Talk:Subprime mortgage crisis/Archive 3

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Archive 4

Rename to 2008 financial crisis?

Shouldn't this page be named 2008 financial crisis? As this crisis unfolds, it seems that the sub-prime mortgage meltdown is only a part of the problem. Securitization and other derivatives seem to be as big a part of the story, and contagion is spreading distress throughout the financial system. BTW, you all seem to have covered all the bases. Nice job. LK (talk) 04:25, 10 October 2008 (UTC)

This is definitely the best of the articles on this general subject but the title is limiting.--JohnnyB256 (talk) 20:20, 12 October 2008 (UTC)

I agree. The topic is a misnomer. Some information shows the mortgage part of the crisis to be specifically one of ARM loans, not sub-prime loans. The topic as it exists is not neutral.RK June 2010

Global world map [[Image:

We/the article need a global world map, with the countries which has been get the financial crisis. (Green color to the countries with big crisis like USA. --CikkBővítő (talk) 17:38, 10 October 2008 (UTC)

I agree. The topic is a misnomer. Some information shows the mortgage part of the crisis to be specifically one of ARM loans, not sub-prime loans. The topic as it exists is not neutral.RK

"Effect on municipal bonds" section is missing

I was reading the wikipedia article on municipal bonds which has a section that linked to Subprime mortgage crisis#Effect on municipal bond "monoline" insurers. This section which used to be part of either the Municipal Bonds or Subprime mortgage crisis articles is now deleted from both articles. I would like to know more about this subject. Thank you. 71.171.118.196 (talk) 00:29, 11 October 2008 (UTC)

I moved it to Subprime mortgage crisis - other economic effects some time ago when that issue faded from the headlines. It's still there along with some headlines. You might also check out credit default swap. Lots going on with that related to the Lehman Bankruptcy.Farcaster (talk) 04:28, 11 October 2008 (UTC)

events

seems like several spin-off referring and generalizing the same current events covered many times, and using various arbitrary names and dates such Economic_crisis_of_2008 or Financial crisis of 2007–2008.....Rodrigue (talk) 13:15, 12 October 2008 (UTC)

Yes, lots of spinoffs. I guess imitation is the sincerest form of flattery. But serious, this main article is about the causes, impacts, and responses. It should be more thematic and summarized, with just enough examples to illustrate the particular element or point. Daily type events and daily he said/she said should be put into subordinate articles. My thought is that this article is the umbrella with other articles for deep-dives on particular issues.Farcaster (talk) 17:05, 12 October 2008 (UTC)

name with United States

Since 98% or so of the article is about the United States, and it is the United States that made all these subprime loans, why shouldn't the name of of the article include 'United States'? Hmains (talk) 00:06, 13 October 2008 (UTC)

Krugman

It seems like this might belong to document the opinion of an expert on fannie and freddie, since much talk has come from this:

http://www.nytimes.com/2008/07/14/opinion/14krugman.html

Brusegadi (talk) 07:56, 13 October 2008 (UTC)

staying on topic

I think this should be deleted as it isn't specific to subprime issues: Gerald P. O'Driscoll former vice president at the Federal Reserve Bank of Dallas stated that Fannie Mae and Freddie Mac had become classic examples of crony capitalism. Government backing let Fannie and Freddie dominate the mortgage-underwriting. "The politicians created the mortgage giants, which then returned some of the profits to the pols - sometimes directly, as campaign funds; sometimes as "contributions" to favored constituents."

On April 18, 2006 home loan giant Freddie Mac was fined $3.8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions. Much of the illegal fund raising benefited members of the House Financial Services Committee, a panel whose decisions can affect Freddie Mac. [1]

BoE govenors warning last June

This may be worth putting in somewhere - Mervyn King June 2007 - "The development of complex financial instruments and the spate of loan arrangements without traditional covenants suggest another maxim: be cautious about how much you lend, especially when you know rather little about the activities of the borrower.

It may say champagne - AAA - on the label of an increasing number of structured credit instruments.

But by the time investors get to what's left in the bottle, it could taste rather flat. Be cautious about how much you borrow is not a bad maxim for each and every one of us here tonight."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/03/ccom103.xml

Could I get a tl;dr version?

If someone could summarize what happened in like, a paragraph, it'd be awesome. thx —Preceding unsigned comment added by 74.213.214.208 (talk) 12:51, 13 October 2008 (UTC)

George Bush's speech to the nation has a good plain-language summary. See the background information article.Farcaster (talk) 01:32, 8 November 2008 (UTC)

I literally just saw this article, scrolled to the bottom, the first thing I thought was tl;dr and hopped over here to write tl;dr. Little did I know someone beat me to it. 19:39, 27 July 2009 (UTC) —Preceding unsigned comment added by 65.113.71.3 (talk)

First paragraph edits

Farcaster keeps on undoing my edits to this paragraph. A fundamental modification is necessary as there is no mention of any loan defaults which is actually the bulk of the crisis. Those of us that have actually studied economics, know that in economics there are causes and effects. Lack of liquidity is an effect not a cause of the crisis. Therefore stating that the crisis "is characterized by lack of liquidity" is essentially incorrect. The real cause are huge amounts of defaulted loans. Please, discuss or understand the edits before undoing them. VShaka (talk) 20:34, 2 October 2008 (UTC)

The tone of the two summary paragraphs is not appropriate to an encyclopedia article; while any writing will have some element of opinion, this is too political in tone. I urge others to clean this up.

While I can't argue whether 80% of sub-prime loans were ARMs, as they may have been, there is a critical difference between what is more generally understood to be an ARM and typical practice in sub-prime mortgage lending. An ARM, after some initial period, has provisions that reset the interest rate in relation to an index. It is my understanding (no, I don't have references; I simply don't have the time) that a great many, perhaps most, "sub-prime" mortgages were written such that even if there were no movement in any index, the interest rate and payments would increase. So, yes, mortgages "began to reset at higher rates," but it wasn't a movement of an index that raised the rate, it was automatic provisions in the original mortgage loans. Then, tighter lending standards and falling home prices prevented the refinancing of the original, unsustainable mortgages.

Finally, I urge someone to research this question: How much of the loss in value of securities backed with sub-prime mortgages was caused by actual default losses? The fear of default losses, and the inability to value those securities may have had just as much, or more, effect on the financial system as actual mortgage default losses.

Madison Max (talk) 14:14, 6 July 2009 (UTC)

The way I've come to think about this is that Wall Street's innovation with CDO and MBS basically means housing price losses translate directly to bank and investor losses eventually. U.S. housing prices are down about $4 trillion; the number is higher if you factor in dollar deflation. Subprime MBS losses are considerably smaller, as you indicate. The best estimate I have is that subprime loans were about $1.3 trillion in 2007 and that about 25% of those have defaulted or foreclosed. This is about $325 billion. Further, there have been about 3.5 million foreclosures so far, at a cost of about $50,000 each. That is $175 billion. These amounts overlap, so I'm not sure how to sort them or add them. I'm sticking with the $4 trillion number. Banks have recognized about $1 trillion in losses so far I believe and have acquired about half that in new capital; with a fractional reserve banking system (i.e., banks can loan $9 for every $1 in capital)that is about a $5 trillion reduction in global credit availability from the banks alone, not to mention the destruction of the shadow banking system. We could probably use a paragraph in here to describe the various categories of losses more clearly. I'll research this more.03:45, 10 July 2009 (UTC)

Speculation sections

Can the "Excessive housing speculation" and "The role of speculative borrowing practices" be combined under "Speculation"? Also, the statement: “The role of speculative borrowing has been cited as a contributing factor to the subprime mortgage crisis”; is supported by an article written in 1996. Something is wrong with that. Halgin (talk) 23:32, 2 October 2008 (UTC)

support. I suppport merging the sections.

Minsky, an economist, who predicted this type of financial crisis died in 1996, the article is about his death. Check this quote out:

"Minsky found that in prosperous times [..] a speculative euphoria develops and soon lending gets beyond what the borrowers can pay off from their incoming revenues. That produces a crisis. There is a pull-back in lending, even to companies that can afford the loans, and the economy contracts."

That's exactly what is happening now. EconomistBR 04:11, 3 October 2008 (UTC)

Bank capital replenishment

The most interesting graphics on financial institutions reserves and borrowings from the fed are these: http://research.stlouisfed.org/fred2/series/BORROW and http://research.stlouisfed.org/fred2/series/BOGNONBR. The first is monthly data from 1919 (not a typo) to date on average financial institution borrowings from the Fed. The second is monthly data from 1959 to date, on financial institutions' non-borrowed reserves. Both clearly show that something broke. DOR (HK) (talk) 06:11, 3 October 2008 (UTC)

Very interesting graphs, IMO they should be added but we must explain what "Non-Borrowed Reserves of Depository Institutions" means to readers.

They may not fit here but one of the sub-article can totally take them.

EconomistBR 15:28, 3 October 2008 (UTC)

Causes of the crisis

Please discuss here removal of the following cause: "requirement of commercial and mortgage banks to lend to high-risk borrowers ". Gogino (talk) 14:08, 15 October 2008 (UTC)

Please remove your edits or I will later today. Cite a credible source that says these are the most important causes. They actually aren't in the top 20, so I'd like to see if you can support it.Farcaster (talk) 14:26, 15 October 2008 (UTC)

Farcaster, I responded to this your post below. You ignored it and again censored my contribution. Why?

--Gogino (talk) 21:01, 15 October 2008 (UTC)

> CRA is covered under regulation or lack thereof.

I agree and this part should be expanded.

> It is not the primary cause.

Yes, this complicated problems usually do not have one primary cause. It is one of the primary causes.

> CRA is covered in depth in the later portion.

I do not want to cover it here. I want to list it here as one of the causes.

--Gogino (talk) 21:18, 15 October 2008 (UTC)

Here are some credible sources explaining the role of CRA: How Government Stoked the Mania, The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities. Gogino (talk) 17:32, 15 October 2008 (UTC)

In the first sentence of the primary causes, you have this specific element. There is an element related to regulation later in the paragraph. CRA does not merit the level of attention you give it there in the summary. For instance, CRA was from 1995 I believe. The primary issuance of subprime debt that is causing the crisis was in 2004, 2005, and 2006. See the Miliken presentation at the bottom for the specifics. The crisis is really the debt issuance in those 3 years. More proximate to this was the decision by the SEC (in 2004) to enable investment banks to dramatically expand leverage. Even the articles you cite do not give CRA primary position, and they are from the WSJ (a very conservative leaning paper). So I ask (again) that you leave that intro part alone and expand the CRA portion lower (or even better, the separate CRA article, as this article is already too large and should be an umbrella rather than a detailed discussion of every part. I don't want an edit war with you and I want the CRA part in there; I don't want it to appear a primary cause anywhere.Farcaster (talk) 21:46, 15 October 2008 (UTC)

> this article is already too large and should be an umbrella rather than a detailed discussion of every part

I agree. Then all possible causes should be at least listed there so that people can research them and make up their own opinions.

How about to list major causes all agree on, then major causes only some agree on, then minor causes all agree on, and finally minor causes only some agree on?

--Gogino (talk) 00:06, 16 October 2008 (UTC)

There definitely is too much information and exposition and extraneous details on various topics, some more related than others, and Farcaster should feel free to move those details to his background article and otherwise let the sources speak for themselves. Carol Moore 12:51, 16 October 2008 (UTC) Carolmooredc

I will add a fraud section later. --Dlawbailey (talk) 12:40, 5 April 2009 (UTC)

Predictions of crisis

I've added a section to highlight some of the predictions as EVERYONE BECOMES AND EXPERT AFTER THE FACT (and add their own spin) but some of those with the initial insight had the clearest understanding of what the causes and rising risks were (of course some predict crisis using flawed reasoning and just get lucky). Additionally, experts tried to dispel and mislead on Buffett's warning about derivatives as weapons of mass destruction but failed to discuss his daisy chain / counter party risk warning - yet that - more so than the products themselves were at the heart of his discussion. —Preceding unsigned comment added by AlbertaSunwapta (talk • contribs) 04:02, 16 October 2008 (UTC)

Good. There also were lots of predictions that various govt polices were leading to doom and they need to be there too. Carol Moore 12:53, 16 October 2008 (UTC) Carolmooredc

Causes in general

Clearly there are two major causes of the crisis:

• the existence of the problem of subprime mortgages and
• its acceleration.

Out of the causes listed the following are related to its acceleration only and assume the existence of the problem already: (1) the inability of homeowners to make their mortgage payments, (2) speculation and overbuilding during the boom period, (3) risky mortgage products, (4) high personal and corporate debt levels, (5) financial innovation that distributed and perhaps concealed default risks, and (6) central bank policies.

The remaining causes (7) poor judgment by the borrower and/or the lender and (8) regulation (or lack thereof) could be related to both the existence and the acceleration.

Ad (7): Many borrowers cannot balance their checkbook. Naturally they will have poor judgment about more complicated things. But this is not special for this crisis. It long has been that way and I don't see any evidence of increase in poor judgment other than by the sheer existence of the judgment opportunities. Increase in poor judgment of lenders should have its cause. Why would they have poor judgment just in subprime lending and not in anything else? Why would they employ people with poor judgment? There must be some external force like a possibility of a punishment (for example, requirement of commercial and mortgage banks to lend to high-risk borrowers) or a possibility of making a profit (for example, possibility to liquidate the bad loans).
The bottom line is that (7) is a part of (8) regulation.
Ad (8): This is the only cause of the existence of the problem but it doesn't give enough useful information. The causes that belong here should be listed.
--Gogino (talk) 00:58, 16 October 2008 (UTC)

I appreciate you trying to resolve this and your thoughts on the causes. My point is not to overweight this towards regulation. This crisis demonstrates flaws in nearly every aspect of the economy and some would argue with capitalism in general. We've had massive amounts of capital sloshing uncontrolled from bubble to bubble (Dot-com, Housing, Commodities). Now it sloshed right out of the container (cash is sitting on the sidelines and in bank vaults) and everyone is freaking out. A debt-financed existence is changing to one where people live within their means. Technically, I disagree with the acceleration vs. existence assessment above, but put a bunch of smart experts in the room and they wouldn't all agree. I really like the article at the bottom by Blackburn on the crisis; probably the best I've read. There is a fair amount of discussion about the regulatory causes in the article and in supporting articles. If you want to expand your argument about CRA, please do so in the CRA article. However, characterizing a law passed in the 1970s as the primary cause of a problem as pervasive as this is simply not supported by the sources cited or the many I've reviewed. I have tried to capture regulation as one of many elements in the summary and we give government regulation pretty thorough treatment in the body of the article. Many conservatives want to blame over-regulation, while many liberals want to blame under-regulation. I think both extremes miss the point, which is that people got caught up in thinking they could get a free lunch on housing and they got burned badly. Every aspect of our value system pushes us to jump in with the stampede when there's a bubble and in this case the leaders of the pack ran us off a cliff. I could summarize this crisis in one simple sentence: People tried to live beyond their means and it cost them. Everything else is academic and there is no regulation in the world that can stop the invisible hand of Adam Smith, or the stampede when it starts.Farcaster (talk) 03:09, 16 October 2008 (UTC)

While I'm not ready to make changes in this particular article I'd like to point out some of the problems with Farcaster's arguments above:

• Nearly every change in the economy can be traced to some inappropriate government regulation or deregulation that benefits one special interest to the detriment of everyone else. I repeat: it's not the bare fact of regulation or deregulation that matters but who benefits and who gets hurt from each one.

• Sure there's a lot of sloshing money from American billionaires who got rich off government protections, subsidies and contracts; Chinese government or government-connected investors wealthy from manipulation of labor markets, trade agreements, environmental standards and savings rates; middle east oil-rich governments wealthy from western governments' stifling of energy alternatives through burdensome regulations and taxes that stifle competition, even as they themselves often are bullied by those govts into keeping prices artificially low.

• But there's a big difference between a bubble caused by mania and greed, like the dot coms and commodities, and those bubbles caused by conscious government laws and polices and institutions that, intentionally or not, make it profitable for shady "community organizer" and other defacto real estate brokers, mortgage companies, Fannie Mae/Freddie Mac profiteering executives, and wall street securities packagers to push people into homes or refinancing packages they don't understand and can't afford. In the former only the foolish get hurt; in the latter millions of people do.

• People who were lied to about how much their mortgage payments would be 2 years down the road weren't living beyond their means. People who had no choice but to pay $400,000 for a $150,000 house because govt policies drove up prices in a speculative bubble weren't living beyond their means. People who see 3% inflation erode their incomes, while they see no pay raise year after year, and taxes keep rising aren't living beyond their means.

• The government that promises people social security and medicare benefits it cannot pay for too many more years, that goes into trillion dollar wars and keeps 800 military bases around the world, and that borrows money from China to fund its daily expense - that who is living beyond its means! The great majority of people are victims of government policies that help the well connected get richer and everyone else get screwed.

Obsfucating those facts through a confusing catch-all article won't change the fact. However, at some point the article will be changed to make it closer to WP:RS reality as opposed to WP:Synthesis fantasy. Carol Moore 03:46, 16 October 2008 (UTC)Carolmooredc

[FarCasters Replies] to CarolMooreDc:

• Nearly every change in the economy can be traced to some inappropriate government regulation or deregulation that benefits one special interest to the detriment of everyone else. I repeat: it's not the bare fact of regulation or deregulation that matters but who benefits and who gets hurt from each one. [Baloney. Regulations didn't force 9 million homeowners to buy mortgages that are now underwater. They bought at what was market value at the time, at the peak of a bubble unfortunately.]
• Sure there's a lot of sloshing money from American billionaires who got rich off government protections, subsidies and contracts; Chinese government or government-connected investors wealthy from manipulation of labor markets, trade agreements, environmental standards and savings rates; middle east oil-rich governments wealthy from western governments' stifling of energy alternatives through burdensome regulations and taxes that stifle competition, even as they themselves often are bullied by those govts into keeping prices artificially low. [Baloney. People love cheap oil. Look at the McCain Morons chanting "Drill Baby Drill" With a dumb population, government has no choice but to feed the mob. We have the regulations and government we ask for.]
• But there's a big difference between a bubble caused by mania and greed, like the dot coms and commodities, and those bubbles caused by conscious government laws and polices and institutions that, intentionally or not, make it profitable for shady "community organizer" and other defacto real estate brokers, mortgage companies, Fannie Mae/Freddie Mac profiteering executives, and wall street securities packagers to push people into homes or refinancing packages they don't understand and can't afford. In the former only the foolish get hurt; in the latter millions of people do. [This bubble was caused by mania and greed too. Nearly 40% of homes purchased in 2004-2006 were second homes! That's insane! We had a ton of excess inventory once the smarter speculators got out.]
• People who were lied to about how much their mortgage payments would be 2 years down the road weren't living beyond their means. People who had no choice but to pay $400,000 for a $150,000 house because govt policies drove up prices in a speculative bubble weren't living beyond their means. People who see 3% inflation erode their incomes, while they see no pay raise year after year, and taxes keep rising aren't living beyond their means. [Oh, yes they were. Most knew what an ARM was. They thought it wouldn't happen to them, because everybody else was doing it. Classic bubble mania; same story, only it's houses and not tulip bulbs. If you can't make a 20% down payment and still have $10K in an emergency fund, don't buy a house!]
• The government that promises people social security and medicare benefits it cannot pay for too many more years, that goes into trillion dollar wars and keeps 800 military bases around the world, and that borrows money from China to fund its daily expense - that who is living beyond its means! The great majority of people are victims of government policies that help the well connected get richer and everyone else get screwed. [We agree on this!]

Obsfucating those facts through a confusing catch-all article won't change the fact. However, at some point the article will be changed to make it closer to WP:RS reality as opposed to WP:Synthesis fantasy. [Good luck with that. I suggest a separate article.]

I enjoy your posts, if only for the entertainment value.Farcaster (talk) 04:11, 16 October 2008 (UTC)

Carol, I favor clearing up the facts ASAP based on WP:RS instead of the current apparent POV pushing. The perspective of the government's actions and regulations being a source for the crisis is not representatively covered in the article. The dots are not connected as well as they should be. Terjen (talk) 04:57, 16 October 2008 (UTC)

I created a subarticle for you guys to tackle, if you want to contribute called Government policies and the subprime mortgage crisis. I just copied what we had here verbatim in the government policies and put a few basic sections in there. You guys seemed fired up on this issue; please put that fire to productive use!Farcaster (talk) 05:19, 16 October 2008 (UTC)

User:Terjen- A few of us have been beefing up Subprime crisis impact timeline with just the facts and it shows the effects of govt regulation over time, though it's still a work in progress, doubtless with some important public and private moves missing, some unsourced info, and too much material on some tangential topics. I went through this and several other articles for any significant dated events/trends, public and private, from WP:RS sources, but it could certainly use more.

User:Farcaster - Wikipedia policy is cooperative editing, not to create a new page every time someone challenges one's favorite formulation in an existing article. See WP:OWN, WP:edit war, WP:Etiquette. Carol Moore 12:24, 16 October 2008 (UTC)Carolmooredc

The subarticle Government policies and the subprime mortgage crisis created by Farcaster is easily recognizable as a WP:POVFORK in clear violation of wikipedia policy. Terjen (talk) 00:51, 17 October 2008 (UTC)

It would be a POV Fork (had to look that one up) if I moved the Govt Policy section there. We've got a thorough discussion of it here. If folks want to expand the discussion of that topic, it can go there, with a summary of the key points here. We've done the same thing with about 10 other sections of this article and I have heard no such complaint. Government regulation is mentioned in the introduction, it's mentioned in the body in its own section, and in several places throughout the article. I have not thinned out the text in this article because of you guys. I hope that you summarize the key points here and move the quotes and detail into a sub-article.Farcaster (talk) 01:01, 17 October 2008 (UTC)

Carol, all you really do out here is blog about your radical views. Start contributing please. I've given you a new venue to do that. Government regulation is one of many causes; any attempts to make it the primary cause will be rebutted.Farcaster (talk) 13:30, 16 October 2008 (UTC)

Please read Wikipedia:TALK#Behavior_that_is_unacceptable. Characterizing and attacking other's incompletely understood or mischaracterized views to avoid dealing with their legitimate criticisms or suggestions is unacceptable. Carol Moore 14:11, 16 October 2008 (UTC)Carolmooredc

Farcaster, I talk here only about listing causes. I do not want a separate article at this point and don't need one just for listing causes. On the other hand, I see you are able to create new articles fast and may use your help later. However here, your response is off topic. The only relevant part I could understand is that you do not want to list causes related to regulation. Do you have any credible source that explains why listing of these causes is not good?

Please do read what I write before responding as you don't seem to. Besides being off topic you wrote above, for example, "Baloney. Regulations didn't force 9 million homeowners to buy mortgages that are now underwater(...)" In "Ad (7)" above, I explained why many homeowners always have poor judgment and that the deciding factor were lenders influenced by regulations. By the way, I did this to explain that I don't like the cause (7) but I still haven't removed it!

--Gogino (talk) 06:00, 17 October 2008 (UTC)

The portion you keep adjusting is what's called a "lead-in" paragraph with a quick overview of what is next. Government regulation is in there. The detail belongs in the government section that follows. Leave the lead-in alone; we are wasting a lot of time on this. If you want to add to the government regulation discussion, either add to what is in this article in the appropriate section (NOT the lead-in) or put in the sub-article.Farcaster (talk) 06:57, 17 October 2008 (UTC)

Yes, the lead-in is biased. --Gogino (talk) 05:19, 18 October 2008 (UTC)

Terjen, thank you for removing the unsourced POV sentence. --Gogino (talk) 03:48, 19 October 2008 (UTC)

This subsection is titled "Causes in general" and I would like to start with their listing. I don't think we can go any further if we don't clarify this. I plan to split the causes depending on if they caused the existence of the subprime mortgage problem or if the caused its acceleration. --Gogino (talk) 06:08, 17 October 2008 (UTC)

Give it a shot in this discussion area and we'll see what happens. To me, the primary causes will always be bad lending and bad borrowing decisions by individuals and corporations. There are a series of supporting or enabling pressures/conditions behind each of those. To throw Carol a bone, there was a lot of pressure by politicians and market participants on Fannie and Freddie to lower their standards, expanding subprime and Alt-A lending. That is a cause behind bad lending decisions, for example.

• Primary cause: Bad lending decision
• Level 1 cause: Fannie & Freddie funding practices (e.g., purchasing and thereby encouraging low-quality loans)
• Level 2 cause: Congressional and market pressures on Fannie/Freddie (see NY Times Article; google "The Reckoning")

Each primary cause has several Level 1 causes; each Level 1 may have several level 2; etc. In problem solving, this is called a fishbone diagram or Ishikawa diagram. You can also set it up more like an org chart, with the tree expanding downward from these final decisions to borrow or loan. If you guys want a stimulating exercise, try that. Perhaps we work on that separately and see where it goes? I tried something similar with my initial overview diagram but it didn't make everybody happy. You can probably get a lot of the causes in front of you there and rearrange to your heart's content. Just go to an old version of this article and the chart is there at the top.Farcaster (talk) 07:17, 17 October 2008 (UTC)

You know that there are different opinions on what should be called primary, level 1, ..., and so it cannot be there. Why did you suggest that?

I, on the other hand, suggest to use a general principle of causality. You need to have bad loans first and only after that you can have them so many that they cause a crisis.

--Gogino (talk) 05:39, 18 October 2008 (UTC)

In all the causes I miss one big one. The war in Iraq and other military expenditure sucked so much money from the US that house prices began to fall. Remember, foreclosures are no problems for lenders as long as they recupe their capital. But when that does not happen any more, because all the money goes to Iraq, Afghanistan, Guam, Diego Garcia, Africom, Guantanamo etc, then something must give eventually. This is not the first time that a country has lost proportion of how much they can spend on the military. When I read towards the end of 2007 that the Iraq war is fought on borrowed money, I thought that cannot go well, but here in Australia, this was no priority issue in my life. 121.209.49.170 (talk) 06:13, 20 December 2008 (UTC)

Most of the money stayed in the US, and experts don't list it as a major cause.Rjensen (talk) 06:19, 20 December 2008 (UTC)

First, POV forking depends a lot on motivation. I don't have a problem with a Law and Regs page that has lots more details than main article. The problem is you created the page to avoid the main issue: I and doubtless other people want govt laws and regs described as a primary cause, in the lead, in any overview, and first or second in the list of causes.

Govt promoted subprime mortgages and low interest rates and Fannie/Freddie lending and allowed or condoned all sorts of fraudulent and risky mortgage and investing practices. It created a bubble that attracted all that sloshing cash and the bubble burst. You can't avoid that debate by creating a new page.

By the way, a new good article that describes Fannie Freddie influence is out from American Enterprise Institute (WP:COI note: even though I've organized and participated in more than a dozen protests at their offices vs. Iraq/Iran wars, I'll still look with a neutral eye at many of their domestic economic pieces :-) The Last Trillion-Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac, By Peter J. Wallison, Charles W. Calomiris. Lot of footnotesCarol Moore 13:24, 18 October 2008 (UTC)Carolmooredc

Carol, I suppose your response was to Farcaster and I changed its indentation. --Gogino (talk) 03:40, 19 October 2008 (UTC)

Other

The following was recently removed: "Another source of the crisis is arguably the evidence of insider trading in credit derivatives". Gogino (talk) 14:20, 15 October 2008 (UTC)

Another Explanation

I attended this Financial Planning Association (FPA) conference in the Summer of 2008 in Charlotte North Carolina and one of its guest speakers, an analyst from Lazard, commented with well over 200 people in attendance, that immigrants are the root cause of the subprime crisis in the U.S. Since this guy has a master's degree in urban planning from Harvard and an undergraduate degree from Duke University, presumeably, he must be the expert on the subject. Does anyone have any real data to back up his claim? If there is, we should note the findings here in this article. Ronewirl (talk) 01:38, 18 January 2009 (UTC)

Could you cite your documented source please for the addition? Of the many causes, the fact that we had illegal immigrants here seems unrelated to the crisis. We've had them here a long time.Farcaster (talk) 01:58, 18 January 2009 (UTC)

I believe the Wikipedia article Immigration in the United States in itself is a documented source. We really need policy makers in Washington with both book sense and common sense or vice versa. Ronewirl (talk) 15:54, 20 January 2009 (UTC)

The guest speaker at this conference made no distinction between illegal or legal. This person most definitely used the word "immigrant" in his speech. And as usual, the means of communication is verbal; not found anywhere in the presentation slide. But, like always, whatever this person's agenda may have been, the truth will come out and when it does, I'll link it or post it here in this article. Ronewirl (talk) 13:22, 18 January 2009 (UTC)

Need to Discuss Bank Leverage

The article does not discuss one of the most significant causes of the subprime crisis. This is the leverage of the investment banks.

Traditionally, the investment banks were limited to borrowing $12 for every dollar of capital. In 2006, the Bush administration eliminated this rule. As a result, the investment banks took their leverage to 30 to 1, and in some cases 35 to 1. In other words, the banks were borrowing $35 for every $1 of capital on their books.

If the melt-down in the stock market looks like 1929, it is because we are following the same policies as in 1929. In both instances, the stock market became overheated because of excessive borrowing to buy securities.

Professor John C. Coffee at Columbia Law School, one of the authors of the Sarbanes-Oxley Act, has complete details on the regulatory changes. It is important that this reason be added to the historical record. —Preceding unsigned comment added by Elliott101 (talk • contribs) 11:46, 16 October 2008 (UTC)

Also, when discussing the problem of investment bank leverage, you might want to include a short discussion of the failure of the hedge fund, Long Term Capital Management (LTCM). In many ways, LTCM was a harbinger of the current financial crisis. In 1997, LTCM borrowed 50 to 1 on its money. While the market was going up, LTCM was getting 50% annual returns. When it failed in 1998, LTCM had borrowed over $1 trillion, and nearly brought down all of Wall Street with it. Federal involvement was necessary to avoid a much larger banking crisis at that time. The lessons of LTCM were recent, but apparently not learned by either the banks or the regulators. Complete details are available in a book on LTCM by Roger Lowenstein. Lowenstein is a former reporter for the Wall Street Journal, and the son of another professor at Columbia Law School, Louis Lowenstein.

See the diagram on financial leverage in the economic background section and again the effect on financial institutions section. We could amplify with a paragraph in the causes section. The SEC change was in 2004, also cited.Farcaster (talk) 13:19, 16 October 2008 (UTC)

Addressed with a paragraph in the cause section and a killa diagramFarcaster (talk) 07:56, 18 October 2008 (UTC)

If exact references to Coffee and Lowenstein can be found, much of the above could be incorporated into the entry.132.181.160.42 (talk) 03:47, 2 December 2008 (UTC)

Opposing views

Farcaster, why did you remove this sentence: "However, there are opposing views on causes of this crisis especially those related to regulation and the reader should not rely on the list written here." from "Causes of the crisis"? Do not remove before finishing discussion. It is clear that there are opposing views. --Gogino (talk) 06:23, 17 October 2008 (UTC)

We should avoid such unsourced editorialization. The use of "however" is a blinking, red warning light.Terjen (talk) 06:39, 17 October 2008 (UTC)

I fixed it. --Gogino (talk) 05:01, 18 October 2008 (UTC)

Much better! Terjen (talk) 05:50, 18 October 2008 (UTC)

Causes of the Crisis - Part Deux

Business week has a cover article that lists the causes at Business Week - The Financial Crisis Blame Game. They list in order:

• The "Whole System" with plenty of blame to go around and a quote from Obama about living beyond our means.
• Soaring home price to income ratio (the housing bubble). Bernanke backed that up here: Bernanke
• Securitization / No skin in the game - passing on risk through MBS
• Smoke and mirrors - complexity and derivatives, lousy disclosure
• Too much leverage (debt)
• Regulators DIDN'T regulate
• Basic bad banking - Even more basic was the mistake of taking too much risk. More risk allows for bigger payoffs for participants, but it put the whole system in jeopardy.

Please read this article Gogino and Carol.Farcaster (talk) 09:04, 18 October 2008 (UTC)

• In any highly government regulated industry - and that includes both banking and housing, as the article infers to some extent - increased or decreased regulations will be major factors, including in creating/allowing booms and causing busts. However, the article is not perfect and BusinessWeek is not the ultimate authority on this.
• More importantly, editing wise let me remind you that you are Not the Dictator of who edits how much on the page or on the talk page. Except for minor obvious improvements, I've avoided editing on the main page until I have a complete understanding of how laws and regulations caused this problem. Meanwhile I'm supporting those who want to go ahead with tweaks in the direction.
• Another reason I haven't tried to do more on the main page at this point is your intimidating and bullying editing and talk page style. FYI, it makes you ripe for complaints to administrators and their institution of a "mentor" upon you who will teach you how to edit cooperatively. I've seen it done before to newer editors with your style. I just haven't had time to investigate how many people have to make those complaints to whom. Obviously you have lots of knowledge, but that doesn't excuse much of your behavior.
• Later note: I just noticed Gogino complained about Farcasters 3RR and both got banned for short periods. Just the kind of edit warring I have been hoping to avoid by having Farcaster learn more cooperative editing! Carol Moore 12:52, 18 October 2008 (UTC)Carolmooredc

Yes, I misunderstood the 3RR rule :( . I thought that this topic is too hot to wait until he would be more cooperative. --Gogino (talk) 06:32, 19 October 2008 (UTC)

Thanks for the article. It confirms again that there are different opinions about this crisis. I added it as a reference supporting that. --Gogino (talk) 06:58, 19 October 2008 (UTC)

The article is a good sum-up of the conventional wisdom, but I don't think that it needs to be given more weight than any other good source of information. Better to give weight to whatever official government reports are available.--JohnnyB256 (talk) 13:17, 18 October 2008 (UTC)

Govt reports, when you can find relevant and timely ones, are under WP:RS are "primary sources" which means they can be used along with other sources, but have to be used carefully by themselves. And their analysis, when it exists, can be self-serving to cover up what agencies have been up to. Like Fannie Mae's falsified reports which got its leaders in trouble. Carol Moore 16:56, 18 October 2008 (UTC)Carolmooredc

Yes, no source should be overweight until a reasonably accepted explanation of this crisis is found. --Gogino (talk) 06:42, 19 October 2008 (UTC)

"Understanding the risks of default" section

The section titled "Understanding the risks of default" is unreferenced. Also, almost all the points made in this section are made elsewhere in the article. I suggest deleting the section, in part because we should probably all be looking for ways to make the article shorter (without sacrificing content, of course).

Also, the graphic titled "Financial Leverage Profit Engine" is too textual. If that much text is needed to explain the graphic, the text should be included in the article. Moreover, many of the referencs on the [page] for the graphic do not seem to support the points made in the graphic's text. I suggest deleting the graphic. Again, all else being equal, shorter=better. Bond Head (talk) 03:22, 19 October 2008 (UTC)

I've added the text to the editable part of the page. If there are any changes that can improve it, please edit there and I will update the text in the diagram.Farcaster (talk) 17:01, 19 October 2008 (UTC)

Subprime Crisis Diagram

This diagram suggests that the causal direction is: Housing Market influenced Financial Market and that influenced Government and Industry. There are many articles suggesting that these influences are more complex and go also in opposite directions.
I suggest that the diagram should reflect this or be removed. If you agree please respond below. --Gogino (talk) 07:51, 19 October 2008 (UTC)

Agreed. Bond Head (talk) 11:57, 19 October 2008 (UTC)

Definitely. I am appalled by much of the financial content on Wiki and this takes the cake.--JohnnyB256 (talk) 14:48, 19 October 2008 (UTC)

The diagram follows the explanation summarized by the U.S. President in his address at President's Address to the Nation. Many government regulations or actions were causes in building the housing bubble (e.g., Fannie & Freddie), but once this bubble was built the crisis flowed pretty much as described by Bush and this diagram and dozens of other sources. This diagram is not intended to cover all aspects of the crisis. It is designed to show how the foreclosures and declines in mortgage payments flow through the economy. Within that scope, it's pretty fair I think. If you have specific improvement suggestions, put them here or in the diagram and I'll modify. I've put a lot of caveats in the diagram's page and if there are more please add.Farcaster (talk) 17:13, 19 October 2008 (UTC)

This doesn't address the main concern. A diagram should not express POV if it is controversial. --Gogino (talk) 17:33, 19 October 2008 (UTC)

Farcaster, it is 3:1, are you going to do anything with the diagram? For example, you can start with erasing the controversial arrows. --Gogino (talk) 21:03, 19 October 2008 (UTC)

Causes of the Housing Bubble

This diagram is accurate with the scope described. More could be added. Removing arrows from a flowchart doesn't make sense. What POV am I supposedly pushing here? That the housing market bubble burst and had a ripple effect through the financial markets and that the government has responded to that ripple? That is widely agreed upon and is all I'm really saying with the diagram. Yes, the government had a role in building the housing bubble, with low interest rates and the GSE's. If somebody wants to add a housing bubble diagram, that is fine. I've proposed an supplemental diagram here at right, where we start with the main causes (bad lending decisions and bad borrowing decisions by individuals--this is capitalism, after all) and then list the influences. Do you like this concept any better? I think together they tell the story.Farcaster (talk) 23:31, 19 October 2008 (UTC)

There are things that are correct on the diagram but that is not the point.

I also understand your frustration since you put your time and a lot of your experience into it. --Gogino (talk) 04:09, 20 October 2008 (UTC)

I am sorry I forgot to check the diagram at right. I'll respond later. --Gogino (talk) 15:07, 20 October 2008 (UTC)

The diagram have not been changed yet so I added "may not represent a worldwide view" flag to extend this discussion before removing or changing it. --Gogino (talk) 03:52, 20 October 2008 (UTC)

I like the style of the diagram at right since it doesn't emphasize some particular theory about the causes. How about if that diagram (at right) goes before the "Subprime Crisis Diagram - X1.png" diagram and the later is changed in the following way: The circle containing "Start" is replaced with a circle "Causes of the Housing Bubble, see another diagram" and all bullets under the square with "Excess Housing Inventory" would be erased (Overbuilding, speculation, easy credit...). This way the context for each diagram is much more clear. After that we can still think about their content. Please let me know what you think. --Gogino (talk) 15:48, 20 October 2008 (UTC)

Seems reasonable. I'll fix the diagrams tonight and post them. I'll see if I can come up with some way of pointing the documents to each other.Farcaster (talk) 20:06, 20 October 2008 (UTC)

All, please check the top two diagrams on the article page (right next to the content) and if you find missing possible causes or items in domino effect or something else then write about them below. --Gogino (talk) 14:54, 22 October 2008 (UTC)

Conflict of interest section

The conflict of interest section is weak, beginning with an oped piece in the New York Post and continuing through campaign contributions. I fail to see how campaign contributions caused this crisis, or to whom that caused the conflict of interest. It seems out of whack.--JohnnyB256 (talk) 14:51, 19 October 2008 (UTC)

Agree. I support removing this section as written. I recommend replacing it with more thoughtful analysis of how Fannie & Freddie contributed to the crisis. This is a complex and contentious topic. They funded a lot of MBS and then in late 2007-2008 transitioned to a rescuer, by increasing purchases of toxic MBS from banks. The latter action was a deliberate rescue step and was done with widespread knowledge of the risk to the GSE's. The testimony of its regulator at [2] is a definitive starting point for this. Overall defaults were 1.36% and is frankly immaterial to this crisis. About 90% of what they did was fixed rate, which has much lower defaults than ARM's. However, they guarantee trillions in MBS held by others through credit default swaps and other mechanisms. There is an estimate of their guarantee liability on their books for this (Fanny had reserved about $8.9 billion on its balance sheet as of June 2008 for credit losses and had recognized losses of $8.5 billion through its income statement). These amounts were material for the company but not to the crisis overall. Fannie said its financial condition was fine in its August 2008 conference call. So help me out here...Farcaster (talk) 17:47, 19 October 2008 (UTC)

Farcaster, you edited your own post above today. If you changed your mind or want to add something then please add another post. This is a talk page. --Gogino (talk) 14:59, 20 October 2008 (UTC)

I've moved it out of the "causes" section, where it didn't belong, and put on a different section head. I still have a problem with what is in it but at least it is better situated.--JohnnyB256 (talk) 01:54, 25 October 2008 (UTC)

MBS

MBS are portrayed negatively in this article. Were they created to improve liquidity and diversify risk? If yes then that is positive. If anything went wrong then why? To say MBS are in fault is cheap and might be wrong. --Gogino (talk) 20:59, 19 October 2008 (UTC)

MBS are like guns. It's how they are used that matters. It's not so much the MBS, but the enormous leverage that was used to purchase them. According to the Economist, banks also retained too much rather than sell them to investors.Farcaster (talk) 23:33, 19 October 2008 (UTC)

Speaking of analogies, guns do not have "no-harm use". Could an airplane be a better analogy? It can be used as a bomber but also as a passenger plane.

Do you know answers to my questions above? --Gogino (talk) 04:03, 20 October 2008 (UTC)

I think we agree that MBS were created to improve liquidity and diversify risk. That appears in the economic background and in the securitization section and leverage section. But it is true that huge losses were incurred by banks on these investments and that this investment vehicle was probably overused fueling the crisis.Farcaster (talk) 04:10, 20 October 2008 (UTC)

MBS weren't the problem, per se. It was the poor risk modelling of the packaged mortgages. I believe Tyler Cowen may be one of the credible sources that agrees with this conclusion. 71.76.12.114 (talk) 20:34, 24 October 2008 (UTC)

Non Voting Shares!

Taxpayers cash being used to buy non voting shares ie A No Strings Attachted Gift! Please could this be interegrated:

• http://news.bbc.co.uk/2/hi/business/7658277.stm
• http://www.time.com/time/business/article/0,8599,1849612,00.html
• http://www.globalresearch.ca/index.php?context=va&aid=10597

Chendy (talk) 16:20, 22 October 2008 (UTC)

Preferred shares pay dividends or interest to the government. Someday, the banks pay the principal value. So taxpayers may do just fine. Here is a quote from the first source you cited: "Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights."Farcaster (talk) 18:40, 22 October 2008 (UTC)

contents and name

other than the first sentence in this article, is their anything in this article that is about any other country than the United States? If not, the article is misnamed--no expanded, it is already too long. The name then needs to include 'in the United States'. Hmains (talk) 22:48, 7 November 2008 (UTC)

Government Policies

This section is getting ripe for an overhaul (summary, with detail to supporting page). I know a couple of folks that would like that job. You know who you are.Farcaster (talk) 02:51, 21 October 2008 (UTC)

I agree :) --Gogino (talk) 15:01, 22 October 2008 (UTC)

Please add all new information for this section first to the subarticle Government policies and the subprime mortgage crisis. --Gogino (talk) 15:38, 22 October 2008 (UTC)

Proposed revision of government section

I am proposing the following shortened version of the text to replace the current government section, minus the citations. Let me know what you all think, as we have a supporting article for this and this section is now quite long.Farcaster (talk) 02:49, 10 November 2008 (UTC)

Both government action and inaction have contributed to the crisis. Several critics have commented that the current regulatory framework is outdated. President George W. Bush stated in September 2008: "Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws." The Securities and Exchange Commission (SEC) has conceded that self-regulation of investment banks contributed to the crisis.

Increasing home ownership was a goal of both Clinton and Bush administrations. There is evidence that the government influenced participants in the mortgage industry, including Fannie Mae and Freddie Mac (the GSE), to lower lending standards. In 1995, the GSE began receiving government incentive payments for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing additional subprime securities. Subprime mortgage loan originations surged by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years. These securities were very attractive to Wall Street, and while Fannie and Freddie targeted the lowest-risk loans, they still fueled the subprime market as a result. In 1996 the Housing and Urban Development (HUD) agency directed the GSE to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

By 2008, the GSE owned or guaranteed nearly $5 trillion in mortgages and mortgage-backed securities, close to half the outstanding balance of U.S. mortgages. The GSE were highly leveraged, having borrowed large sums to purchase mortgages. When concerns arose regarding the ability of the GSE to make good on their guarantee obligations in September 2008, the U.S. government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers expense.

Liberal economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act by the Gramm-Leach-Bliley Act of 1999 as possibly contributing to the subprime meltdown, although other economists disagree. A taxpayer-funded government bailout related to mortgages during the savings and loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans.

It seems to be a good summary.

Could you add the paragraph "By 2008, the GSE owned or guaranteed nearly $5 trillion (...)" also the the main article Government_policies_and_the_subprime_mortgage_crisis and source it? Thanks. --Gogino (talk) 04:42, 13 November 2008 (UTC)

Missing info on govt policies from still POV article

I still argue, as I have from the beginning, that this article gives insufficient weight to government laws and regulations in causing the crisis and that they should be the first listed cause. (I've got lots of WP:RS opines on that won't share at this moment.) One of the reasons I worked first on Subprime_crisis_impact_timeline was just to find out what all the relevant laws and regulations were, in chronological order. (Refs from below at that article.) Do so just confirmed that government policies artificially promoted housing ownership and created a housing bubble through lose monetary policy and through various laws, regulations and subsidies. The following are most to blame and should be explicitly mentioned in this article. The whole causes section should be in chronological order with current sub-sections directly tied to government policies that largely caused them. Right now the article remains a hodge podge of POV viewpoints. I haven't even looked at the sources for the lead section to see if they are WP:RS and relevant and if text reflects what they say. Anyway, for the edification of those who may want the cause section to reflect reality, here's a list of biggest government influences on the problem:

• 1977: Community Reinvestment Act which can be enforced in part with onerous sanctions under 1974 Equal Credit Opportunity Act.
• 1980: The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 granted all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts and exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury (unlimited interest rates) limits.
• 1982: Alternative Mortgage Transaction Parity Act of 1982 (AMTPA) preempts state laws allows lenders to originate mortgages with features such as adjustable-rate mortgages, balloon payments, and negative amortization and "allows lenders to make loans with terms that may obscure the total cost of a loan".
• 1986: Tax Reform Act of 1986 (TRA) prohibited taxpayers from deducting interest on consumer loans, such as credit cards and auto loans, while allowing them to deduct interest paid on mortgage loans, providing an incentive for homeowners to take out home equity loans to pay off consumer debt.
• 1992:Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities; Office of Federal Housing Enterprise Oversight (OFHEO) created to oversee them
• 1994: Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) repeals the interstate provisions of the Bank Holding Company Act of 1956 that regulated the actions of bank holding companies.
• 1995: New Community Reinvestment Act regulations allow community groups that market loans to collect a broker's fee.
• 1997: The Taxpayer Relief Act of 1997 expanded the capital-gains exclusion to $500,000 (per couple) from $125,000, encouraging people to invest in second homes and investment properties. Freddie Mac helped First Union Capital Markets and Bear Stearns & Co launch the first publicly available securitization of CRA loans, issuing $384.6 million of such securities.
• 1999: Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans. Gramm-Leach-Bliley Act "Financial Services Modernization Act" repeals Glass-Steagall Act, deregulates banking, insurance and securities into a financial services industry allow financial institutions to grow very large
• 2000: Fannie Mae and Freddie Mac start buying billions in subprime mortgages, in part because of new Department of Housing and Urban Development (“HUD”) requirements it to dedicate 50% of its business to low- and moderate-income families"
• 2000: Commodity Futures Modernization Act of 2000 defines interest rates, currency prices, and stock indexes as "excluded commodities," allowing trade of credit-default swaps by hedge funds, investment banks or insurance companies with minimal
• 2000-2001: US Federal Reserve lowers Federal funds rate 11 times, from 6.5% (May 2000) to 1.75% (December 2001),
• 2002: President G.W. Bush sets goal of increasing minority home owners by at least 5.5 million by 2010 through billions of dollars in tax credits, subsidies and a Fannie Mae commitment of $440 billion to establish NeighborWorks America with faith based organizations.
• 2003: Fannie Mae and Freddie Mac buy $81 billion in subprime securities.
• 2003-2007: The Federal Reserve fails to use its supervisory and regulatory authority on lenders, emphasizing instead lender's ability to securitize and repackage subprime loans. Carol Moore 18:40, 14 November 2008 (UTC)Carolmooredc

This is some good research Carol and thanks for that. A few key points to keep in mind. It is defaults on subprime loans issued primarily between 2004-2006 that are the primary cause of the crisis (see Milliken presentation in external sources, which shows subprime issuance nearly doubled vs. historical rates during that time). Fannie & Freddie lost market share due to competitive pressures and had between 20 and 40% market share of MBS issuance during that period. About 90% of their loans were fixed rate, which have low default rates relative to ARM's. If I'm not credible enough, Nobel Prize winning economist Paul Krugman says their focus on lower-risk mortage types (e.g., fixed rate) limited their impact. The investment banks, which had $4 trillion in liabilities as of 2007 (vs. the $5 trillion in Fannie & Freddie guarantees) bought and sold most of the garbage. They were NOT regulated very much. In fact, the SEC let the investment banks self-regulate more starting in 2004. You can see how they increased leverage dramatically. Your list above does not include MISSING regulations. Fannie & Freddie default rates on their portfolios and what they guarantee (the big chunk - almost $5 trillion) still remain below 2% (and they can seize the collateral of the homes to offset some of that) so directly attributable losses remain less than $50 billion. So please keep the blame in perspective. Also, we have a separate timeline article for that specific purpose. This article is organized by topic deliberately, to focus on key issues. The sub-article on government is another good place to expand if you wish.Farcaster (talk) 19:08, 14 November 2008 (UTC)

Like all wiki lists, a work in progress, with various driveby Anon IPs and other editors adding good stuff. Editors generally have added dated timeline stuff to this list, but a few more "trend" things with less clear dates could be added. Many "missing regulations" would not be necessary if it were not for some preceding law or regulation that caused the problem in the first place - like loosening money supply and lending standards, thereby encouraging speculation. One would have to look on case by case basis. Fannie and Freddie were highly regulated quasi-government "enterprises" forced to engage in bad practices by congress and other agencies, as that list makes clear. The issue in this article is need to put in chronological order, as opposed to haphazard current organization, and use some good comprehensive WP:RS articles for introductory overview. As said above, finding some comprehensive WP:RS articles to help structure it is a real good idea. Carol Moore 21:14, 14 November 2008 (UTC)Carolmooredc

> It is defaults on subprime loans issued primarily between 2004-2006 that are the primary cause of the crisis

It depends what you call a crisis. I think we can agree that we have here a domino effect here. Well, then it doesn't make sense to call some particular domino to be the cause if it was hit by some other domino. These defaults didn't come out of nowhere, but were caused by many things as one can read, for example, in the government section.

> Paul Krugman says their focus on lower-risk mortage types (e.g., fixed rate) limited their impact.

He is talking about their 'direct impact'. Consider the following example. Somebody drives a car and hits a wagon. Then breaks and stops the car but the wagon goes down a hill and crashes into a house. Yes, the breaking action limited the 'direct impact' of the car.

> The investment banks (...) They were NOT regulated very much.

That is correct. However, first problem is not the lack of regulation but the lack of information. One must have an information that there is something wrong first and then one can act on it. I believe that not distinguishing of these two brings a confusion here.

--Gogino (talk) 00:38, 28 November 2008 (UTC)

I fully agree with Carol Moore on the importance, in principle, of statutes and regulations bearing on the USA mortgage industry. My comments, in italics, on the specific actions she lays out follow.

• 1977: Community Reinvestment Act. The American Right, and the libertarians, point to this as the point where the snake first crept into the Garden of Eden. Time will tell...
• 1980: The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 granted all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts and exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury (unlimited interest rates) limits. This law contributed to the S&L meltdown of 1987-88. Not clear if it is relevant to the subprime crisis.
• 1982: Alternative Mortgage Transaction Parity Act of 1982 (AMTPA) preempts state laws allows lenders to originate mortgages with features such as adjustable-rate mortgages, balloon payments, and negative amortization and "allows lenders to make loans with terms that may obscure the total cost of a loan". If states had the power to ban such mortgages, how many would have elected to do so?
• 1986: Tax Reform Act of 1986 (TRA) prohibited taxpayers from deducting interest on consumer loans, such as credit cards and auto loans, while allowing them to deduct interest paid on mortgage loans, providing an incentive for homeowners to take out home equity loans to pay off consumer debt. This law explains why there are so many home equity loans outstanding. Such loans are valuable primarily to people who find it worthwhile to deduct mortgage interest. Most people who qualified for subprime mortgages either did not itemize, or if they did, paid tax at a marginal rate not exceeding 15%. In any event, home equity loans are not securitizable, so that issuing banks must hold them to maturity. This eliminates the moral hazard inherent in securitization. Sure enough, default rates on home equity loans have not been high.
• 1992:Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities. Down the slippery slope...
• 1994: Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) repeals the interstate provisions of the Bank Holding Company Act of 1956 that regulated the actions of bank holding companies. Don't see how this matters.
• 1995: New Community Reinvestment Act regulations allow community groups that market loans to collect a broker's fee. Strikes me as trivial.
• You omit the the 1995 amendments to the CRA and the regulations enforcing it, that effectively put the burden of proof on lenders instead of plaintiffs. Those amendments also legalized the securitization of subprime mortgages, which began in 1997; see below.
• 1997: The Taxpayer Relief Act of 1997 expanded the capital-gains exclusion to $500,000 (per couple) from $125,000, encouraging people to invest in second homes and investment properties. That exclusion can be invoked only once, after one's 55th birthday, and applies only to capital gains realized on one's principal residence. Most homeowners prefer to remain homeowners until the infirmities of age drive them into a retirement home.
• 1997: Freddie Mac helped First Union Capital Markets and Bear Stearns & Co launch the first publicly available securitization of CRA loans... This was indeed fateful.
• 1999: Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans. Once again, Fannie Mae sent the wrong message...
• 1999: Gramm-Leach-Bliley Act repeals Glass-Steagall Act, deregulates banking, insurance and securities into a financial services industry allow financial institutions to grow very large. Not clear how this is to blame.
• 2000: Fannie Mae and Freddie Mac start buying billions in subprime mortgages... Bluntly, this sent a disastrous message to the world financial industry that subprime mortgages, and MBS based on then, were OK. If subprime mortgages had not been securitized, the dollar amount outstanding would never have grown big enough to cause a crisis.
• 2000: Commodity Futures Modernization Act of 2000 defines interest rates, currency prices, and stock indexes as "excluded commodities," allowing trade of credit-default swaps by hedge funds, investment banks or insurance companies with minimal. Interesting, but I can't comment.
• 2000-2001: US Federal Reserve lowers Federal funds rate from 6.5% to 1.75%. That flooded the system with liquidity in search of borrowers.
• 2002: President G.W. Bush sets goal of increasing minority home owners by at least 5.5 million by 2010. This reveals a cargo cult approach to reducing the USA underclass by turning much of it into homeowners without regard to ability to pay. Homeownership is a consequence of personal responsibility, not a cause. Rather, it is responsible people that can qualify for mortgages and so become homeowners.
• 2003: Fannie Mae and Freddie Mac buy $81 billion in subprime securities. This sent the worst possible message to the world financial industry. The GSEs in effect burned their charters, and no words are too strong to condemn what they did here. I hasten to add that while they may have acted unilaterally, the President and a majority on Capitol Hill quietly but surely agreed with this purchase because it made homeownership "more affordable" which is like motherhood and apple pie, no?
• 2004: You omit the SEC's decision that allowed investment banks to issue debentures at will, and to invest the proceeds in subprime MBSs.
• 2003-2007: The Greenspan led Fed was, it seems, asleep at the switch.

My bottom line: until mid-2008, the fundamental principle of the mortgage industry was: "If Fannie and Freddie do it, it's kosher."

Around 1980, the Chicago Tribune ran an article describing the gradual decline in downpayments over the 1970s, blaming that on competitive pressures. It went on to warn readers that that decline would inevitably lead to a dramatic rise in defaults and foreclosures. Low downpayments contributed to the S&L crisis of 20 years ago. Downpayments continued to decline because issuers of MBS, first Fannie and Freddie then Wall Street, began to buy mortgages with downpayments under 20%, then under 10%, then zero or near it.132.181.160.42 (talk) 02:38, 27 February 2009 (UTC)

I think you both have valid points. I'm beginning to see that the doctrine of "original research" seems to be an issue here. That is, we are not supposed to be doing original analysis and punditry, we are supposed to rely on the analysis and punditry of others. My opinion or yours or other editors are not important, and ours is a more rote task of compiling what is already out there. To sum up: we really should be discussing what others say and not try to analyze the roots of subprime ourselves.--JohnnyB256 (talk) 15:55, 29 November 2008 (UTC)

To agree, it's more important to find a reliable source that says what you said than say it yourself since this is a sourced Encyclopedia and not a personal opinion discussion list. But if doing so motivates you to find those sources, great! CarolMooreDC (talk) 23:16, 29 November 2008 (UTC)

New Edits

Adjustable rate mortgages were not new in 1982, per two reputable sources. Since I apparently cannot remove the contention that they were new, I am in the absurd position of having to put both things down at the same time. --Dlawbailey (talk) 02:15, 25 April 2009 (UTC)

Adjustable rate mortgages were not new in 1982, now per three reputable sources. Neither were option ARMs new in 1982. The 1982 act is about preemption which is an extremely interesting and germane question, but it is not handled appropriately or truthfully here, inappropriately citing an opinion-of-opinion piece which misrepresents the legislation. As for the 1995 change in GSEs and subprime loans, I am only getting started. There was no change to the tax code. There was no tax consequence specifically linked to the GSEs taking on the loans and none is cited.--Dlawbailey (talk) 07:09, 25 April 2009 (UTC)

Failure of Free Market

the basic problem or most important one that triggered subprime crisis is declining house prices. Why has no one yet explained anywhere on the internet how did the real estate market in US work and what made it collapse and exactly how did it collapse(illustrate)
Creation of bubble!. ok but how did market fail to overcome this bubble and how this bubble was inflated in in first place explaining all that above using simple microeconomics and some macroeconomics will help millions. -- Asadlarik3 2008-11-12T06:37:18

The section Subprime_mortgage_crisis#Causes explains pretty well how it was inflated. It is not simple because it consists of many policies, rules, use of financial instruments, and regulations. Even just naming them all takes a long time. Later when the crisis will be better understood this ,hopefully, will be simplified.

"how did market fail to overcome this bubble" - that is a good question. The section Subprime_mortgage_crisis#Government_policies states "To increase home ownership was a goal of both Clinton and Bush administrations." In short, the market knows it cannot fight the government. Similar to Don't fight the Fed. --Gogino (talk) 06:03, 13 November 2008 (UTC)

the question is still open to be answered, no really be answered but more of teaching. —Preceding unsigned comment added by 116.71.66.94 (talk) 11:12, 13 November 2008 (UTC)

House prices have declined of late, from levels that were economically untenable. 30-50 years ago, the typical house in a USA metro area sold for 2-6x average household income. 1-2 years ago, that ratio ranged from 2-12x around the English speaking world, with cities in the interior of North American being under 6, and nearly all of the rest being over 6. House prices were weirdly high relative to the income available to meet mortgage payments.

The reason house prices rose so much was that a variety of (sensible) rules limiting mortgage lending were gradually relaxed. In particular, there was a major decline in the required downpayment as a percent of the buying price. Lenders have long required that the proposed buying price for a house bought with a mortgage be consistent with its appraised value, but such appraisals are not worth the paper they are written on. So buyers bid freely, knowing that they were likely to borrow all the money required to honor a winning bid. The usual intuitive notions of supply and demand must be qualified when demanders are buying with borrowed money.

Below I explain how this crisis is evidence that the USA mortgage market suffered from crony and not cowboy capitalism. In particular, mortgage securitization is a creation of Federal legislation.132.181.160.42 (talk) 05:55, 24 November 2008 (UTC)

adding external links

I'm new to this and i was told by an editor on this site that adding the link of a non profit org news site http://www.usbailout.org was a spam link.

I don't understand this? Can anyone comment.

Thanks, Phoenixauthor

Phoenixauthor (talk) 21:08, 12 November 2008 (UTC)

Thanks for the contribution, and the question. Check out the guideline at Wikipedia:External links. Basically a general link to a news site (as opposed to a specific link to a particular story) is not specific enough to help Wikipedia's readers. "Spam" is too strong a word for the editor to have used. UnitedStatesian (talk) 21:47, 12 November 2008 (UTC)

That link would be good, for example, on a page that lists news sites. --Gogino (talk) 03:50, 13 November 2008 (UTC)

Looking again at that link and it seems to me now that it is useful for Wikipedia readers since it is specialized in the bailout. Is this the only news site with this kind of specialization? --Gogino (talk) 05:31, 13 November 2008 (UTC)

Please list your qualification

all the editors of this article who make major or minor edits or additions please list your qualification so that the credibility of this information can be judged.

Since anyone can edit Wikipedia, you should consider the sources cited and look to those for any point you consider contentious or unclear. There are a variety of high-quality sources cited in this article. If there is a particular topic of interest to you, indicate it here and I'll point you to some helpful sources on it, if not already apparent in the article. I recommend the New York Times "The Reckoning" series on the crisis and the article "The Subprime Mortgage Crisis" in the external links by Robin Blackburn for starters. Read those and you'll know a lot about this topic.Farcaster (talk) 04:24, 14 November 2008 (UTC)

I'm not a contributor here, just lurking… but considering that the crisis has engulfed not just the global financial system but the entire world economy, it might be a good suggestion to start figuring out who can speak with reasonable authority. "Just read the sources" and "newspapers are informative" are good mantras, but writing a good article here requires the efforts of several people who have spent their careers "just reading sources," and for the sake of writing comprehensibly, hopefully they have already written some too. Even then it can only be a summary of the problem's full scope. Potatoswatter (talk) 05:59, 14 November 2008 (UTC)

Only for the sake of betterment of this article i gave that suggestion because this article does not by any means looks as an encyclopedic article but appears more of a newspaper item. I even don`t have any idea how much work this massive article might have required from the contributors but an encyclopedic article is more of a study then just statements and statistics.

If any contributor thinks this suggestion useful and tries to figure out the right way to to do this article may help many. And many will agree that this article at least requires contributions form scholars and then the professionals. —Preceding unsigned comment added by Asadlarik3 (talk • contribs) 12:11, 14 November 2008 (UTC)

It would be great to have some economists work on this and it would make my day to have a pro copy editor here also. But that is the fun of it; amateurs with an interest in the topic quoting the gurus. Wikipedia is about the "democratization of information" --for all of us, not just elites or so-called experts. One thing I've learned in studying this over the past year is that there are few experts on this crisis; we are in new territory. For example, Secretary Paulson asked for a blank check, $700B with no oversight in a 3 page memo. One month later, the initial buying of problem assets is out the window and we are recapitalizing the banks. Bloomberg is suing the Fed for disclosure on who it is lending to--$2 trillion being loaned against ever-shakier collateral. The SEC let the investment banks do what they wanted. You have senior management in banks and mortgage companies saying the companies are fine and two weeks later they file for bankruptcy or go to the markets for more capital. One must question the credibility of all these experts. Don't be shy about contributing; some common sense is all you really need to be helpful here and enthusiasm for this topic. Plus, experts tend to have specific agendas, which distort the facts. For example, you might think tax cuts raise government revenues if listen to conservative experts, until you study the data and realize that is baloney, which gets cited even by Presidential candidates.Farcaster (talk) 14:43, 14 November 2008 (UTC)

This article seems marginally better than when I stopped by a few weeks ago. Maybe I am in a better mood. It still wanders around the lot too much and tries to be too comprehensive. The whole things appears to be a synthesis of what's out there rather than relying on comprehensive studies or articles that put the whole picture together. I think articles that that need to be used as the framework and then all the pieces will fall together.--JohnnyB256 (talk) 20:30, 14 November 2008 (UTC)

It is very bad form to ask people to list their qualifications, since the WP:RS should speak for themselves. See Wikipedia:Etiquette for general rules about cooperative editing.

I agree with JohnnyB256 excellent summary of problems with article and solution and have been gathering high quality comprehensive articles for just that purpose. Obviously there is a big difference between the "blame the government" verus the "blame capitalism" crowd, and lots in between. But any article that ignores the impact of the list of laws and regs I added below is not sufficiently comprehensive. Carol Moore 20:54, 14 November 2008 (UTC)Carolmooredc

That's a very good list. This whole subject is exhausting and I admire your energy.--JohnnyB256 (talk) 22:25, 14 November 2008 (UTC)

I agree with most of your statements, farcaster, however building an accurate, NPOV, and complete as possible article trumps the fun factor and anonymity. Although it is poor wikietiquette to ask for qualifications, the information may certainly be helpful to expose agendas as well as to appraise contributions. Moreover, anyone can lie about their resume, but one would expect a qualified economist to be better at adding references and providing criticism and management—respecting certain editors more doesn't mean kicking the "amateurs" out. Perhaps it would be better to ask for background, such as "What are your favorite books/sources relevant to interpreting the crisis?"

The notion that common sense is all that's needed, and pointing at the pandemonium in Congress, is the only thing I disagree with. Economics is ever the "soft" science that should be "hard," but that's evidence of the difficulty of the subject rather than the cluelessness of the experts. They're trying to solve the problem, anyway, and we're just trying to summarize it. Although I always try to be an optimist, and usually am, economic crises (including all wars) I have little hope for. Personally I'd like to see this article list and demolish every proposed solution, with equal bias and prejudice against each. (Or, maybe in a satellite article.)

Anyhoo, my main problem with the current revision is the rapid descent to dense language, with "characterized by contracted liquidity in global credit markets" not being lay language, or really correct: "contracted liquidity" is a characteristic of all bubbles, not this one. It should say

For many years prior, lenders chose to make loans with low, yet uncertain, chances of repayment. It gradually became clear how many loans would not ever be repaid, with the money lost to the lender. This "disappearance of money" characterizes an economic bubble. The rise and fall of any bubble is defined by a delusion causing a resource to be overvalued. The subprime mortgage bubble is characterized by mortgages made by, and traded among, various banks. During prosperous times, it was assumed that homeowners could gradually repay their debts with future wealth, causing a bubble to form: the loans were overvalued, worth even less than the initial investment given to the homeowner. Overvaluation was (and is) perpetuated as banks trade loans between each other, trading "known evils" for "unknown evils," and often adjust the terms of the loans themselves, slowing the process of measuring their total losses. Due to the nature of a mortgage, the collapse of the bubble directly causes evictions by home repossession, as well as the loss of capital from banks associated with all financial panics.

How does that look? I tend to err toward repetition but that doesn't look excessive to me. Issues with actually measuring the size of the bubble and specific effects should follow the first paragraph. Personally I think we should even avoid the term mortgage—doesn't credit card debt play a major role too? (I wouldn't know how to start comparing its relative contribution.)

And for what it's worth, I have no qualifications, not even the patience to wade through the present article. (I did, long ago, move this article to its present title, though.) However I'm generally interested in economics and keep a good habit of seeing world issues through a filter of disbelief in free lunches, which is apparently what bankers are incapable of. Potatoswatter (talk) 00:20, 16 November 2008 (UTC)

I've taken a crack at simplifying and internationalizing the intro, as this thing is much more global now. I would suggest the text above for a financial bubble article or financial crisis article. I like your idea about addressing the solutions in more depth, as we have been listing responses up to this point and not really analyzing them (they now have some runway behind them and it makes sense at this stage to start). Once we get past the causes, this article loses steam quickly. I'm wrestling with how to fix the bottom third, as it is primarily lists at this point. Some assistance from editors here with that would be great.Farcaster (talk) 08:07, 16 November 2008 (UTC)

Wikipedia is not made by experts writing their opinions here. It consists of commonly agreed or sourced information. Check the sources WP:CS to assess credibility.--Gogino (talk) 01:06, 28 November 2008 (UTC)

The intro is much too long, given Wikipedia norms; I propose moving most of it to the start of section 1. The writing of the intro leaves a good deal to be desired, and there are some questionable assertions and emphases. I changed the entry to correct these objections, but Farcaster reverted my edits. His action prompts me to write here. As for my qualifications, I teach in a business school and did my Ph.D. in a leading USA business school, specializing in finance and economics. I also agree that much of the prose of this entry is turgid, but I may not be the best person to correct that.

The best reading I have encountered about this crisis is the 2008 working paper by Reinhart and Rogoff; they may be mistaken, but I can vouch for their credibility. Too much of this article consists of citations of personal opinions by various public figures of varying credibility. That said, I suspect that fundamental change in the nature and thrust of this entry is not possible until more books are scholarly articles are written about its subject.

My take (POV). The crisis stems from irresponsible (subprime) mortgages issued to satisfy the Community Reinvestment Act. The issuers bore no default risk, because they quickly sold the dubious mortgages to mortgage pools, sometimes even ones sponsored by Fannie Mae and Freddie Mac. Thus moral hazard. The resulting MBSs were seriously overrated as investment grade by agencies suffering from conflicts of interest. Low US$ interest rates assured that there was a good American and global appetite for subprime MBSs, assuring that the crisis soon had a global scope. The deep problem is that Americans see access to mortgage finance as part of their birthright. The American residential mortgage industry is seen as "too sacred to fail." The crisis is is not a failure of cowboy capitalism but of crony capitalism, a very seductive combination of privatized gains and socialized losses!

The long run solution is simple and painful: go back to the 20% downpayment USA mortgage lenders required in the 1950s and 60s. Too harsh you say? Well, required downpayments in continental Europe range from 20% to 50%. The higher the downpayment, the fewer the defaults. More immediately, I have no prima facie objections to what Gordon Brown has proposed, namely that troubled financial firms should have the option of selling to the government new preferred stock paying a substantial dividend. The dividend on the common stock should be zero until this new preferred stock is retired.132.181.160.42 (talk) 05:39, 24 November 2008 (UTC)

Thanks for taking this up here and I appreciate your help. I happen to agree with your solution, by the way. I would add to that restricting the leverage of key financial institutions. We've had an ongoing and spirited debate in this article and discussion pages over the past year regarding the causes. I want to be sure we balance the "government caused this" school of thinking with the "capitalism/bubble psychology" school. Subprime debt issuance jumped from around 10% of mortgage issuance to 20% during 2004-2006. Those three years seem to be the problem, with the 2006 vintage particularly awful. CRA is much older, even with amendments. This New York Times article shows the competitive pressure to issue the mortgages that turned toxic.NY times. I think the big 5 investment banks, all of which are in big trouble or BK, with $4 trillion in debt, are a major part of the uncertainty. They were not forced to take on massive leverage, nor were individuals. The U.S. has been spending beyond its means for a very long time and it has now caught up with us. Robert Shiller (a pretty credible economist) places most of the blame on bubble psychology. The G20 quote casts a wide net. I'd be happy to work with you on shortening the part above the table of contents and moving much of the intro into the first section. But I will push back on balancing too much to the "government caused this" school.Farcaster (talk) 06:37, 24 November 2008 (UTC)

The entry should give equal time to a range of views, and those views not need include my own, as I have yet to publish them in hard copy. But I am adamant that the Intro is far too long, and is full of sentences that belong below the Table of Contents. I put an edited version of most of the present intro in section 1, but you undid that. I invite you to revert your reversion.

The CRA is the sort of law whose pernicious consequences require 10-20 years to manifest themselves. The 5 New York investment banks went overboard on leverage only after a crucial 2004 SEC decisions let them do so. I am not a fan of Robert Shiller. He is one of those fellows who pulls a long face, wrings his hands, then says with a sigh "Aren't my fellow human beings an awful lot..." Not very helpful, really. Reinhart and Rogoff rightly remind us that credit crises are as old as the hills. I think that central banks should have the standby authority to set minimum downpayments on real estate transactions, and thus have the power to prick any house price bubble.

There is nothing wrong whatsoever with the world stock of physical and human capital, and the capacity of the human race to innovate. The problems are purely financial and matters of business law. If credit markets remain frozen 4-6 months from now, and the unemployment rate continues to rise inexorably, the central banks of Japan, USA, Canada, UK, and Eurozone, should agree on concerted action to raise the price levels of their respective currencies by 30-40%. This can easily be achieved via coordinated open market operations. The resulting massive injection of liquidity will quickly raise wages, and hence the ability to meet mortgage payments. It will also stop the house price decline, and hence the incentive to default on mortgages. Most important, it will reduce the real value of outstanding debts, assuring that a much larger fraction of outstanding debts will be repaid. The resulting 30-40% decline in the real value of debts has already been recognized by stock markets around the world.132.181.160.42 (talk) 06:06, 25 November 2008 (UTC)

> (...) 2004-2006. Those three years seem to be the problem (...)

If something is visibly screwed it takes a short time to collapse but it takes a long time get visible.--Gogino (talk) 01:21, 28 November 2008 (UTC)

> I changed the entry to correct these objections, but Farcaster reverted my edits.

I cannot find what was removed. Could you or Farcaster point me to the exact revision where it was removed? Thank you. --Gogino (talk) 02:17, 28 November 2008 (UTC)

We're good to go Gogino. The new intro and organization as of this posting are OK with me.Farcaster (talk) 02:32, 28 November 2008 (UTC)

> I changed the entry to correct these objections, but Farcaster reverted my edits. well this might have been done but i am sure if you had tried to discuss those problems in `discussion`. Farcaster would have himself made the changes. He manages this article regularly and if you can provide your professional insights what else will this global article require. I also have to admire Farcaster for his commitment to article and consideration to contributors. —Preceding unsigned comment added by Asadlarik3 (talk • contribs) 19:38, 30 December 2008 (UTC)

Scope of this article

Conventional wisdom seems to be the financial crisis is lessening with the recapitalization of the banks and now the broader economic effects are hitting outside the housing and financial markets as consumers are slowing spending and businesses are preparing for a downturn. For example, in the U.S. we lost a major retailer and the Big 3 auto companies are getting close to a bailout or bankruptcy. I'd propose limiting the scope of this article to the housing market and financial market pieces; any discussion of the other markets would be limited to quick blurbs and handoffs. What do you all think?Farcaster (talk) 08:07, 16 November 2008 (UTC)

Agreed.--JohnnyB256 (talk) 23:56, 17 November 2008 (UTC)

I was just proposing something to that effect at Subprime crisis impact timeline after someone dumped a bunch of overly detailed global reverberation timeline stuff there, the kind of stuff we deleted a couple weeks ago. My proposal to add to (slightly reworked) introduction something like: For more information on reverberations of this crisis throughout the global financial system see Financial crisis of 2007–2008 or Global financial crisis of September–October 2008. Or whatever other articles have been or are to be created of relevance. Carol MooreCarolmooredc

Sounds good to me. If you cannot squeeze it into the intro, the section on impacts would work OK also.Farcaster (talk) 00:43, 25 November 2008 (UTC)

Charts

There are some interesting looking charts illustrating this article. They are, however, far too small to be useful unless you click on them. Is this standard practice?--JohnnyB256 (talk) 23:58, 17 November 2008 (UTC)

MBSs and CDOs

I am sorry, but if one of main reason of the ciris are MBSs and CDOs structures, and the whole credit risk has been hiden under MBSs and CDOs, the diference between MBS and CDOs needs to be explaind somehow.

- In the whole introduction CDOs are not even metions - In the section "Understanding Risk" CDOs suddenly appear, but merly as a synonimum for MBS - In section called "Securitization praticies" CDOs are not even metioned

What exactly are the differences between how the crisis materialized viac CDOs compared to MBSs securiities?

On the plus side, I really need to give credit to the authors of the paragraph on CDS, which are clearly and well explaind. Could we work something explaning seprately the role of MBSs and separately the role of CDOs?

Further, did CDOs of CDOs play any role here at all? If yes, I believe it would need pointed out somewhere, because the chain of CDO^n surely has different implications that na simple CDO.

Thank you, and compliments for the great job on this article so far. --PBES (talk) 03:09, 25 November 2008 (UTC)

Thank you for your comments. Science fiction writer Ben Bova has a wonderful saying for dealing with complex gadgets: "Tell them what it does, not how it works." I'll see if I can sneak in something about opaque and complex instruments like that. If you would like to go into CDO in great detail, there are supporting articles for those and they are linked. The subprime mortgage crisis background article is a place I've tried to put the complex concepts should the layperson want to suffer further with the terminology. You are welcome to add to that also.Farcaster (talk) 03:41, 25 November 2008 (UTC)

Thanks. I am mainly interested in understanding the difference between diffrent roles MBS and CDO played in the crisis. If I am correct MBS and CDO should be different securitization structures, and thus should impact the balance sheets in different ways. —Preceding unsigned comment added by PBES (talk • contribs) 08:58, 25 November 2008 (UTC)

> one of main reason of the ciris are MBSs and CDOs structures (...)

It that's true the crisis wouldn't happen without them. Would bad loans exist without them? Of course, with so many incentives... Would it take longer time? Yes, but that's the only big difference. MBSs and CDOs are accelerators of the crisis but they do not look to be the reasons. --Gogino (talk) 01:36, 28 November 2008 (UTC)

This is important point, for I think the crisis would not happen without CDOs, MBSs, and CDSs. It would not bee so unexpected and so deep. And there would be a better due diligence. But my main question is, how are MBS different to CDO in the crisis? Did they have the same effects, or were CDOs more evel than MBS? Everybody, is like blah blah ciris, but when it comes to detail on how the CDOs and MBSs actually worked in the crisis, there is little answer. (With the exeption of the paragraph on CDS, that is very well written). --PBES (talk) 18:19, 30 November 2008 (UTC)

Sections 3.2, 3.3 are a problem

Most statements in sections 3.2 and 3.3 are one or more of irrelevant, trivial, unsubstantiated, pointless, or downright false. These sections should also be combined and drastically pared down.

Here's all that need be said. The typical national stock market attained an all-time high sometime in 2007. It has since declined 40-70% (the tables on the last page of issues of the Economist document the decline since 31 December 2007). The declines since 15 September 2008 have been especially brutal. 2008 will see the largest decline in the USA stock market since 1931. This worldwide bear market is invariably blamed on the worldwide credit crisis stemming from the USA subprime mortgage crisis. Someone should research the performance since 2005 or 2006 of, say, the finance industry subindex of the S&P 500.123.255.28.93 (talk) 07:41, 29 November 2008 (UTC)

I agree with summarizing the two paragraphs. Your line of argument seems reasonable to me.Farcaster (talk) 07:54, 29 November 2008 (UTC)

Material that doesn't reflect references

I'm updating the time line with some private company-related info and finding that what is alleged to be in some articles used as sources is not in there. I'm noting most of those I've found; might have missed a couple. So let's be careful :-) CarolMooreDC (talk) 19:07, 6 December 2008 (UTC)

Interest-only mortgages; low-down-payment mortgages

The main article does not seem to refer to interest-only mortgages. It does mention (to its credit) adjustable rate mortgages. It does not seem to mention balloon mortgages. I am not sure that it mentions low- or no-downpayment mortgages.

All of these are relevant to the current high rate of mortgage default.

Adjustable rate mortgages and balloon mortgages are ticking timebombs, except in special cases (e.g., qualified speculators). No one can predict the future. Monthly payments can rise significantly. Even homeowners who are employed (who have not lost their jobs) can find themselves unable to pay such mortgages, resulting in defaults. It's bad enough that in many states property taxes can rise dramatically (and have done so) and unexpectedly. It's bad enough that energy costs can and have risen dramatically and unexpectedly.

I am not sure the main article mentions the role of unscrupulous mortgage brokers, epitomized by Countrywide Financial and its CEO Angelo Mozilo. Mortgages were sold to borrowers on the basis of monthly payments, with brokers taking cash out of the mortgaged properties. This exploitative practice contributed to putting properties "under water," tendind to prevent them from being sold for fair prices and avoiding defaults. Jabeles (talk) 22:07, 7 December 2008 (UTC)

Take a look at the "High-risk mortgage loans and lending /borrowing practices" section. That covers most of your points above. Mention what else you'd like added.Farcaster (talk) 01:46, 8 December 2008 (UTC)

Does anyone have a citation for what rule change by the fed allowed banks to start giving these interest only mortgages? LK (talk) 03:16, 8 December 2008 (UTC)