Capitalism Rules, Socialism and Communism Suck Thread

[wufwugy]

Maybe you guys are more informed on the history of the 2008 financial crisis than I am, but the story I heard was that banks lacked solvency due to a high number of low-quality loans on their books. Loans that got there as a result of Clinton-era de-regulations that made mortgages more accessible.

It isn't clear how this can be the case in theory. Market valuations are based on expectations that the evaluated components are causing that valuation. If it were the case that the banks were behaving in any ways that were harmful that others could identify, that would have been reflected in how others assessed them, which would have impacted the banks' abilities to continue their behavior. This also applies to any regulators. They don't have a magic crystal ball that allows them to see things the markets don't. If it is the case that the markets didn't evaluate the bank behavior as bad, then it is necessarily the case that regulators couldn't do so reliably either

Essentially, it was decided that a policy of loan approval/disapproval that was based on financial merit was biased against poor people. And when democrats say "poor people" they mean "black people".

Then in the late 90's and early 2000's we saw an increased prevalence in some exotic financing programs that allowed more people to buy houses. Not only that, vehicles like the 'interest-only' mortagage allowed people to buy houses they couldn't afford by offering extremely low payments in the initial years, followed by inflated payments in the later years. They sold people on the idea of "hey, don't worry about what happens in 7 years from now. YOu're a smart, hard working guy...you'll surely be making more money by then"

So i'm not really seeing how regulation caused the crisis. Seems to be quite the opposite. the government allowed predatory practices to take over the market. Had they been a little more on top of things....ie. regulated more....perhaps the banks could have maintained solvency

The question is why did this stuff happen? Why did banks act atypically? It was because of incentives the regulators gave them, like the government creating higher demand for mortgages and created the mortgage-backed securities market, and like the government giving guarantees to bankers that the government would cover their risks and failures.

[BananaStand]

It isn't clear how this can be the case in theory. Market valuations are based on expectations that the evaluated components are causing that valuation. If it were the case that the banks were behaving in any ways that were harmful that others could identify, that would have been reflected in how others assessed them, which would have impacted the banks' abilities to continue their behavior. This also applies to any regulators. They don't have a magic crystal ball that allows them to see things the markets don't. If it is the case that the markets didn't evaluate the bank behavior as bad, then it is necessarily the case that regulators couldn't do so reliably either

I think the banks knew the loans were bad. That's why prior to this...poor people could not get mortgages. You don't need a crystal ball to predict that broke people can't pay bills.

But like you said, the government guaranteed a lot of these programs, so why wouldn't the banks gamble? There's no risk!

these mortgage practices were encouraged by the government through de-regulation, and risk mitigation. their goal was to address income inequality by declaring that home ownership was a "right", and thus should be accessible to everyone. Any policy that excludes the poor (the way a sensible loan approval process would) is perceived as racist. The government believed it could correct systemic racism that prevented black people from achieving the American dream.

and it typical congressional fashion.....lawmakers didn't really give a shit what would happen 10 years later.

[wufwugy]

I think the banks knew the loans were bad.

We should make a distinction between knowing that they're bad and knowing that they're bad, so to speak. Market evaluations change based on all information. They evaluate what are normally bad loans as not bad if there is a sufficient enough guarantee or payoff or risk-management such that makes those loans not bad. And banks got that from government.

Like I would not loan a crackhead $100 at 5% interest rate. But if somebody else with sufficient credibility guarantees me 5% on the 100 even if the crackhead doesn't pay, well I'll make that loan then. This is a simplification.

[wufwugy]

and it typical congressional fashion.....lawmakers didn't really give a shit what would happen 10 years later.

Most people (or all people) do not employ logic above first-order for most things. I think the reason I like economics so much is because it's all about higher order logic. It's about evaluating what an action incentivizes (first-order), what that result incentivizes (second-order), what that result incentivizes (third-order), etc..

In general I think it is fair to say that people typically don't think about incentives, don't understand the concept, etc..

[forkitnow]

Most people (or all people) do not employ logic above first-order for most things. I think the reason I like economics so much is because it's all about higher order logic. It's about evaluating what an action incentivizes (first-order), what that result incentivizes (second-order), what that result incentivizes (third-order), etc..

In general I think it is fair to say that people typically don't think about incentives, don't understand the concept, etc..

Economics is inherently sexist and racist because it was developed and advanced purely through white, cis males.

[MadMojoMonkey]

We didn't need economics when this species was a race of nomadic hunter gatherers.

Someone doesn't know what economics means.

[spoonitnow]

Someone doesn't know what economics means.

Yeah pretty much everyone who advocates communism.

[wufwugy]

Yeah pretty much everyone who advocates communism.

Liberalism and conservatism are two sides of the same coin. Socialism is a mangled chunk of wood pretending to be a coin.