2008 Recession

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Re: 2008 Recession

Post by NVGdude » Fri Oct 05, 2018 2:00 am

Langenator wrote:
Tue Sep 25, 2018 12:18 pm
Termite wrote:
Tue Sep 25, 2018 10:06 am
A big part of it was banks making home loans to people who didn't qualify for them.
They were doing this for 2 reasons: #1, they were under pressure from the fed.gov to "help" minorities be home owners, and #2, when sketchy home loans are guaranteed by Uncle Sugar, bankers have little incentive to make sure the borrower can "tote the note" because taxpayers will bail out the bank.
A knock-on effect to the lowering of lending standards for the minorities who wouldn't normally qualify was that the standards got lowered across the board - so people who would have normally qualified for an "entry level" home loan were given access to much bigger loans. Couple that with low-initial rate ARMs and the "you can just refinance before the rate goes up - the market is always rising and you'll have lots of equity by then" prevailing 'wisdom' and you've got a recipe for disaster.
Also FOMO (Fear of Missing Out). As the bubble inflated people were literally being priced out of the market, which encouraged them to enter the market faster and with less equity. Thus inflating everything even faster.

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Re: 2008 Recession

Post by Windy Wilson » Thu Oct 11, 2018 1:52 am

Fear of missing out drove the banks as well; there's a saying that no one ever got fired for buying IBM.
Funnywell, now . . .

As for "The Big Short", pretty realistic, except the houses they were using as capital goods were mainly in the poorest sections of the cities, because the prices were lower and entry was cheaper.
The use of the word "but" usually indicates that everything preceding it in a sentence is a lie.
"I believe in Freedom of Speech, but". . .
"I support the Second Amendment, but". . .

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Re: 2008 Recession

Post by Vonz90 » Thu Oct 11, 2018 8:43 pm

A lot of the discussion here has been on why the downturn happened. That is fine as far as it goes, but was not the point of my post or the linked article. It was dealing with the monetary policies that turned what should have been a housing market correction into a huge recession of the century event.

This is important because the same mistakes can impact any current or future cycle on either the up or down side

The piece below discusses it a bit relative to now
Money Is Getting Looser
October 10, 2018 4:30 PM
The association of low interest rates with loose money and high interest rates with tight money is an understandable fallacy, but as Milton Friedman pointed out it is a fallacy. The low interest rates of 1930s America and 1990s Japan were, as he said, symptoms of very tight money. His argument implies, further, that falling interest rates can coincide with and even be caused by a tightening of monetary policy.

Because of that widespread fallacy, the conventional wisdom made a major error about the economic crisis that hit in 2008 and another one about the recovery that followed. Because the Federal Reserve did not raise interest rates during 2008, the CW failed to recognize that monetary policy had disastrously tightened during that year. And because interest rates were very low (and the Fed’s balance sheet swollen) thereafter, the CW mistakenly saw monetary policy during the early years of the recovery as extremely loose. (I went into all of this in a recent article for NR that went back over the monetary history of the last ten years.)

Now we’re seeing the exact opposite mistake being made: Monetary policy is getting looser but a lot of people think it’s getting tighter because interest rates are rising. (President Trump thinks they’re rising too fast.) Scott Sumner makes the case that money is getting looser here: Whether you gauge looseness by looking at inflation, inflation and unemployment, or nominal spending, monetary policy has been turning more expansionary.

Sumner thinks monetary policy is close to neutral (as it should be) right now, and is agnostic about whether it is a little too expansionary or a little too contractionary. But I’d add that the direction in which the Fed is going is a symptom of what’s wrong with its approach to monetary policy. Monetary policy shouldn’t get looser as an economy strengthens. It should make the business cycle milder, not more extreme. But it has been doing the latter, and confusion about interest rates helps explain why.

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