Oct 14 2008

The U.S. Financial Crisis: A Misunderstanding of the Top Causes

16 responses so far

16 Responses to “The U.S. Financial Crisis: A Misunderstanding of the Top Causes”

1. # Justinon 14 Oct 2008 at 6:28 am

   How about this cause

   The Government intervening in the housing market, making home purchases available for nearly anyone, causing a major increase in demand for homes, causing prices to rise, causing banks to make riskier loans, since homes were increasing in value so quickly. Enter Sept 11 and dot com bust, homes still increase in value through that recession, due to the large numbers of 1st time homebuyers that couldn’t afford mortgages except with no down payment, and super low ARMs thanks mostly to ole Greenspan taking interest rates down to 1 percent or so. When the rates came back up, median home prices stablized, then fell… home equity lines, which had kept the economy rolling for the last 5-10 years, start drying up, because home values start decreasing, and all hell breaks loose.

   Homes are not an investment. At their very best, they are a hedge against inflation. Case in point, low interest rates mean higher home costs.

   This whole crisis goes back to the federal reserve manipulating interest rates, and postponing corrections from previous bubbles. We have two options, both bad. Government lets insolvent companies fail, its bad for a short amount of time, and things get better. Or, government props up prices, and floods the economy with more money… things look ok for a bit, until hyperinflation starts and we start looking like Zimbabwe.

2. # Aaron Conynghamon 16 Oct 2008 at 9:47 am

   This article puts the economic crisis into an entire new perspective. All the media says is that the mortgage defaults are the sole reason to blame for this. This article points out the reasons of how this economic problem has occurred. But, why does the media solely blame the mortgages? Do they not know enough about economics to truly see what’s going on? Or do they not want to blame the law makers for allowing this to happen? Now that people know the causes we have to find a solution and find a way to prevent this from happening again in the future. After reading this article it is clear to see how and why these causes tie into what is going on in our economy. I’m sure the media knows the true causes and they should do a better job of informing the people of them. Yes, the mortgages were a significant cause but they need to let people know the other reasons for this economic calamity. For people to solely lay the blame on just that one cause seems almost illogical to me.

   Now that the causes are obvious and are listed in a way of significance we must find a solution to resolve each and every one of these causes. It is clear to see that the lawmakers have the most work to do, since the most significant cause according to this article was that there was an imprecise law dealing with financial institutions. I believe that if the government sufficiently makes the laws and makes the right plan to get the economy out of this current situation, then all the causes will be resolved. But fixing all these causes should start with the most significant and work its way down. In dealing with all these causes individually, I believe that the government will make it easier to settle all these and make it easier to prevent this from happening again in the future.

3. # Steve Latteron 16 Oct 2008 at 4:37 pm

   Hi Aaron,

   Thanks for the post! I really do believe that the government will pass new regulation to help prevent this situation from happening again. Our government has a pretty good track record of taking follow up action once problem areas explode in our faces.

   Now, probably as I write, some new unforeseen problem is brewing in our economy. Regulation to protect our economy is a little like that game I play on the beach boardwalk called “Whackamole”. Our laws keep trying to protect us from problems that have previously pooped up or ones that we can logically anticipate, but new and unforeseen problems will keep popping up.

4. # Michael Summerson 17 Oct 2008 at 5:26 am

   Hi Mr. Latter,

   I think that the mortgage companies are mainly to blame for the economic problem, but I think that they should not be the only ones blamed for this. One of the major causes of the economic panic is the accounting rules regarding uncollectable accounts. When all the companies have to write off the accounts, it causes there profits to reflect a major loss. That causes the stock owners to panic, which causes stock prices to fall, which in then causes the mortgage companies to panic, which finally causes the money (loans) to stop flowing. When the mortgage companies stopped loaning out the money, it caused other companies to have to record losses, which in then caused those companies to record losses. All these losses caused the stocks in the companies to fall, which lead to what we have now a national panic in the stock market.

   Also the blame should be put on the people getting the loans and the government. The people who took the loans, knowing they could not afford them, took them anyway. Yes, the mortgage companies should have not been stupid enough to give them the loans, but the people were just as stupid in asking for the loans too. Both sides should have not been so naive to think that there would be no repercussions for their lofty ideas. Then there are the people who say that it is not the companies’ or the peoples’ fault, but the government’s fault. While the government should have been paying closer attention to these problems, it is not the government’s job to hold everyone’s hand. If the government went around holding everyone’s hand, telling them who they can loan money to and who they can’t loan money to, people would complain that it interfers with their rights. Some of the blame should be put on the government, but what ever they did, they would find everyone blaming them.

   We also can not over look the CEOs and the CFOs and all those people. But when you go to blame them, you have to be very careful who you pick to blame. Some of the CEOs of the companies now can not be blamed. The reason for this is that it could not be their fault at all, but instead they could have been brought in to try to save the company, and had nothing to do with the bad loans made.

   So then, who do we blame? Everyone but ourselves works, but that would not be fair. Really when you look at it, it was not just one single event that caused this major economic problem but, instead a collection of many different problems.

   I think that people should stop looking for someone to blame and try to figure out how to solve the problems our economy has first. Then they can all go and point fingers at each other and say they were against what ever caused the problems.

5. # Courtney Connorson 17 Oct 2008 at 5:46 am

   There are a large number of reasons that have recently been proposed for the financial crisis that we are experiencing in our country right now. Everyone is trying to figure out where we went wrong. I tihnk that of the list of things that went wrong, the main one that could have been completely avoided was private lenders getting greedy and lowering or violating their own lending standards in hopes of making more interest income by loaning to people who were very risk bets. These lenders and CEOs should be informed enough about their businesses and consequences of what they do to know that this action can really cause a huge problem in our economy. The households borrowing more then they should was also a problem that could have been avoided for the most part. When borrowing money, one should know how much they should borrow for the time being, and consequently borrow enough without exceeding their limits.
   With this being said, I felt that the imprecise regulatory law allowing the financial institutions to carry too high a ratio of mortgage-backed securities to collateralized debt was probably the most important problem in where we went wrong. This lack of regulation caused a domino effect in creating other problems as well. We should have addressed this problem long ago in order to avoid such a financial crisis as this one and should not have expected the problems that would result to just disappear. The ratio should have been lowered in order to prevent this. I feel that these kinds of problems are not paid enough attention to, mainly due to the greed and lack of regulations. The regulators should have paid more attention to these important ratios as well as the ratio of assets to debt and made enough of a big deal about it, knowning that this was bad, to have something actually done. Sadly, none of this happened and people noticed these key factors in balancing the economy too late and we are now in need of a bailout.

6. # Kyle Schreiberon 17 Oct 2008 at 8:49 am

   As the article says, there is no one problem for this economic crisis. It seems that people are too busy trying to point fingers at mortage lenders, goverment officials, and banks. The bottom line is that whose ever fault it is, its a problem and it needs to be solved soon. Things can not stay as they currently are. First off, banks need to keep much tighter control on how much money in loans they are giving out. Right now, their loans are more valueable than their assets which creates a very difficult situation for a corporation to get out of. As a result, banks can’t give out loans which are vital for home mortages. Corporations taking out loans is one way they expand. WIth no loans, corporation are put in a crucnch trying to pay for labor. This then jacks up the unemployment rate. This is the satge we are at right now. People are starting to lose their jobs and the crisis is now hitting ” Main Street”. If consumers do not have jobs, they have no money to spend. With no money, this put corporations in an even tighter crunch for money. The whole crisis is compounding, that is the problems are creating a domino effect with no clear end in sight. Perhaps the most frustrating part of this ordeal is that there is no one specific thing the government or banks can do to turn it around. I think that people need to stop being so greedy. Lenders give loans to just about anyone because they want to profit on the intrest. Banks need to closely monitor their asset values. People need to not move into houses and take out mortages that they cannot afford. Banks need the bailout money to even themselves financially. They wil then begin lending out money to corporations again. They will learn (hopefuly) to be careful who they give mortages to. People will begin spending again which will also help our economy. The great thing about the economy is that no matter what happens, it will always balance itself out. It might take a few months or years but the economy will get back to where it was and begin expoanding again. If someone gave me a $100,000 check today, I’d throw every cent into the stock market. Reason being that stock prices are so deflated, that once they go back up I would be making a lot of money. The most important thing to do is to just remember that yes there are a few things we can do, but ultimately we just need to trust the economy and in the fact that it will recover.

7. # Chris Rieveon 17 Oct 2008 at 9:04 am

   I think that the reason that the mortgage defaults were blamed for the all the economic problems was because they were the last piece to fall into place, and therefore bore most of the blame. Even though it wasn’t completely their fault most other things ended leading toward the defaults on the loans. It was the fault of the banks who got too greedy trying to continue to raise profits by handing out loans to people too poor to be able to pay them off themselves. This spurred the creation of companies who would absorb the debt and help pay off their debts by creating even more debt. This turned into a never ending cycle of debt. Of course this was going to fail eventually.

   I also think that the government is partly to blame for massive collapse of our economic system. They sat back and didn’t create enough regulation in order to prevent the system from collapsing, and they were too cautious with the legislation passed after the Enron trials, because they were overly cautious. In the end there really wasn’t anything that the government could have done in order to avoid the blame, and would get blamed no matter what. Their legislation undervaluing the debts doesn’t really help the situation, but makes it awfully convenient for them to step in and buy these undervalued loans.

   Mainly though, most of the blame should be placed on the free market. Consumers bought loans that they could not afford. Young couples bought houses way to out of their price range, but because the companies gave out loans at such low interest rates that no one in the company would make enough back. This all caused a huge collapse in everything and in the general market when people are pulling back in their spending, and not saving enough money. Overall were just in a big mess.

8. # Justinon 17 Oct 2008 at 9:47 am

   Is this what they teach in economics now? Government is to blame because of lack of regulation?

   There was plenty of regulation. Government looked the other way.

   Not to mention the “greedy” banks would never have made these loans if the government didn’t get the whole ball rolling in the first place. When government has massive regulation of banks, and they tell you to make loans to people who are traditionally a credit risk, you do it.

   And when the government props up fannie and freddie, and buys up almost all of the mortgages in the country, something called moral hazard occurs. Banks don’t directly feel the negative impacts of their poor decisions. So making risky loans doesn’t matter… they don’t keep them on the books, but sell them to fannie and freddie.

   No wonder our country is full of brain dead socialist and corporatist ignoramuses.

   Kids, check out some real free market economic theory at the mises institute. Lewrockwell.com, read Hayek, Von Mises, Rothbard. Stop reading these faux capitalists who tell you that government can save us from economic disaster, and can guide the markets, and can control monetary policy. Its not capitalism. Its corporatism. AKA fascism.

9. # Chris Griffithon 17 Oct 2008 at 10:36 am

   Before reading this article, I truly believed that it was the mortgage “defaults and delinquencies” were the main causes of the current economic crisis and that there were a couple other things adding to them. After reading this article, I now see and understand that the mortgage “defaults and delinquencies” were actually lower priority issues that sent the economy crashing, but the really high priority issues were the lack of regulation on the financial institutions and the whispering, which should have been shouting, of the bank regulators. These high priority issues were the main underlying causes of the economic crisis. I did know that the regulatory issue was a problem that led to the economic crisis but I did not realize that it was the most significant of the causes. The lack of regulation on the financial institutions presented the opportunity “to carry too high a ratio of mortgage-backed securities to collateralized debt.” I believe that the government should have noticed that dangerous ratio of assets to debt and should have reacted to prevent the debt from increasing even more. The lack of regulation also presented the opportunity for greedy CEO’s to increase and decrease interest rates to give out highly risky loans. Cause #2 was the hesitation of bank regulators to scream warnings of the ratio of assists to debt, this allowed the debt to soar out of control before anything could be done to prevent it. These regulators should be held somewhat responsible for the economic crisis because if they had not hesitated and had made a stronger effort to make the situation known, there would have been a greater chance to prevent the crisis.
   These two main issues, the lack of regulation on the ratio of assets to debt and the hesitation of the bank regulators, were issues that I saw as lower priority issues because the media made it seem like the main causes were the mortgage “defaults and delinquencies.” I now believe that the lack of regulation and the hesitation of the bank regulators were the main failures that led to the economic crisis.

10. # Alec Kormanecon 17 Oct 2008 at 11:27 am

    I think that blaming the mortgages and delinquencies because the American people because it is one of the easiest things to understand of all the issues and problems. this is not one of the main issues of the economy, it is rather low on the severity of economic issues and problems. What i do not understand is how corporations like AIG can just go out and spend 400 K on a corporate spa outing right after the government bailed them out. It seems that these big corporations have not really changed their mindsets on the way they act. This economic problem does not deter them from their normal ways.
    I feel that the government is just letting these big corporations off with a warning and are not really punishing them for what they did. I think that this economic problem’s root is at the regulation issue of the government. You cannot say that there are no regulations because there are regulations. They are specific regulations but the government did not truly enforce the laws and just somewhat looked the other way. I think because the government did this all of these financial institutions were more tempted to give out these loans to riskier candidates. If the government would have enforced their regulations the way they should have, these big corporations would have been less prone to taking big risks an their greed would be kept in check.

11. # Steve Latteron 17 Oct 2008 at 4:58 pm

    Hi Justin,

    Thanks for the response.

    I believe all of the authors on this blog site are free market zealots. But a free market has to have the appropriate balance of regulation, especially over lifeline areas like our banking system.

    To use an analogy, with no government invovlement in areas such as product safety or work place standards, capitalism, although a wonderful thing, can tend to get out of balance as the drive for profits can blur vision occasionally. Government regulation is an appropriate check on economic self interest that may go to far in hurting innocent bystanders with collateral damage.

    One has to look only as far back as Enron and AIG to have support for this. It’s one thing when a firms failure only affects that firm itself and its employees, but it is another thing when the failure of a firm “spills over” and affects other businesses. That is where, in my opinion, regulation becomes necessary. Not a lot. Just the appropraiate amount.

    Long live free market capitalism!!!!!!

    Regards,

    Steve

12. # Patrick Shugrueon 18 Oct 2008 at 7:02 am

    The media, while sometimes a useful tool to the American public, is often a warped, distorted, and biased outlook on world events and occurrences. More recently, the media’s reports on the economic crisis have an extremely, yet ultimately understandable, negative outlook; what is unacceptable is the misinformation and the political agendas that many of these news outlets push. The public and high school students in particular are susceptible to all the major stories distributed by the media. This is a significant reason why people, including myself, are clueless as to what the true causes of the economic crisis entail. Many are quick to presume and point fingers and many also blindly accept their favored political candidates’ explanations for the financial “recession”.

    That being said, considering my limited knowledge of economics, the three major points that you address seem to be quite reasonable and fairly simple to understand. I would have to agree that the government’s lack of appropriate trading laws, as well as the presence of lax laws which leave room for irresponsibility in running businesses, were primary sources of the economic breakdown. I am in no way supporting what some would refer to as a “socialistic” economic system; I think that while the government’s involvement in business should be quite limited, it is merely prudent to establish certain regulations to prevent corruption and the possibilities of further economic setbacks. To not have such regulations serving for the well being of the country, would be foolish and again, irresponsible, considering the current condition of the economy. Loopholes need to be fixed and corruption and greed should be brought down to a bare minimum. Also, it seems to me that banks were trying to get away with as much as possible.

13. # Becca Pooleon 18 Oct 2008 at 7:50 am

    This financial crisis is a complicated problem that can be blamed on many different people and groups. However, I think right now we should focus more about making sure our economy is staying above water. I believe we should prevent something like this from happening again, but I feel that the media and many Americans focused too much on whom to blame when this crisis was finally unveiled to the American public. This took time away from how this crisis is going to be fixed, or what has even happened. As you stated in your blog article, Mr. Latter, many American people still do not understand what has happened to our economy. Consequently, I think the media could have helped more in educating the American public.

    I also am very worried about the crisis in other countries. I have always known that trade has always been beneficial to everyone, but I have not fully understood the depths of the interdependence all the countries have with one another. Americans always wonder why our government gets involved with some many countries when those countries are struggling, and the reason is America is acting out of self-interest. We’ll have to keep watching not only our economy, but also all the other foreign economies who are experiencing the same kind of crisis.

14. # Stephen Turcolon 18 Oct 2008 at 10:44 am

    This post and Mr. Latter’s classroom discussion completely changes my view on this subject. I can not believe that a 650B dollar problem is cause 8T in “bailouts”. I believe that our regulations are defiantly not regulating correctly. I believe that one of priorities as a country should be to change the rules of accounting so this will not happen again.

    I completely agree with your list of causes for the current situation. In my mind regulatory law was most at fault for this crisis. It should be changed so companies provide a more accurate account of what is really going on with their financial issues. If they did show their true worth then the fun of the banks may have been prevented. I also agree that households borrowed too much money. People should have known that they could not afford the house they bought and not have been tricked by the no money down/interest only mortgages.

15. # Colin Jon 18 Oct 2008 at 11:50 am

    Your article really puts the facts in line, Mr. Latter. These concepts do not seem to be overly difficult to grasp, so I fail to understand why the true causes are being ignored in the press. I can understand why economic principles such as international trade and outsourcing get a bad rap, because they look bad on the surface to an uninformed citizen. However, everyone knows that the situation is bad, so why the actual roots of this financial predicament are not being publicly presented boggles my mind.
    I guess these current circumstances are not example why a mixed economy is necessary. From my understanding, the financial companies were allowed to operate with little to no governmental regulations. This means we were allowing a “too free market” to develop. I think markets that deal in tangible things, good and services are much more able to self-regulate then those dealing with finances. To counter this potential imbalance, governmental regulation is needed to keep those industries in check. As we have come to know, the financial companies could not be allowed to fail, because that would send our economy into major chaos. When one section of the whole economy become so intertwined with the whole it is of utmost importance that it be monitored and kept steady.
    I find it troublesome that the same politicians who preached their deregulation and helping anybody get a loan, in order to get elected, are now supporting the “save the economy package.” I am pleased that they understand the necessity of such a bill, but the fact that they proudly took claim for the very factors which caused this mess, and few people connect the dots real make me upset.

16. # Kyung Leeon 18 Oct 2008 at 12:27 pm

    I just saw an article says the Dow Jones went down about 40% from what it was about 6 months ago. As we can tell by the headlines of the news, we are NOT doing good. Everything that you can think of, in terms of making money is going down, (except the price of Gold though) and it is getting harder to get a job. Now, as human’s nature, we like to blame things on someone when it goes wrong. And apparently, people like to blame this on the companies, or the government. However, can you say that in a K-1 (a fighting match I think), it is referees’ fault that a fighter got seriously injured, or possibly, killed? The answer obviously, is NO. It is not referees’ fault that a fighter got killed, but it is his own fault. Yes, it is referees’ fault that he could not stop the game before it became a chaotic fight between the fighter and everyone who were watching the game, but in referees’ defense, they probably did not have power to stop the whole thing. The fighter decided to fight for his life, and even when he gets killed, it is his fault. That is why I think it is greedy people are the cause of this problem.
    The greed of people, the eager to make more money gives the people who knows what is going on more money and the others, and takes the money from people who have no clue what is going on. That is why, I think, the education of the people is the best protection against these kinds of problems.

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