What caused the recession? Government.

Me ^ | 12/6/08 | Brilliant

[genghis]

Your analysis is correct, but only 10% to agree with you.
It doesn’t seem that people are moving in your direction yet.

[unixfox]

Does anyone think that DC/Wall Street would change anything?

No, but millions of people showing up with pitch forks and torches at their doorsteps will!

Unfortunately that IS the option we have left.

[griswold3]

Look out for Obama’s National Civilian Security Force!

[Vaduz]

If people would vote things would change look what we ended up with for a president because people didn’t get out and vote the election had such a low turn out it looked like a fire sale at a sewer plant.

[Attention Surplus Disorder]

Yes, forcing banks [via legislation, community organizer pressure, or congressional pressure, or all in concert] to make snarky loans incentivizes (if not forces) banks to offload their risk. (The truth is, the banks generally don’t want to hold mortgages anyway) Fannie/Freddie provided the ready offload mechanism for those risks. All well and good so far, even with default rates rising from appx 3/4 of 1% historical to 3-4% = now, at least anecdotally.

So, with an implied (since made explicit) govt guarantee, FNM debt was attractive in the post 9/11 era of VERY low ROIs, brought on by Gspan dropping rates so low and for so long. Still OK. OK in the sense that if you, as an investor, are looking for secure rates a tad above Tsys debt but instead come out with a 3-4% loss, this shouldn’t be the end of the universe as we know it. But this problem was made quite a bit worse by the real estate valuation bubble brought on such low rates, and yes, the desire to bloat the GSEs to house everyone and anyone in a suburban home. Left alone, the RE crash might have made debt investors lose 8%-10%-12%, nothing to be happy about, but not TEOTWAWKI.

But now, we take the financial engineering aspect; the tranching, the extreme levering, the creating of hierarchies of debt grades and the resulting need to attach massive amounts of default insurance to the lower grades of debt. The wizards of Wall St simply outran the regulators (however you wish to characterize them; either deliberate aiders and abettors; flat-out idiots; or, only-able-to-respond-to-crisis reactionaries) AND the raters (Moody’s, Fitch, et al) with the financial engineering necessary to achieve the gearing that WAS and WOULD HAVE BEEN in excess of banking regs before Glass-Steagal was repealed.

***NOW***, a 3-5% default problem multiplied by 30-50-80 becomes potentially an “over 100%” problem truly suggesting the whole affair could be sucked into a black hole of impossible, defaulting debt. That’s where we are.

So, generically, I would agree with you that it was a gov’t “failure”. It was a failure in the “write mortgages to any person w/a pulse” sense but it was also a failure in the “remove any restraints on the masters of financial fraud” sense. Because it must be noted that in the tranching scheme, the “hot potato” you mention was cut up ten ways and every holder got 15% of the total!

Barney and Dodd may have been flaming socialists in their desire to mansionize everyone. But the turbocharger was really the securitization mechanism brought to a fine art by Wall St. Meanwhile, the entire world deleted the word “risk” from their collective dictionaries. It DID start with morts; and those WERE defined as sub-1% defaulters. Yet without the leverage engineered by Wall St, the problem(s) would be at most 1/20th as big as they actually are.