[personal profile] longhairedweirdo
One of the nastiest, and stupidest, memes that cropped up on the right wing concerned the cause of the "Great Recession". The problem was poor, and working class people, they said - buying houses they couldn't afford. Presumably, these poor and working class people also went into banks with guns, forcing them to grant sub-prime mortgages to applicants who qualified for prime mortgages - just so when "fixed rate" mortgages turned out to be ARMs, they could go broke. They also went to the financial industry, with guns, to force the financial industry to purchase those loans, singly or in large swaths, and repackage them in complicated financial instruments, and to sell vast quantities of "derivatives" - financial products whose value was derived from the health of those financial instruments.

Presumably, we just needed some "good guys with guns" to protect us, eh?

Well, there's a couple or so problems with that scenario.

First, poor and working class people don't have enough assets, not even with overly-appraised houses under mortgage. That's kinda why we call them "poor, and working class," rather than "upper class, and wealthy."

Second: no, they didn't force anyone to extend them a loan, prime or sub-prime. Yes, it's true, banks had to show that they were making an effort to invest in local communities. "Making an effort" means making good loans, and being able to show why rejected applicants were refused for good, solid, financial reasons - the color of their money, not the color of their skin! Also, remember, the Republicans had been in charge of regulatory agencies for years by then: there was no need to fear that the wealthy would face the wrath of regulators.

Third, no one forced the banks, the financial services industry, the credit rating agencies, etc., to engage in such widespread delusion and mutual enrichment. The banks made loans they knew were bad, and in some cases, loans they couldn't know were good (aka "liars' loans"). Why not? They just wanted the origination fees; some other poor sucker would then buy the loan and be stuck with it! It's possible each individual bank thought that their own tiny piece of the pie wasn't a big enough problem to cause devastation to the US and the rest of the world. Or it's possible that they just didn't care! The root of most evil in this world is not malice (i.e. wanting to cause harm) and is instead due to indifference ("I got mine, with no provable or indictable criminal activity, so who cares if someone else gets hurt?")

The credit ratings agencies knew they had to produce "reasonable" evaluations of the risks, that would nevertheless guarantee return business. They did this with a fine trick, in some cases: they would use the price of a credit default swap (basically, insurance against a bond or other financial product defaulting) as evidence of the safety of the financial products: the price of a credit default swap was low, so the bonds produced must be low risk. Of course, the price of a credit default swap was low because the credit rating agencies decreed the bonds produced were low risk. If this sounds circular to you, thats becuase it is, and we should be suspicious there were back channel, unofficial, communications, or egregious lack of oversight and prudence (or both, naturally).

And of course, the financial services companies would sell bundled products and use the cash flow to make leveraged buys of more products that gave them have bigger, fatter balance sheets, allowing them to leverage themselves further. In engineering terms, you might think of this as them trying to build a huge skyscraper on a foundation appropriate to one of those overvalued houses that formed the basis of this ridiculous speculation adventure. And this all works until some tiny tremor triggers a drop in valuation, and someone gets a margin call.

"We loaned you a billion dollars for securities worth 1.025 billion. But now those securities are worth 998 million; we want you to come up with the 27 million dollars in collateral to balance things out."

No biggie, if it's just a single leveraged loan... you don't borrow a billion if you can't come up with 27 million by using some of your fast food budget (for buying stock or restaurants, you probably don't know or care).

But if you're leveraged on stuff that you only have because you're leveraged on other stuff, which you only have because you're leveraged on other stuff... you don't have any more collateral. But worse: once that margin call goes out, you have three things happening.

No one wants to buy from you - they know you're trying to dump the worst stuff you can - hey, it's what they'd do! No one wants to lend to you - if you go bankrupt, the last few loans are the last in line in a bankruptcy. And everyone who has assets you're managing wants them back, now(!!!) for fear of not having access to them in a bankruptcy. Just like a bank run, only the financial industry wasn't well regulated or insured, as banks are.

Boom, down goes one, which means someone else has lost a lot of money they lent, or invested in, the first, so down goes another and soon, it's like dominos falling.

It was a hideous failure of the "let's cut (or is that "gut"?) regulations!" idiocy of the 80s and 90s. Ah, but that would mean the answer is "regulation". And we can't have that!

So voila! It had to be the poor people, even though that's ludicrous on the face of it.

I think I've said this before... there are times I envy the Republicans on the gravy train. If you have no compelling need to be honest, you can make quite a killing by bamboozling and bullshitting and, on top of it, you get to pretend to be patriotic and moral, while basically prostituting your integrity. (Or is that pimping? I guess it depends on whether you still have integrity of your own to prostitute.)

Date: 2017-01-10 01:02 pm (UTC)
dubhain: (Spike_wall_rain)
From: [personal profile] dubhain
Watch the narrative change, in the next few years. It won't only be the fault of the poor people. It'll be the 'fact' that the financial sector is over-regulated and forced to do things which, if they'd only been allowed to self-regulate, would never have happened and thus the poor would've been protected from themselves. (And, thereby, everyone else would've been protected from the predatory poor as well. Which is why we must keep the Conservatives in office, because the poor, and their Left-Wing champions, are dangerous, and only want to steal your money from you while you work to support them, barely being able to support yourself.)
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