Real Cause of Collapses

[Libsmasher]

This thread is for people who want to argue REAL economic causes of the recent brokerage and Fannie Mae Freddie Mac collapses. People at the level of Top Grin's "Duhh! Splutter! It was the republicans!" blather are specifically disinivited.

If you read any of the articles on the collapses, you'll find all kinds of arcane reasons offered, which imo are proximate causes which don't go to the root cause. If you go back to the S&L crisis of the 1980s, they'll even say one of the reasons was "deregulation". Specifically, they'll say the S&Ls engaged in imprudent real estate investment.

During the early-mid 1980s, the US was still fighting to come down from the Jimmy Carter inflation, the highest since WWII:

S&Ls were pushed to invest in risky investments (with correspondingly higher returns) since in an era of high inflation it was demanded by investors. Now, S&L savers didn't have to worry about this risky strategy - why? Because the the FSLIC was guaranteeing their deposits. An individual's attitude was therefore "invest in anything you want, I'm covered."

In other words, the FSLIC, ie, the federal government, underwrote risky behavior by the S&Ls. In the absence of the FSLIC, savers would have taken a MUCH more careful look at what was being done with their money. After the S&Ls collapsed because of their risky loans, the demogogues started yammering that it showed that more regualtion was needed - akin to someone demanding more of the poison that made him sick.

In a like manner, Freddie Mac and Fannie Mae, created by the federal government, and with the implicit imprimatur of the government, was supposed to act as a secondary market for qualifying real estate loans made by lending institutions. Investors gladly signed up to invest in Freddie Mac and Fannie Mae's loans, because of the implict backing of the federal government. However, Freddie Mac and Fannie Mae got sucked into accepting the sub-prime loan bundles. Sure enough, the federal government bailed out their investors when the collapse came.

And now, you'll hear all kinds of demogoguery from the left for more government regulation, when analysis shows that it was government interference in the market which is precisely what caused the problems to begin with.

 

[Phoenix68]

This thread is for people who want to argue REAL economic causes of the recent brokerage and Fannie Mae Freddie Mac collapses. People at the level of Top Grin's "Duhh! Splutter! It was the republicans!" blather are specifically disinivited.

If you read any of the articles on the collapses, you'll find all kinds of arcane reasons offered, which imo are proximate causes which don't go to the root cause. If you go back to the S&L crisis of the 1980s, they'll even say one of the reasons was "deregulation". Specifically, they'll say the S&Ls engaged in imprudent real estate investment.

During the early-mid 1980s, the US was still fighting to come down from the Jimmy Carter inflation, the highest since WWII:

S&Ls were pushed to invest in risky investments (with correspondingly higher returns) since in an era of high inflation it was demanded by investors. Now, S&L savers didn't have to worry about this risky strategy - why? Because the the FSLIC was guaranteeing their deposits. An individual's attitude was therefore "invest in anything you want, I'm covered."

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See: 4:40 thru 12:00
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