Question by ideogenetic: Why did the Clinton and Bush deregulation regime lead to misallocation of capital ending in financial collapse?
Is it now obvious that markets do not know best how to allocate capital?
“And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.” – Alan Greenspan, finally realizing the flaws of capitalism that Marx understood in the 19th century.
Best answer:
Answer by Bo Bo What they called deregulation wasn’t.
Question by Adam G: Explain securitization and how it relates to the global financial crisis?
Best answer:
Answer by gorilla When an organisation lends money it makes a legal charge on an asset ie the house for a mortgage. This is of value as the house could be sold and the bank receives interest payments relating to the debt. Over a period of time there could be thousands of such debts and the organisation may decide to sell a “parcel” of these to raise capital for other things or to improve the liquidity in its balance sheet. This is called securitization.
The global problems arose when some US companies lent money for houses to people without the ability to continue mortgage payments (it was called trailerpark lending) on the promise that the mortgage could be renewed at favourable interest rates (less than rent) and falsely inflated the values of the properties thus increasing the debt of the customer. They then securitized the lending but the value was much less than they claimed and when the property values fell, people defaulted as the debt was more than the value of their property and the banks who had purchased the parcels in good faith found that they were sat on useless paper( assets were much less than the expected value). This reduced the value of their balance sheets and also reduced their liquidity which led to distrust in the financial community as no-one knew which bank was sat on reduced value assets. The lending lines between banks were based on good faith but these were cancelled as no bank wanted to be pulled under due to the failure of another. This created a situation where credit disappeared from the system so the banks could not lend to their own customers.
It gets a bit more involved but I hope that answers your question.
Question by Mister Chartreuse: Can someone recommend a good book that thoroughly describes financial terms/concepts (for investing)?
An introductory book, which describes terms/concepts like securitization, derivatives, bond-markets etc.
I want to understand these things to the end of knowing how to interpret/read company balance sheets, market speculation/volatility, currency markets etc, so that I can have some general financial/investment wherewithal.
Any suggestions would be greatly appreciated.
Best answer:
Answer by cactusgene ‘Investing for Dummies’ is a good book for a novice and it is available on Amazon. The advanced concepts you mention above are quite complex, but try the links below:
Question by Rocky: What caused the Subprime Mortgage Crisis that Caused 2008 Financial Disaster?
New Study Finds Democrats Fully to Blame for Subprime Mortgage Crisis that Caused 2008 Financial Disaster
Posted by Jim Hoft on Saturday, December 22, 2012, 9:48 AM
In his early activist days, Barack Obama the community organizer sued banks to ease lending practices.
State Sen. Barack Obama and Fr. Michael Pfleger led a protest against the payday loan industry demanding the State of Illinois to regulate loan businesses in January 2000. During his time as a community organizer Barack Obama led several protests against banks to make loans to high risk individuals. (NBC 5 Week of January 3, 2000)
Here’s something that won’t get any play in the liberal media…
A new study by the respected National Bureau of Economic Research found that Democrats are to blame for the subprime mortgage crisis.
Investor’s Business Daily reported:
Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.
But a new study by the respected National Bureau of Economic Research finds, “Yes, it did. We find that adherence to that act led to riskier lending by banks.”
Added NBER: “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts,” or predominantly low-income and minority areas.
To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found.
The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.
CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.
It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.
But they had to loosen underwriting standards to do it. And that’s what they did.
Republicans warned Democrats of the impending doom in 2004.
video
Fannie Mae/Freddie Mac Hearings 2004
