Credit, Noted

The Best Explanation I Have Heard For How The Credit Crisis Happened

I love talk radio.  I love podcasts.  One of my favorite radio programs – which is also available as a podcast – is This American Life.  This past Sunday’s episode, entitled The Watchmen, provides the clearest explanation of the current credit crisis, what it is, and how regulators failed to regulate it, that I have heard.  I strongly recommend that you visit the This American Life site and stream or download the program.  You can listen to it on your computer, or download it and put it on your mp3 player.  Many of the interviews for the program were conducted by Chana Joffe-Walt and Dave Kestenbaum from NPR’s Planet Money.  Regardless of your political affiliation, I think you will find the podcast to be informative, entertaining, and enlightening.  After listening to it, I sat quietly for fifteen minutes in my car, contemplating the reality of a tragically flawed regulatory system.  Give it a listen, and let me know what you think.

8 thoughts on “The Best Explanation I Have Heard For How The Credit Crisis Happened

  1. “commodity futures modernization act of 2000” signed into law by bill clinton just before he left the white house. “credit default swaps” were legal AGAIN and the economy crashed AGAIN! just like 1907! that’s half the reason the economy crumbled, the other half is the selfish, i deserve it, i want attitude of the modern american! we needed this wake up call!!!!!!! it sucks but we need it. gotta go buy a new cell phone, BUY…

  2. Without having the time to listen to the podcast, I’ll just say this, based on your comments on it: overregulation is part of the real reason, not underregulation.

    Here’s a good read for you:

    Some tidbits:

    *In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.

    * In 1995, Fannie and Freddie were given permission to enter the subprime market and regulators began to crack down on banks who were not lending enough to distressed areas.

    *In addition, Congress explicitly directed Fannie and Freddie to expand their lending to borrowers with marginal credit as a way of expanding homeownership. What all of these did together was to create an enormous profit and political incentives for banks and Fannie and Freddie to lend more to riskier low-income borrowers.

    *While all of this was happpening, the Federal Reserve, nominally private but granted enormous monopoly privileges by government, was pumping in the credit and driving interest rates lower and lower. This influx of credit further fueled the borrowing binge. With plenty of funds available, thanks to your friendly monopoly central bank (hardly the free market at work), banks could afford to continue to lend riskier and riskier. The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them.

  3. Can you put up a link to download the podcast directly? I can’t find the podcast from the side. Maybe I’m a little bit tired…

  4. Pitiful. The credit crisis is not one-sided, nor is it or was it a lack of government regulation that caused it. At its simplest form, the credit crisis was caused by:

    1) Greedy people maxing out their credit to buy the biggest house, best cars, and everything else their heart desired

    2) Greedy lenders willing to do it without regard to credit worthiness, debt-to-income ratio of borrowers, or, in some cases, if borrowers even had a job

    Is there some element of law involved in some cases? Sure. The government forced lenders to make loans to people who couldn’t pay in order to be “fair.” After all, why should only people who can pay get loans?

    I say they all need to suffer. When I hear of someone making $30k having trouble making their $2,500 house payment, I really don’t lose sleep. That’s a person who needs a smack in the head along with the question, “What on earth were you thinking?”

    When the lender doesn’t get paid, having made that loan to that person, well… ditto the head slap.

    I don’t really care what the stock market does today or if housing starts improve significantly, at this point I’d pay real money just to hear all the whining losers shut up.

  5. I think both NPR and PBS have some of the most robust reporting available now. Frontline is one of my favorite news shows and will watch it online. Mainstream reporting is so flawed now, go figure we have to rely on publicly supported news to get the scoop.

    As for the financial crisis, there is one word that represents everything that happened in the financial crisis, FRAUD. Fraud at all levels.

    Borrower: Misrepresenting income or ability to pay. Not questioning loan documentation. Borrowing with no intention to pay back.

    Lenders: Mortgage brokers committed fraud in numerous ways including changing of terms and conditions, pushing for higher appraisals (regardless of actual values), changing metrics for borrowers and pushing them into products that were going to blow up.

    Banks: KYC, Know Your Customer. It is a central tenant to the banking laws. The banks did not know their customer, go figure it blew up in their face. Front loaded fees that guaranteed pushing loans at all costs.

    Investment banks: Not doing the due diligence on the product including even a cursory glance at the loan level data.

    Brokers: KYC again. Brokers are required to know your customer and only sell product that they know their customers know and understand and is at the risk tolerance appropriate. How many QIB (qualified institutional buyer) forms did many of these customers sign?

    Rating Agencies: Rating Agencies get special dispensation from regulation FD in order to do a thorough job at digging deep into the data. The data was there that it was fraudulent but they chose to ignore it.

    Federal Govt: Here is the biggest fraud. No there is not over regulation and no their is not under regulation. Ya there are flaws in some laws such at the commodity futures modernization act, but all government had to do was their job, which they refused to do.

    Why did laws that have worked for 70 years all of a sudden fail? How about an administration that believed in “free markets” so much that they essentially appointed administrators that were going to do NOTHING. Add on top of that, starving each regulator for funding and personelle to do their job. Think how many fiascos we could have avoided if we didnt spend half a trillion on a fraudulent war. Add on top of this the massive power grab from the federal government away from the states and it just compounded. And even more we are still not following the laws. Prompt Corrective Action is required to deal with insolvent banks. Not TARP, not bailouts. The FDIC has the know how and the ability to deal with Citi, and the other dead horses. Let them.

    As for financial products, most of these products are sound and have been around for many years. What happens is when things are done fraudulently, no amount of regulation or prudence will help you.

    Mortgage Backed Securities have been around since 1979. Yes 1979. The first CDO was in 1990, Subprime and Credit card paper since the early 90s’. What happened, fraud, fraud, fraud.

    The community Reinvestment Act has been around for years and never caused problems. The CRA was more about ensuring lending in at risk communities, i.e. no redlining. The lending that happened in the last 5 years has been way in excess to requirements under the CRA. Again, even without the CRA, lenders would have jumped on the sub-prime bandwagon given the high fees it generated.

    What really scares me is when insurance companies start pushing for federal instead of state regulation of their industry. Look at AIG, almost all their state regulated insurance subsidiaries are extremely strong. National Union alone has 12 billion in surplus. It was a failure at what should have been a federally regulated subsidiary that brought it down.

    God I could go on but lets face it. All this happened because of fraud. Enron collapsed because of fraud. Worldcom went into bankruptcy because of fraud.

  6. Oh, by the way. This podcast explains the institutional side, not the personal side. In other words, there’s very little about why the money was lent, but a lot about the institutions that should have been regulating the lending.

  7. Thank you for this – I subscribe to This American Life on iTunes, and had not had a chance to grab this one. That is one show that I have yet to hear an episode that didn’t completely enthrall me! I’m looking forward to hearing their take on the crisis.

  8. Thanks – I am always looking for new podcasts (talk radio junkie who can’t listen to radio streams at work). I really enjoyed the program and felt enlightened (?Not sure if that’s the right word).

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