Just wanting a sense-check here...

[andrewducker]

[Poll #1276047]

Comments

[drplokta]

Where's the tick-box for "The credit rating agencies that gave AAA ratings to these complex mortgage-based financial instruments that they manifestly did not understand"?

[sbisson.livejournal.com]

At the end of the day we *all* fucked up here.

[andrewducker]

That's waaaaay further up the chain. If we're talking about "who is responsible for companies buying up loads of investments they didn't understand?" then yes, it's the company and the ratings agencies.

There's a fundamental problem at the basic level though, of people wanting to live beyond their means, and banks lending them the money to do so.

[chuma.livejournal.com]

Abso-bloody-lutely mate. It was the inter-bank lending that led to this crisis otherwise it would have just been those banks who had been stupid enough to get bad loans on the back of rising house prices that would have suffered not the entire industry.

[henriksdal.livejournal.com]

where's the box for "I don't know! I don't know! I don't understand what's happening! Is it the end times yet? Waaa!"

[palmer1984.livejournal.com]

Neither. I blame deregulation.

If banks have liquidity they'll lend it, and if people can get loans they'll take them. It's in their DNA.

[a-pawson.livejournal.com]

The problem was compounded, certainly in the US, by a system in which brokers received a flat fee for each mortgage arranged. They had no interest in whether or not people could or did repay the loan as their commission was simply paid on signature.

[bohemiancoast.livejournal.com]

It's actually pretty fucking outrageous to blame the borrowers. We were all brought up to believe that banks would not lend more than x times your salary, (where x was 3, ish, or 3x the higher + the lower). I think most people continued to believe that 'how much professional lenders will lend based on your income and the property' was a good test of affordability, even when it clearly wasn't.

If there's no onus on the lenders to check affordability, then what are they doing asking for income details?

[andrewducker]

In _any_ contract there's an onus on both sides to make sure they can live up to it. Sure, the banks shouldn't have been lending them money, but there's a clear duty on individuals not to sign up to things they can't fulfill.

Many people clearly continued to believe things that were untrue - and regulation should have helped there, but many people go through life without paying any attention to financial matters, and then blame other people for not pointing out their idiocy.

[chuma.livejournal.com]

I disagree almost completely. If you take out a loan and can't afford it then that is your responsibility not the bank's. When the house prices were rising this wasn't a problem because the asset in the house meant if people had to default, the bank took the house and sold it at a profit. This is no longer the case.

My point is that blaming others for you doing something stupid because they didn't warn you is passing the buck of personal accountability.

[ciphergoth.livejournal.com]

And of course, the more you can borrow, the higher house prices go, feeding the bubble.

Really I blame neither of the above, because the lenders don't have much choice but to match those around them risk-for-risk, so there's a Red Queen effect unless regulation comes in to save them all. In other words, I blame the Government...

[intelligentrix.livejournal.com]

It's my understanding that a lot of the loans that went into default did so not because the people who took them out couldn't afford them, but that they couldn't afford them once the ARM adjusted to an absurdly high rate. At a reasonable interest rate, these people could have and would have continued to make their payments and the banks would have made their money, albeit over a longer span of time.

[andrewducker]

It's my understanding that the loans started off at an absurdly low discount, and then reset to the standard market rate. And that this was made clear in the original documents, which people just don't read.

[a-pawson.livejournal.com]

The problem may stem from people borrowing money they couldn't pay back, but that is only a tiny part of the problem. If it were just people defaulting on mortgages and loans, the banks would take a financial hit, but would be able to absorb it easily. The fact they then used these mortgages to leverage further loans, which were in turn used to leverage further financial deals is the problem. By the time you have aded in 1 steps, the amounts of money secured against the initial mortgages are astronomical.

It's hard to blame Joe Bloggs who took out too big a mortgage for that.

[palmer1984.livejournal.com]

I'm going to say again that this poll is very silly. The people who borrowed too much money were possibly unpragmatic, but they are not responsible for what happened to the entire economy. They were not going to take the risk to the whole economy into account. You could argue (and I won't, because I don't have that English Protestant love of seeing "greed" corrected) that it's their fault if they're now poor. But arguing that they were to blame for what is happened to the entire economy is just idiotic. Taking a loan out is a personal risk, you don't think about what happens to the entire economy.

Same with the banks - they were not thinking about the systematic risk.

Again tougher regulation is needed.

[andrewducker]

Aaah, I wasn't blaming them for the entire economy, I was asking if they were to blame for what happened to _them_.

[rhythmaning.livejournal.com]

There is an awful lot about this financial crisis that I don't understand. Particularly that the numbers are so, so big. $700bn for the US and approx $1,000bn for the UK - let's say $2,000 bn world-wide (nice easy numbers - I am busking this now!) - and average house prices of say, $200,000 (I think they were a lot cheaper in the US than they were over here) - so that is 10 million bad mortgages. Mmm, maybe no so unbelievable!

On the other hand, it is a hell of a lot of capital that the banks have lost - essentially to cover profits booked in previous periods on loans which went bad. When RBS asked for £12bn back in May-ish, that was more or less the combined net profit for 2005 and 2006 - and yet the trades that produced the toxic loans (assuming they stem from US sub-prime mortgages, CDS and so on) were just a small part of the business.

I think I am working up to a post about this myself - sorry to use your comments box as a space to try to articulate some of my thoughts!

[andrewducker]

Answered this one yesterday:
http://scienceblogs.com/goodmath/2008/09/how_mortgages_turned_into_a_tr.php

[fetket.livejournal.com]

Can we also have:

The share dealers who decide to use a delicate financial moment to tear down healthy banks for profit.

[xquiq.livejournal.com]

Add, the system that made it rational to repackage and sell on high-risk debt, thus increasing the overall risk burden within the market. The fact that this was recognised and effectively sanctioned as a means of reducing individual risk exposure, despite market indicators pointing to a downturn in the property market.

Also, the combination of an active rumour mill talking the country into a recession while key contributors to said rumour mill held short positions on the shares of major financial institutions.

Human nature: if it's legal & it appears to be the rational choice under imperfect information, then that's the choice most institutions will make. The only way I see to get round that is regulation.

[xquiq.livejournal.com]

Oops - posted my comment as a reply to yours rather than a direct reply to andrewducker as I had intended.

[aliiis.livejournal.com]

[x] capitalism.

[ashfae.livejournal.com]

I'll take "Kind of everyone, Bob" for $500 please.

[anef.livejournal.com]

I know it's a bit late, but I'd like to blame an education system that seems to have left lots of people with no idea of how to budget, or calculate interest payments, or work out how to save for their retirement, or anything that they will actually need to survive the rest of their lives.

[andrewducker]

I totally agree. We are leaving people unprepared to cope in the modern world.