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Economists’ Faith in Markets Broke America (theatlantic.com)
40 points by henrik_w 76 days ago | hide | past | web | favorite | 8 comments

Banks were subsidized or required by the state to issue subprime mortgage loans to the poor; people with terrible credit who would have no chance of actually paying the loan back. The Federal Nation Mortgage Association would then give banks guarantees that they would buy the loans from them if they needed funds. So these terrible loans that no bank would ever issue were suddenly considered to be a reasonable investment, because the federal government would just buy them out. Something very similar is currently happening with student loans. This is why lenders will gladly loan 90k to somebody to major in Gender Studies, where the major itself provides very few financial prospects for the loan being paid back.

That system is not "markets." That system is the federal government saying "Americans need to be homeowners and Americans need to be college graduates," with no consideration for whether or not the loans will ever be paid back. So then of course banks will say, "uhh, okay, ya I'll give you a loan. The government has my back."

And then when all the people failed to pay back their mortgages, the banks get "bailed out" for doing shitty loans...but they were "bailed out" from the get go, that's literally WHY they issued the loans in the first place. People will say "oh look at these free market capitalist looking for social welfare," but again, these loans were only issues as a means of actual social welfare for the poor, subsidized by the federal government.

It's worth noting that a significant number of mortgages were made without federal backing[1]. Any conception of the financial crash has to deal with the way that unregulated investment drove itself to new heights looking for better ways to invest money.

[1] https://www.thisamericanlife.org/355/transcript

This is not correct. The vast majority of subprime loans were issued and packaged by private entities into structured entities — those high-risk securities were then rated as low-risk by rating agencies. Your misunderstanding is probably around how Fannie Mae/Mac bought some of these securities and then had to be bailed out. They actually held fewer risky loans than most banks!

Banks did collapse! (Lehman) as they were not, as you suggest, backed by the government. And a legislation-backed bailout was necessary was because again, these risks were not backed by the government.

In broader sense, however, I agree that the banks and government both knew they were “too big to fail” and therefore could take risk without risk.

I’d hold the murky position of the ratings agency higher on the list of malefactors in the crisis than FNMA.

That may be a piece or the seed of it, but no govt forced the lenders to generate fraudulent loans at scale or to then repackage those loans into securities and massively mis-rate the risk of those securities -- both of those activities done at massive scale (along with CDOs and other shenanigans) is what collapsed the banking system.

A lot of it was break down of originating standards, rating fraud, and worthless insurance on as you said CDOs and other shenanigans. All the people responsible get protected and 10-20 million people lost their homes.

Worse the employment to population ratio dropped 10% and has stayed there since.

> Banks were subsidized or required by the state to issue subprime mortgage loans to the poor; people with terrible credit who would have no chance of actually paying the loan back.

How likely is this, really? These people wouldn't be poor if they could pull fast ones off of the best, brightest, and richest. In fact the intentional packaging of MBSs with bad paper, packaging directed by rich people who wanted to and actually did short the securities knowing full well they'd fail is what broke the system. Fed guarantees wouldn't have happened but for the the MBS' AAA ratings, and that problem persists, because the issuer pays the rating agencies for the ratings. It's called conflict of interest, it's rampant throughout the system.

This is such a meme.

Lenders originated bad loans, banks bought them and packaged them into securities with fraudulent ratings, and banks sold them to bag holders. Banks knew exactly what they were doing, and went to washington to beg for cash so wall street doesn't turn into Detroit

ralusek, I have a question for you.

But first let me say that you're offering the standard conservative explanation of why the crash happened. But at the time the real estate bubble was going on, the conservatives all said it was sound economics and there was no chance it would crash.

And then when it did crash, then almost overnight they all suddenly changed their line and talked as if they had known all along the country was on a dangerous financial path.

My question for you is, when real estate prices were skyrocketing, did you think it was good or bad?

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