail to go back to the true cause of the crisis, i.e. the repeal of the Glass-Stegall Act[2] via the Gramm-Leach-Bliley Act[3] signed by President Clinton in 1999. It took almost a decade but the entire "too big to fail" concept grew from that repeal.

[1]: I generally don't like qualifying my statements but for clarity, I'm saying you could argue it. I'm not saying that I would necessarily argue against those (well except the EV one which is asinine...).

[2]: https://en.wikipedia.org/wiki/Glass_steagall

[3]: https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bl...


> With all the demonizing of wall street in regards to the 2008 crisis, most fail to go back to the true cause of the crisis, i.e. the repeal of the Glass-Stegall Act[2] via the Gramm-Leach-Bliley Act[3] signed by President Clinton in 1999. It took almost a decade but the entire "too big to fail" concept grew from that repeal.

As pointed out elsewhere, the repeal of Glass-Stegall was not the problem. Not only do most other countries not even have an equivalent law, but the crisis was triggered when a standalone investment bank failed.


It didn't cause the root problem but it contributed greatly to it ballooning beyond a handful of investment banks to main street ones.

Interestingly it was also involved in the solution as it allowed some of the mergers that softened the collapse.


> I don't think it's possible to legislate morality and the entire concept is downright scary.

What are laws if they are not an attempt to codify and enforce a group morality?


Dick Fuld significantly misrepresented the actual financial health and leverage of Lehman on public financial documents. Pretty clear Sarbox infraction. Nothing happened to him.

At the very least the WS power structure should have been redistributed. Prior to the crisis there were eight major WS "banks." After there were seven. We were told by many elected officials that less was not a positive for the rest of us. Ten years later, after eight years of a "liberal" POTUS, there's still seven.

Editorial: In the context of such history, DJT is the least of my worries.


>after eight years of a "liberal" POTUS

6 of those 8 years fighting a conservative Congress in both houses. Only 4 months of those other 2 years did he have enough Senate votes to bypass conservative filibusters. He spent that time/capital/effort squeezing ACA through.


My understanding is the Obama DOJ was "guided" to turn their backs on any prosecution of WS and WS execs.

The bottomline, zero effort was put into it. None. Given the magnitude that's not acceptable. I'm pretty sure DJT sent BHO a thank you card.


What would all those executives go to prison for?

Did those people do anything wrong or were they just essentially incompetent or not adequate for the job? Bonus clawbacks after government bailout are one thing but jailing people who probably didn't do anything criminal is a dangerous precedent.

If they are incompetent and they have consciously taken the positions they hold - then they are liable. Finance isn't "revolutionary" tech - there isn't much you can do that requires high risks and actually rewards you in the long run.

I would wonder what you'd say about a general who didn't know that using chemical warfare is a possible tribunal scenario.

We have a similar legal case in maritime law, where captains can be sued for anything that happens on their ships. If you can't take on that role and it's liability - then you shouldn't be the captain.


> Finance isn't "revolutionary" tech - there isn't much you can do that requires high risks and actually rewards you in the long run.

I don't think you read the article because it is based on a 700 page book about how it was revolutionary tech. It was just revolutionary finance tech. There was no ABCP before, there were no CDOs before, there were no central bank swaps before, there was no wholesale funding market, there were no offshore dollar banking market, etc.

It is hard to take seriously any arguments that the bankers were incompetent when you look at the sheer number of affected institutions -- you're left defending a claim that virtually every banker and most companies (look at the impacts on, say, Russian resource companies when they could no longer roll their dollar debt in wholesale funding markets in 2008) are incompetent. And that's always going to be difficult argument to make.


>> you're left defending a claim that virtually every banker and most companies

I don't need to defend that claim: most companies didn't care and neither they had enough resources to do their own, full due diligence into the state of America at the point of time. That's the job of the banks.

The fact that Russian companies held their debt in dollars has nothing to do with CDOs but rather their (false) belief in the stability of American economy.


All of those "technologies" you mentioned are schemes for a small elite to accumulate wealth.

There exists the concept of criminal negligence. I would say being in the wrong and being incompetent are not mutually exclusive.

We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be. It would be far better to have economic corrections along the way with little dips than to keep the house of cards going on worse and worse foundations until it all falls apart in a large depression. Little distortions can be corrected in the short term, but keeping those distortions in the economy long enough can make some very bad effects in the long term. So, we may get the worst of both worlds.

Even if the government had simply paid off everyones' mortgages, it would be better for the average person; but instead they transferred the approximate amount required to do exactly that to the banks directly in bailouts. Which means people got stuck with bill for the bailouts [from taxes] and the mortgages; which is rather unfair to the average Joe.


Sure, but allowing half the banks to fail would not have lead to a little dip. The collapse of Lehmans was very damaging for many perfectly healthy, well managed firms that depended on them. The only reason the effects were not worse was that there were other banks around to pick up the pieces, but if the domino effect had been allowed to play itself out the dramatic loss of capacity in the banking sector would have been truly catastrophic.

Note that the bailout money wasn't simply gifted with no strings, it was leant and paid back with a profit to the tax payer. Of course QE had it's costs and they were very high, there were other costs as well, but they're often exaggerated.

Paying off everyone's mortgages sounds lovely, how nice. In reality everyone would have rushed out and re-mortgaged their properties again, attempted to re-invest or spend their wind fall leading to massive house price inflation and a titanic credit binge the likes of which the world has never seen. The consequences would have been apocalyptic.


I don't think we've even begun seeing the terrible results of QE , at least in Europe.

QE's long-term effect on housing prices will probably be terrible on many people wanting to purchase an appartment, possibly leaving many without one.

And on the other hand, QE created such a boom in startup investing, which will greatly increase the rate which jobs will be automated.

I can't see how this ends well over the long term.


> Note that the bailout money wasn't simply gifted with no strings, it was leant and paid back with a profit to the tax payer.

I can't comment if this is true in America but in the UK we've been selling off bailed out assets at a loss. Sales seem to be timed for political points not to maximize profit.


Not much, we dumped Lloyds because it was profitable, we can't let go of RBS because we will make a loss. This is loss aversion on a nationwide scale.

> We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be.

How so?


The economy has become an absolutely horrific place for most of the population. Financial security is an unrealisable dream for most workers.

Bailouts saved the economy for the proverbial 1%, who are doing wonderfully. But no one else is. (I'm including many HN readers in the 1% because they work in a privileged and relatively highly paid part of the job market.)

When the mountain of debt finally implodes, it's going to be far worse than 2008.

This is very different to - say - the 50s and 60s - when ordinary working people could accumulate significant assets by working hard and saving.


A no-bailout crash would have hurt the 99% even more.

We all can kumbayaa about how the Fed enriched the asset holders, and how unfair that is, but they did what they were able to, while Congress did nothing. (The Obama stimulus was too small, and no reform followed, the 2010 Dodd-Frank Act was a mere correction of something that should have been there all along.)

The mountain of debt imploded in 2008, and since then financial regulation is very much systemic stress test based. The next crisis will be at least different. Bankers can just sit back, relax, and watch as the world burns around them.


The banks paid back their bailout loans, with interest. There was no way the borrowers who got those no-doc loans in the mid-00s could have ever paid off those loans. Bailing out the borrowers would have actually cost money, and would have created enormous moral hazard.

How about the moral hazard of teaching an entire generation of bankers that picking up nickels in front of a steamroller is a great career move with virtually no risk of personal consequences?

It's bad, which is why after the crisis the Dodd-Frank act was passed to reduce the chances of too-big-to-fail entities failing. So while we taught them they'd be bailed out, it's much less likely they can get themselves into that situation again.

Do you really believe that? Because I certainly don’t.

They are required to hold enough liquid capital that they won't need to be bailed out next time. As far as I can tell, it did work, yes.

>We haven't escaped the depression; the bailouts and quantitative easing simply delayed it for a bit, and the more it is delayed, the worse it will be.

It's this mentality which is going to cost you in the long run. People have been saying "the next one is around the corner" for 10 years, and missed the biggest bull run in history. If you bought prior to the Lehman collapse you'd still be up 130%.

>Even if the government had simply paid off everyones' mortgages, it would be better for the average person

I disagree. I'm not going to pay the mortgage for someone else because someone decided they needed way more house than they could afford.


Agreed, by delaying crashes, the problems pile up and they compound. You're not allowing the population to update their skills and targets to meet real economic needs because reality has been distorted by the bailouts. For example, maybe one reason for the crash is that the economy couldn't support so many people working in finance. Because of the bailouts however, it's now probably more lucrative than ever to work in finance; so we probably have even more people working in finance today than in 2008. People who are succeeding in business today don't actually know how to fulfil real economic needs. They only know how to fulfil artificial economic needs in this make-believe economy that the Fed has created.

>Agreed, by delaying crashes

Uh, what crash was delayed? 2008 was the worst since the Great Depression.

>Because of the bailouts however, it's now probably more lucrative than ever to work in finance

This is simply incorrect.

>so we probably have even more people working in finance today than in 2008

We have slightly more now than 12 years ago. Why would we not?


In the long run, we're all dead.

I hear that tongue in cheek response many times but that's not true in its spirit, we will be survived by our next generation & they by theirs.

Unless you are talking about ultimate heat death of universe. but then if you truly are that fatalistic then why bother commenting?


Idk what Keynes really meant honestly, but I like to think it means we can only plan so far ahead. Every action we take is to push Armageddon back another 5 years. Having disaster be just over the horizon is our constant state of being.

The Wikipedia article has a list of proposed alternatives.

https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati...

Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back.

https://en.wikipedia.org/wiki/Swedish_banking_rescue


> After the crisis, the government starts selling their shares, getting at least part of the money back.

Wasn't TARP repaid?


> Especially I'd like to point out the one proposed by Paul Krugman. Instead of injecting money into the banks, the government invests the money in the banks, diluting the previous shares. After the crisis, the government starts selling their shares, getting at least part of the money back.

You are basically describing TARP, which is what happened (and netted over $11 billion in returns).


To my (amateur) understanding, that's what they did in Switzerland and it turned out pretty well for the national bank.

Personally I also made some smallish stock investments during that time. I only regret that I didn't invest just a little more... the profit is/was huge.


  But what was the alternative to the bailouts?
The bailouts, but engaging with the narrative of a rigged game and applying substantial and highly visible reforms to prevent another financial crisis.

I mean, when your ship hits rocks you gotta patch the holes so you don't drown - but then you also gotta stop the captain navigating you into rocks. We did an OK job at the first, but did practically nothing about the second.


There were "reforms" (or at least important fixes, like the stress test based financial sector oversight, and other stuff enacted in 2010 as the Dodd-Frank Act), but visibility was and still is shit. (And now Dodd-Frank is being reversed bit-by-bit, but again, nobody really cares, which is not surprising when there are new disasters every day in US politics.)

The Obama stimulus was too small, and it simply took too much time for the economy to recover.


There were reforms to address banks not holding enough cash - but there wasn't anything to address the misaligned incentives and short-term-ism that rewarded people for mispricing assets.

> misaligned incentives and short-term-ism that rewarded people for mispricing assets.

Yes, absolutely, agreed. But this is the classic problem of not pricing in externalities, like every kind of pollution (climate change), delayed effect on human health, and various second- and higher order consequences.

Legislation should demand better goals (sustainability, health friendliness, inequality-decreasing). As long as tax incentives are broken, we'll continue to see the race for the quarterly profit.


Debt is worse now than in 2008. We haven't / didn't escape anything, just passed it on to future generation(s).

Future generations will be paying the bill for mistakes of their parents.


As a parent, I fail to see exactly how I'm guilty of anything here. I used the banks because I had to, I listened to their advice because I can't possibly become an expert on their subjects, etc. I even voted for people who want to regulate them. I don't play on the stock exchange (pension funds do, with my money). I didn't do anything wrong.

My children will pay for the mess a few made by pushing unreasonable expectations and by not listening to people like me.

There are some fights that must be fought by others.

Now if you can provide me with decent alternatives, I'd be glad to here from them. But remember, I have to live in the system.


>But remember, I have to live in the system.

That's generally the problem is that people can only ever see a solution that mirrors our society as is which means voting for the same politicians talking about the same neo-liberal capitalist economy, people need to be a bit braver ideologically if they don't want the wealth gap to increase and when the time for peaceful solutions has passed. We see the rise of the far right, it's slow but there's no denying those people are there in significant numbers and won't go away by calling them all sorts. It would be easy for me as a generally liberal middle-class white man to say everything is fine now but there are some issues which are still prevalent that can't be ignored.


I'm with you on decent alternatives of which I think a non-Fed based monetary system as well as the end of crony capitalism (not capitalism itself) would probably be a decent alternative.

However, the biggest problem is the education of the wider public and garnering the democratic will of the people to make necessary changes.

Economics, for all its show of being empirical is really just politics, and politics is really just philosophy.

In the daily struggle, hustle and bustle of life, few have the time and desire to learn these subjects, let alone pay the price to apply themselves politically to make the necessary changes.

Are you willing to?

I'm not... at least for now, willing to do anything. Charity starts at home and before I contemplate doing anything political I must ensure my family is well off.

However if you are willing, and able to do something, I strongly encourage you to.


>>> Economics, for all its show of being empirical is really just politics, and politics is really just philosophy. >>> Are you willing to?

You're painfully right. I 100% agree. There lies the issue. I have the philosophy right, but the opportunity and skills to fight for it, well, it's much tougher. If only one could contribute to that like on open source projects ('cos there, I contribute, I find time and energy)

But I'm not guilty :-)


Well I think you can make opportunities through persistence and sacrifice and for a given level of intelligence and time, all skills can be learnt.

However the will to do it requires a good enough why... and if you have more pressing whys than you just won't start.

Best I can do for the time being is vote.


> a non-Fed based monetary system

Could you elaborate on that please?

> Economics, for all its show of being empirical is really just politics, and politics is really just philosophy.

That's very-very incorrect. Economics is about models, and understanding the past, and maybe trying to peek at the future. But at its core, it's about modeling.

And it helps us understand what works and what doesn't. Politics should be about giving the parameters to those models. And philosophy (logic) is about finding the inconsistencies in our politics.

And as you say, nowadays people don't care about logic, they care about their beliefs. Even if they are inconsistent. They are too busy to notice that they are wrong.


Re: The Fed

The Fed is a privately owned bank that is given the monopoly to issue debt backed by the taxation of the State.

The U.S. could simply issue debt itself. Even though the President appoints the Fed Chairman and it has the word "Federal" in its name it is not a Government organization. If you don't believe me, try getting ownership information from the Fed via the Freedom of Information Act.

For further information see what happened when President Andrew Jackson abolished the precursor to the current Fed. America didn't implode it actually thrived. Also worth looking into is how the current Fed came about. President Woodrow Wilson lived long enough to regret bringing the Fed back.

Fun fact, the Bank of England started off as a private bank before it became nationalized. Nothing is stopping the U.S. from doing the same.

Re: Economics is modelling

If that were the case what is Communism? Is that a model or a political system? What is Capitalism? Is that a model too? No... they are 'societal beliefs in action' which is what politics is.

As for your assertions on philosophy... I would say philosophy is more than finding inconsistencies, it's a framework for thought itself that allows for reasoning.

What is a model anyway? At its essence it's an idea (or set of ideas) that may or may not be true. I think a big part of the problem with Economics today is the hubris modelling can confer by giving the illusion of accuracy.

It's worth looking into the works of Nobel Prize winner in Economics and the Turing Award winner Herbert A. Simon or more recently Nassim Nicholas Taleb.

Simon's Nobel acceptance speech suns things up better than I can.


> Even though the President appoints the Fed Chairman and it has the word "Federal" in its name it is not a Government organization. If you don't believe me, try getting information from the Fed via the Freedom of Information Act.

The Fed's own page on the FOIA indicates that the Fed thinks it's a federal agency covered by FOIA.

https://www.federalreserve.gov/foia/about_foia.htm


Okay... request information on the ownership structure of each of the Fed banks (i.e. share register) and see how far you get.

I know it sounds crazy but the Fed is simply not a Government organization if it is privately owned.


It's not privately owned.

It has mandatory non-voting non-transferable shares. That is, when you fund a bank, you have to buy in at the regional Fed. Why? Who knows, it's a law on the books, and it's basically mindless administration. It does not make it "owned" in any sense.

The Fed is established by an Act of Congress, directly reports to Congress, and every aspect of the Fed's rights and duties is directly spelled out in laws.

If you do a FOIA request for ownership structure, you'll get nothing, because there's no such thing. The Fed is not owned by anyone, it's an independent-from-the-WhiteHouse US agency. It has a budget (and is self funded, from the interests of the securities/assets it holds), it has expenses for staff and for the cost of providing services, it then gets reimbursed from the Treasury for certain services, etc. ( https://www.federalreserve.gov/foia/files/2018ReserveBankBud... ) And it pays out 6% to the member banks, who are mandated by law to have equal to 3% of their capital in Fed Regional Bank "shares".

There's one instance where the regional fed banks can be thought of as "private": from the perspective of the FTCA [the Federal Tort Claims Act].

See also Scott v. Federal Reserve Bank of Kansas City, in which the distinction is made between Federal Reserve Banks, which are federally created instrumentalities, and the Fed Board of Governors, which is a federal agency.


if you are referring to the budget debt of the US government then a simple cap limiting expenses to less than inflation would in a decade result in a positive balances. however Congress changed their accounting rules decades ago and neither party is interested in fiscal responsibility while the other is in office.

the only real fix is getting out of the tyranny of a two party system, however each new finance reform bill does its best to prevent that possibility under the guise of protecting democracy from outside influence


Will they pay the bill or will they revolt? I feel it is time for some of the latter.

Depends what proportion of them are kept content with mediocre food, shelter, and a slimmer of hope that their kids can move up in the game. And as long as the security guards (military and police) are kept happy and well equipped, then a small number of them should be able to keep the rest in line.

Debt is the smart way to keep them in the hamster wheel.

Edit: fixed contempt to content


contempt -> content

Thanks, missed that auto correct!

The trouble with revolutions is you end up with a new set of leaders, who may well be worse than what you have now.

It served the US quite well the last time they did it around 1776.

We got pretty lucky though, George Washington and others were exceptional people.

How so? What evidence do you have that the US is better off than it would have been by continuing along the lines of e.g. Canada?

If your life is poor, you don't have much left to lose

Venezuela disagree with you, wholeheartedly

You can (especially in US) lose a looooot more.


And most African nations would disagree with Venezuela. But many governments have been overthrow for much less or in cases where a government is so authoritarian that a coup is very difficult. Not saying America is in that situation, but something has got to give, especially when you look at how far wealthier certain people are living in your country.

Icelands seems to be doing well, just Google Iceland and banks, for example: [0]

[0] https://www.bloomberg.com/news/features/2016-03-31/welcome-t...


Actual bankruptcy could have resulted in a chain of collapses that might have left large areas of the Western economy without functional banking for weeks or even months.

But the bailout should have had a lot more "never again" in it, rather than "how can we get back to the old normal of bubble finance as quickly as possible".


> a lot more "never again"

What do you have in mind? Could you explain this?


Ideally when there is a sufficiently large disaster an inquiry is held which suggests measures to prevent the disaster, and these measures are implemented and enforced. Air safety is closest to the ideal on this. Politics and political economy is often very far from it, especially when it's possible to profit from a disaster.

Part of the explicit aim of the bailout was to preserve the finance industry status quo, one of very unequal incomes and widespread effects on people by forces outside their control. In the long run this has turned into a sort of formless populist anger that's been successfully transmuted into racial hatred, but there is a real and persistent sense of injustice that needs to be addressed.

Turning this into specific plans is too big a question for me. All that has really been done to prevent it happening again has been a raising of European regulatory capital requirements.


> Politics and political economy is often very far from it, especially when it's possible to profit from a disaster.

Sure, but financial services oversight is not that far from air safety (NTSB, FAA). The SEC, FDIC, CFTC, FSOC (established in 2010 via the Dodd-Frank Act), the Fed, and a few others are rather technical agencies. If they have enough power to request certain kinds of data from financial institutions and fine them if they are deemed not secure/stable/compliant enough, they can and will prevent any similar upcoming crisis.

The problem is, of course, that rules are gradually rolled back due to politics, and the oversight agencies understaffed and underbudgeted. Thus they are not proactive, they are reactive, and there was nothing they could have done in 2008 when it was already too late. (So the Fed stepped in with QE, and Congress with TARP, and with ARRA - but that was too small, so recovery took too long.)

That said, yes, absolutely the incentives aligned toward preserving the status quo. Which is not necessarily wrong, as doing something radical was likely unhelpful. What needs to be done is clear (better effective proactive expert oversight) but it's politicized. Just like the FCC regulation with the TelComms industry. And so on.


We didn't break up banks, nor did we reform credit rating agencies much.

We basically gave them a big sack of cash and asked them not to do it again. No one went to prison and GS went back to paying out bonuses.


Breaking up banks would create the Bell -> AT&T situation. Sure, better than nothing, as at least there are 3 offspring companies. Though the US has no shortage of competing banks. (But the big banks have too much influence, that's undeniable.)

> We basically gave them a big sack of cash

We had no other choice, really. They paid it back.

> and asked them not to do it again.

There is a long list of new regulation overseeing systemic risk related concerns. (We shall see their effectiveness and longevity.)

> No one went to prison and GS went back to paying out bonuses.

Intent is key for successful criminal prosecution, and it's very hard to prove.

The solution is known, and old. A competent proactive expert non-understaffed and non-underbudgeted oversight agency that can react to the changes in the market/industry (eg new products [investment vehicles, etc.] appearing) without Congress.

And serious compliance regulation that creates a paper trail for proving intent. (To deter people from stupid shit.)

Aaand [corporate] whistleblower protection.


Both US and EU should have done the same as Norwegian Government did during our banking crisis in the 90s. Let the banks fail, stocks to zero, no bailout of investors or paper/derivatives holders etc... then nationalize their brick and mortar operation so the real economy keeps functioning

Much of the economy is not brick and mortar anymore. And wasn't in 2008 either.

Sure, Congress could have created an Uncle Sam bank, but that wouldn't have solved anything.

Stocks, investors, bondholders are important, because they underlie much of US pension plans, social security account, and so on.

And even if the day to day operations could have been somehow continued, someone would had to arbitrate what is okay to save, and what is okay to let it perish. And that would have been a much harder and basically impossible task.


Norway is a small country, and in the 90s had very little exposure elsewhere. What you are implying is a meltdown of global assets, to prove a point.

Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset.

> Nationalisation was the alternative. Government acquires the failed banks. Manages the issue (even almost the same way the did). Profits flow back to the public. When happy, privatise again with a healthy profit. Maybe keep one as a public asset.

Are you unaware that TARP happened?


I'm aware, and it was a joke.

"purchasing the illiquid MBS, and through that, reducing the potential losses of the institutions that owned them. Later, it was modified slightly to allow the government to buy equity stakes in banks and other financial institutions"

Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left. No financial mercy should be shown to the institutions that put themselves in that position. Nobody has ever shed a tear for anybody else financially squeezed, and in this case it would have been good for society and fitting capitalistic justice.

Instead, we pumped their bags, regained the value of equity and then had the debts repaid from the equity that was saved. Its a nice story, we got paid back, but the reality is, the Gov/ people should have made out like bandits while those bankers were kicked to the curb. This is how capitalism is supposed to work.


> Why would any rational investor purchase dog crap knowingly for the good of society, by spending that society's money on dog crap. Instead, buy the dog, discounted by the amount of dog crap it has, and squeezed by how desperate the seller is of what is left.

I don't think you understand how TARP worked if you think that's even remotely applicable as an analogy

> This is how capitalism is supposed to work.

Maybe you should learn a little more about the system you claim to be critiquing, so your criticisms don't fall so completely flat.


Since you are so wise, maybe you could enlighten me rather than responding with a response that amounts to - you know nothing, please learn more.

This is supposed to be a forum for intelligent discussion.

I literally quoted investopedia for how TARP works - so don't pretend that isn't how it worked. "Purchasing illiquid Mortgage Backed Securities" aka "Toxic Assets" aka "Dog Crap".


> This is supposed to be a forum for intelligent discussion

And yet you began with a sarcastic quip, followed by comparing TARP - a program that has generally been considered a successful part of mitigating the 2008 financial crisis by all mainstream economists, to different degrees - to passing around a bag of "dog crap".

That's not what a good-faith intellectual discussion looks like, so don't expect replies to exceed the level of effort and discourse that you yourself are presenting.


That isn't sarcasm, it is metaphor. You are looking for a pretty cheap out if you think using metaphor reduces discussion such that you can just respond by calling somebody dumb.

I'm going to stop here because you have set this discussion on a path towards unhelpful negativity. I hope any moderator/ reader reading this can see that you side railed this and not me. None of my discussion was about you, but was about the issue. Your response might as well breach the name calling rules of this forum.


I just realised you were referring to the sarcasm after your rudeness, to justify your rudeness. Makes sense /s

Late to the discussion, but the alternative to the bailouts was to not bailout, and let the problems unwind. As mortgages were sold at firesale prices to attempt to remain solvent, it would be in the interest of the purchasers to lower the effective rates on the mortgages, because they could still book a profit at the lower rates.

The net effect would have been to cripple most of the national banks to the point where they would have to be liquidated and purchased piecemeal by smaller banks and local credit unions that managed to behave responsibly during the crisis.

The FDIC already exists and has a mandate to draw unlimited funds to make customers whole up to the limits. This is already priced in.

As to what would happen as companies failed to make payroll as their banking arrangements failed, it's likely that there would have been problems along the way, but the existing credit markets, especially short-term consumer credit (i.e. credit cards) would have allowed most households to stay solvent while the banks reorganized around the new reality.

I'm far from convinced that there would have been a depression -- for the most part I believe that it would have self-corrected on an individual or company basis except for the finance sector, which created the crisis in the first place.


This comment reads like a hot-take based solely on the subject without reading the article because you don't really engage substantively with any of the nuances the article talks about. As such, I'm not sure it really contributes as much to the discussion as if you did engage substantively with the details of the article.

For example:

Even if there was no alternative, that doesn't mean a clear understanding of the costs & downstream consequences is a bad thing.

Even if some kind of bailout was necessary, bailouts can take many forms. Do you think the bailout chosen was the best form?

There wasn't, actually, one bailout. There were many ad hoc choices made along the way. Why was Lehman allowed to fail? It was purely an ideological choice; the Fed clearly had the ability to save it, they just underestimated the pain it would. Why were swaps extended to some countries but not others? Why didn't the ECB help out Hungary or even Austria?

For that matter, why was the Federal Reserve acting as a global lender of last resort without telling anyone, not even Congress. (It required a Freedom of Information lawsuit that went all the way to the Supreme Court for the Federal Reserve to turn over details on the full scope of their swaps with other central banks.)

Maybe the bailouts should have happened exactly as they did but the optics & politics should have been done in a more transparent fashion?

But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you.


> But taking such a non-nuanced, instrumental view I feel like you make the discussion less interesting than it could otherwise have been. And because it was a "first comment", it then warped much of the entire discussion on the topic. This thread has 80 replies and 55 of them are to you.

You are entirely correct, but unfortunately, I suspect that this is inevitable. Discussions of economic policy on Hacker News almost always end up in this same place.


False dichotomy. The problem was letting it get that bad to start with, and letting any single bank get so huge. If banks had been kept smaller and limited from taking on such crazy risks then it would have been far easier to just let some banks go out of business and let the market adjust itself.

Additionally, the fact that people in the street got screwed while hedge funds got their profit margins protected by tax payers is something that shouldn't have been allowed to happen. Much of the pain for the top 1% from the crash was socialized away and absorbed by tax payers and the working class. There should have been much more financial assistance to the working class.


Less generous bailouts for one. A lot of creditors were just straight up reimbursed for making bad investments with no penalty. Having them be wiped out would be a disaster, but asking to accept losses in exchange for not being wiped out would have been a good compromise. The other option, which we didn't have at the time but do now, is for the federal government to take over failing banks to keep them afloat long enough to be dismantled. It's called orderly liquidation.

I believe too many made out fairly well and by not wiping out the shareholders we've created a gaping maw of a moral hazard. Corporate governance is in tatters, has been since roughly the 80s when the goal became quarterly earnings at all costs.

Wiping out the shareholders when bailing out would have incentivized the next set of shareholders to police their investment. Now the only disincentives are executive compensation and some additional express limits on dividends.


If there was no bailout then even people who were paying their mortgages on time would be affected. The bank needs money now so it will have to sell some of it's assets such as the house you're living in but 5 years later it is probably swimming in money.The government effectively acts as a very large insurance company by giving the bank a loan.

> If there was no bailout then even people who were paying their mortgages on time would be affected.

People who were paying their mortgages were effected by the general economic downturn, collapse of home values, and credit crunch, for some parts of which the bank bailouts were an ineffective remedy. (Bailing out troubled homeowners probably would have been more effective.)

> The bank needs money now so it will have to sell some of it's assets such as the house you're living in

Unless you are renting from a bank, it's not going to sell your house, because it doesn't own it; particularly, that's not how most mortgages work (there are some that are callable early where that would be a theoretical possibility, but they are almost never used for owner-occupied residential property.)

> The government effectively acts as a very large insurance company by giving the bank a loan.

No, it was acting as a very large bank. An insurance company would have recieved premiums in advance and not given loans, but just paid out money.


The bank doesn't own your house. The asset it has is the mortgage on your house. The bank could could sell the mortgage, but the only impact to you is that your mortgage payments go to someone else.

The alternative was to let capitalism administer its punishment to reckless speculators.

Instead, they were made whole again at the cost of years worth of future demand pulled forward by easy money policies. Worse, the sense that "we made it across" has caused way too many people to jump back on the risk/debt wagon with gleeful abandon.

The crisis wasn't resolved, but merely postponed.


Nationalising the banks, perhaps? Some were, at least partially, like RBS.

> But what was the alternative to the bailouts?

Nothing.

> Another depression?

Recession/depression/whatever, that's exactly what we had. At that stage of things, it was essentially unavoidable.

> I feel we made it across fairly well.

The billions and billions and billions spent by the federal government didn't come from nowhere. They came from taxes (which didn't increase) or deficit financing (which did increase), thus crowding out the investment market and making the recovery much longer.


If we're going to be capitalistic, apply Bagehot's dictum (from 1873) "in times of financial crisis central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need" [0]

I feel like, jail or no, the financial executives who got us into the mess - and who haven't really gotten us out yet - ought to be former financial executives that are working as, e.g., baristas.

Instead, a decision was made that the bloated mortgages that had been issued, would be turned from bad collateral into 'sound collateral', keeping asset prices high. It's like resolving Ford's problems with exploding gas tanks back in the 70's by arranging to buy all the bad cars.

[0] https://en.wikipedia.org/wiki/Walter_Bagehot


We shouldn't get any banking advice from anyone from the 1800's.

If you're seeking to broaden your perspective, you might find "Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis", written by a director at the Fed, to be worth your time.

[0] https://www.federalreserve.gov/newsevents/speech/madigan2009...


That's like saying we shouldn't pay attention to the lessons of the great depression because it was in the 1930s.

You shouldn't take advice on building a stable financial system from 1920s economists either.

Take lessons from their failures? Yes. Not what the GP was saying.


You should weigh any advice on its merits.
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