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The banks ended up holding much of the 6 trillion dollars in mortgage-backed securities in off-balance sheet vehicles called SPV's or SIV's (as in Enron) and leveraged the holdings at nearly 50-to-1. When the securities lost their value in the housing bubble bursting, it caused a cascading effect in other financial securities since the banks had to raise cash by either issuing secondary shares, selling assets, or both.
Some of it was planned. Just before the crash, the regulators enacted fair market value accounting and eliminated the uptick rule for short sales, which forced banks to mark the mortgage-backed securities to market values and allowed other banks and hedge funds to drive down their stock prices. Both rules were rescinded at the beginning of 2009.
there were so many factors that froze the credit markets . the credit default swap market became a vegas casino . untested cdo products went bad . the housing market was really the effect .
the kink in the flow of money had layoffs and with jobs went mortgages being paid . everyone just diod not wake up and go i can't pay my mortgage . there were layoffs when money ,the blood of business started to falter .
Prof Tooze does a good job. But the root of the crash was that debt after debt was poured into land. Banks could foreclose with the asset increased in value. Interesting when Tooze mentions that pre WW1 the US economy was volatile.
The land cycle is approx 18 years, the business cycle follows. Halt the land cycle then the boom & busts are eradicated.
all those untested products that froze the credit market was the result of the public complaining they wanted more yield . people were buying bigger and bigger homes expecting them to soar .
so as answer to grandma and grandpa and all the other investors they created new products which took the same old mortgage bundles but brought them to market in a new multi level way .
Prof Tooze does a good job. But the root of the crash was that debt after debt was poured into land. Banks could foreclose with the asset increased in price.
The land cycle is approx 18 years, the business cycle follows. Halt the land cycle then the boom & busts are eradicated.
There were a lot of things that led up to the boom and even fostered speculation in real estate.
1. Residential real estate last peaked in 1989. There was substantial time for homeowners to build up equity.
2. Congress changed the capital gains exclusion on residential real estate in 1998, making it easier to move around and pull out equity while putting some of it into another home.
3. HUD allowed third-party downpayment 'charities' in 2001 where home sellers and builders could front the downpayment to buyers. The builders would mark up the price of all homes to accommodate the cash-less buyers.
4. There was a dramatic drop in interest rates since 1994 when 30-year rates were around 10 percent. There was an international QE program to push down US long-term yields.
5. Simultaneously, there was a dramatic drop in short-term interest rates to 1 percent in 2004 making investors desperate for yield. Greenspan lowered rates during the housing bubble which made ARMs extremely popular.
6. In 2003, federal regulators blocked the states from prosecuting the large banks on predatory mortgage loans. Mortgages for subprime borrowers started to take off. Removing the requirements for a downpayment in 2001 and checks on financial suitability made it easier to push more mortgages. It also created a lot of fraud on both ends. Investment banks were intentionally pushing lenders to make loans to bad credit risks so they could be packaged into complex securities against which they could place bets in the form of credit default swaps, for which Congress passed a law in 2000 to exempt them from oversight by state insurance regulators. On the borrower side, there were a lot of people who took advantage and kept pulling out home equity to support their daily living expenses, mainly in meeting the mortgage payment. Once the price of homes stopped rising, these borrowers would default.
7. In 2005, Congress passed a stricter bankruptcy law that made it harder to discharge unsecured debt. Borrowers took out loans on their homes to pay off debt. Combined with the regulations that hamstrung consumer protections, these borrowers were set up to lose their homes as noted in a Federal Reserve study of the contributing causes of the bubble.
There are other contributing factors.
1. Ratings agencies were in on the fraud. They were slapping investment-grade ratings on the mortgage-backed securities, probably as a result of a conflict of interest. As I recall from a documentary on the mortgage crisis, they were now being paid by the originators of the securities. Financial documents and models accompanying the securities were falsified.
2. Too much confidence in the Fed using the interest rate mechanism or whatever it takes to save the banks. It's now 10 years later and we're in the late stages of the whatever it takes policy.
3. Too much confidence that the securities could be dumped on investors. The US and European banks ended up holding much of the debt. Asian banks were largely untouched by the crisis. They started dumping their holdings in early 2007.
Yes, but the root was that land was untaxed. Land rose in value so it was great to lend for land. Cannot lose. Look at the root. A bank could lend to borderline borrower, but it never mattered to them as if they defaulted the foreclosed property had a value more than what they lent for it. That does not happen when lending for industrial machinery, it loses value greatly. I see the banks never threw money at industrial machinery. If you wanted that they would would want to see your business plan and have all sorts of check done, not give you a mortgage over the phone.
It was land that was the problem. If Land Value Tax (zero tax on buildings) was in place, land would not be such an easy earner for them. They would not have been cavalier with the crash not happening.
No doubt that checks and balances were removed (mainly by Reagan and Thatcher), as Tooze explained. Some have been put back but it will not stop another bust. The bust may not be so bad as 2008, but it will happen. As Martin Wolf states, remove the boom & bust land cycle. That is a great stabilizer.
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