BF2S Forums The Crisis of Credit

But... but, but it was all because of the people defaulting on their loans.

/Lowing.

I agree with Diesel, thanks for finding such an excellent video. The finance is sound, and the great graphics (should) allow the average person to understand the whole problem.

This whole Credit Crisis has been an excellent example of the effect of the human capacity for greed, some questionable decision making (eg. Greenspan leaving the Federal Funds Rate at 1%, and that it's now 0.25%) and a lack of strict regulation in the financial sector (has BASELII been fully implemented yet?)..

To save from quoting it all

LividBovine wrote:

A good post

As I'm not specifically familiar with the US financial system, and thus I didn't know good specific examples, thanks for your example of the CRA. Are there many more like this, that illustrate the role government played in the lead up to the crisis?

On my greed thing, I wonder why Congress just swept it aside. Considering the lobby culture of the US political system, did members of the Congress and Senate have more to gain by ignoring the problem?

Just saw this:  http://www.bubbleinfo.com/2009/12/05/10b-gone/

Looks like a scam to me that was allowed to go on for years to get low-income people into houses they couldn't afford.

Dilbert_X wrote:

How banks were allowed to loan 30-40 times their equity I'll never understand.

Failure of the USA to properly adopt the Basel II Accord...

The standardised approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on unsecured commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as capital) remains at 8%.

They should have been considering loans with poor credit ratings as 150% of their value, as opposed to 50%, for determining minimum capital requirements. Even then I'm not sure if US Banks had minimum capital requirements for covering defaults on the financial instruments they issue..

I wouldn't so much call it greed, but that they all believed a set of lies. Most people knew it was a bubble long before it popped. You can't have 20% growth in home prices per year and expect that to be sustainable. Anyone with half a brain could figure that out. Instead of facing that reality, everyone involved tried to wish it away and/or they have the gamblers mentality of 'let it ride' for just one last throw. When your profits off investment are so much higher than normal, I'm sure it's hard to resist.

But one thing bothered me in the video. Bonds are never a good investment, they're awful. If you do your research on the stock market you can easily double the return that a bond gives you. Substituting bonds for derivatives is just as bad. 4% growth rate considered investment level? Christ, what were these people thinking? 4% wasn't even covering inflation during the period.

Anyway, I'm rambling. Buffett calls the lemming like actions that large investment companies make the 'Institutional Imperative'. Think of it as a bunch of smart kids who are deathly afraid of failing on their exams. They're all smart kids and would ace the exam if they gave themselves the chance but the fear of failure makes them glance over constantly at their neighbors exam and copy his answers. Instead of scores of 100, 95, 85, 80 etc they all get the same exact grade.

This carries on down the line and isn't limited to investors, but consumers as well. One of your friends buys a house, would you not look into it?