Credit, Monetary Policy, Depressions, and More!

[DuncanONeil]

I was kind of hoping that the discussion would not head in this direction. Many of those "targets" were imposed by an entitiy without the banking industry!

The Making of the Credit Crunch.

The trouble with the MBSs you describe is not that they were based upon mortgage loans, but that some of the loans that were packaged up should never have been made in the first place. This was entirely the fault of bankers who encouraged people to buy properties they could never afford. They had targets to meet: so many loans a week, or $/£ hundreds of thousands each month would produce a tasty commission for the adviser (who probably thought he was giving good advice according to his company's criteria). But scant attention was paid to the ability to repay ... perhaps it was thought that the usual provisions for bad debts would suffice, despite the careless lending policy being followed.

Now MBSs were bought by banks all over the world, believing each other's assurances that these were safe investments, backed by property, whose value was almost certain. It seems, in fact, that the amount of these investments the banks were holding was phenominal - Icelandic banks holding more than the whole population of their country could afford, for example. As the reality began to dawn on these bankers (cockney rhyming slang for something very uncomplimentary) they began to put up the shutters and stop lending against such securities. They also found they could not raise money against them, and so the crisis began, affecting one country's economy after another.

This is a gloabl problem affecting almost every economy in the world. It requires a global solution, which means international agreement and co-operation. It would be wrong and self-defeating to adopt isolationist, beggar-my-neighbour policies, because, as we have seen, if the banks ruined themselves by refusing to assist each other, so too will nations.

[SadisticNature]

I was kind of hoping that the discussion would not head in this direction. Many of those "targets" were imposed by an entitiy without the banking industry!

The regulations you've mentioned in previous threads on this topic didn't apply to the institutions purchasing, bundling and reselling the subprime loans.

The banks were making loans because they could make a quick profit on them by reselling them to the investment banks who could bundle them into a clever security which increased the investment grade and enabled them to resell it at a profit. This is the epitome of free market transactions, every step along the way is justified by profit.

[DuncanONeil]

Banks were making the loans because regulations had been passed forcing them to do so. Anything that grows out of the forced applied by the regulatory action of Congress is a direct result of the force applied.
Said force put the banks in a weakened position. The markets that you decry as a sole product of evil greed were efforts to remain a viable business. Mayhap even in some cases to enable the banks to comply with other regulations with regard to reporting and required reserves.

The regulations you've mentioned in previous threads on this topic didn't apply to the institutions purchasing, bundling and reselling the subprime loans.

The banks were making loans because they could make a quick profit on them by reselling them to the investment banks who could bundle them into a clever security which increased the investment grade and enabled them to resell it at a profit. This is the epitome of free market transactions, every step along the way is justified by profit.