Chart showing policies that led to the econopocalypse

Barry Ritholtz sez, "Contrary to the nonsense being fed to the public, the credit crisis and economic collapse was not an accident or the result of a 'perfect storm.' Rather, it was the result of deliberate policies that were pursued over the course of many years."

7 Factors That Led to Crisis (Thanks, Barry!)

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

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Anonymous

Why is that a non-sequitor?

The entire operative belief at the Fed under Greenspan was that “markets could take care of themselves.” Easy Al even admitted (after it all collapsed) this was a flaw in his belief system.
Anonymous

FREDDYBEAR: Citation needed.
ju2tin

I like how the chart starts in the year 2000, conveniently leaving out anything that might have happened under Clinton, such as the expansion of the derivatives market, or, more importantly, the Clinton administration lowering standards for mortgage applicants so that people who had no ability to afford a house nevertheless were allowed to go deep into debt to buy one.

No siree, everything bad started when W came into office.
Ugly Canuck

Gee, d’y'all think that the portion of the increase in the world price of oil, attributable to decades of war and political instability in the very regions where the cheapest to produce and most massive reserves of petroleum are to be found, has anything to do with these economic troubles?
Or perhaps that (contemporaneously to these economic events) the commencement of two separate land wars in Asia by the oil-poor West may have had some economic effects?
Or that the US Armed Forces (even with a nuclear Navy!) alone use more oil annually than the entire nation of Sweden? Could this also have had some influence?

All in all, a tale of monstrous mis- and mal- investment, with avarice, rather than any vaunted ‘efficiency’, as its engine, purpose and reason.
But on the bright side, this all does leave us with work to do.
Anonymous

It’s funny that the timeline is too short to include the 1999 repeal of the Depression era Glass-Steagall Act. Props to “Anonymous” who got there first (6/5 07:35). This was another SNAFU by a Congress who increasingly just phones it in, instead of doing what they are being overpaid for.

http://en.wikipedia.org/wiki/Glass-Steagall_Act

As an aside: My captcha words “Nebula Football” sound like a great SciFi video game.
Ernunnos

It’ll take more than a chapter to explain how $4.2 trillion in new credit dumped into the housing market had no distorting effect on the market. That’s $14,000 for every single American. Around $40,000 per household. And renters didn’t get it, so the amount per homeowner is probably closer to double that. This is far more than the stimulus packages that we’ve expected to rescue the economy. And then it was leveraged – multiple times over – increasing its impact even more.

Can you seriously assert that an $75,000 line of housing credit won’t change the behavior of home buyers and home owners? Seriously?
BrooksT

@17: I think you’re revealing some knee-jerk partisanship.

The chart starts in 2000, sure. But derivatives have been around since the dawn of time (guess what pork belly futures are?), and securitization of mortgages started in the mid 70′s.

Sure, Clinton’s policies contributed a lot to the problem. W’s real failure was his believe that deregulation and zero enforcement of remaining regulations would lead to a healthy market. Just one of many mistakes made by many people, including Clinton.

I suppose if the chart had started in 1994, Clinton backers would be up in arms. In 1984, Reagan disciples would scream.

They’re politicians, folks, not religious figures to be worshiped and defended.
Ernunnos

If China just dumped the wealth onto lending markets, we’d be fine. China would take a massive loss – just like Japan did in U.S. real estate in the late ’80s, early ’90s – but we’d be fine. The wealth would exist. It would just get transferred from them to us.

(This is one way to correct trade imbalances, and is a good reason why a trade imbalance is as bad an idea for the positive side as the negative side. The Japanese ended up holding lots of dollars, but didn’t have anything to buy with it except overpriced U.S. real estate. Which then crashed. We ended up keeping the VCRs, the cars, the cash, and the real estate.)

No, the problem this time isn’t just a trade imbalance. It’s that the wealth doesn’t actually exist. The cheap loans weren’t provided by China, they were provided by U.S. banks with the backing of the Fed and the U.S. government through their bagmen Fannie and Freddie.

Now that all those loans are going bad and the toxic assets are being bought up by the government, China is being called upon to buy up U.S. government debt. Which would amount to dumping their accumulated wealth into the market. But they weren’t the original source of that credit. They didn’t create the situation. They’re just the ones we’re calling on to bail us out. They could still refuse, and may. If they’d been in it from the beginning, it would already be on them, and they wouldn’t have that option. We wouldn’t have to pass the buck to them, because it would already be on their desk.
SeamusAndrewMurphy

Everyone pointing fingers at the “greater fools” who (m…? I can never remember) bought at, or near the top of the housing market and who deserve all the opprobrium of the more restrained of us who owe more appropriate (and far older) mortgages might want to consider that as home prices went through the roof, so did rents. Families, though not the flippers, weren’t left much choice really. It was buy at outrageous prices that don’t look like they’re ever returning to a normal, or continue to pay an ever increasing rent. That is not a case of the greedy being led by the stupid. It is one hell of a problem for a lot of families with parents in their thirties, with small children, who will wait decades before their mortgage equals their equity, or they won’t be able to hang on that long. This isn’t a defense of the home flippers who were just opportunists and part of the problem, but really, a lot of families were squeezed: “buy now or be priced out”

I don’t see much of that sentiment ever being expressed though. Easier to lay blame when we, who bought 10 to 20 years earlier were so much smarter (‘cept we weren’t…just a tad more fortunate).

And I’m not one of the recent unfortunates. I spent the last four years paying down debt in anticipation of this mess. So, this isn’t excuse making by a “greater fool”. There is going to be a world of misery for a lot of young families going forward, for years.
Anonymous

That chart starts about a century too late.

This crisis has roots that go right back to the beginning of banking in America. Regulation has often accentuated the process; for example, the Glass-Steagall Act of 1930 may have kicked the whole thing off by forbidding banks to own equity in the firms they lend to.

This is in sharp contrast to German banks (which admittedly have their own pathologiesâ€”but at least they are different ones).

Also, many of the relevant changes to banking regulation were made unilaterally in the early 1990s by the Federal Reserve. When Gramm-Leach-Bliley was passed in 1999, it was because the banks had been “acting as if” for several years already, with the help of the Fed.

Don’t get suckered by the partisan hacks on either side. This thing is much deeper than a decade or two of policy.
jetfx

@ #8

Untrue. Most economists dispute that the CRA had any role in the crisis. Less than a quarter of the supbrime loans were not CRA loans, and most of the institutions that were involved in subprime lending were not affiliated with the CRA. The CRA loans were actually safe and profitable, because CRA regulations were designed to make sure borrowers could pay the loan back, rather than engaging in predatory lending.
grimc

@#17

Yeah? Well, I like how you leave out the part about the lenders that gave people those loans, convinced them they could afford it. Takes two to tango, bub.

@seamusandrewmurphy

Simple rule. Replace the object with “he” or “him”. If you’d use “him”, use “whom”.

‘Everyone pointing fingers at (him)’ = whom.

Thus ends your pedantic treat for the day.
SeamusAndrewMurphy

Copied and pasted on word doc said rule.

Most appreciated (but really, I should have had it down by now).
shiseiji

1. Free Markets aren’t. Many people worked hard to obtain decent working conditions and a healthy environment. Enter “Free Trade” and cheaper labor and lax laws over seas and manufacturing moved over seas. Other then Wally-Mart, seen many prices go down? No manufacturing businesses to lend money to and people thrown out of work. But “Free Trade” sounds so good and we can point to all those jobs created.
2. Making money off of money vs. money lent to produce a product required looser and looser regulation. Enter “The market will self correct.” And oh my has it. In the end, something has to be produced or the perceived value will become zero.
3. “Banks” lending money to purchase houses are the real minority. Mortgage brokers who will have nada to do with the life of the loan as it will be resold sell most loans. In FL it is well documented that con artists became mortgage brokers as one example. As it was all going to be sold, rolled up, the risk faked by the rating companies, no one really owned the problem.
4. The number of CRA loans is quite small compared to all the other loans. Sorry, facts.
5. In the end, banking and fiduciary products can be done anyplace (Iceland and Great Britain have a bit of a problem for buying into the wonderful US money products).
6. After Alan Greenspan bet the US economy on real estate as the last remaining asset (see point #1), it too has played out.
7. There is no one simple answer, if it was simple we wouldn’t be in this position.

Refer again to point #1. “If I can think it up, it must be OK (at least for me).” vs. “We choose to band together to minimize the ability of the few to take down the many.”

JMHO
Dave

This chart implies consensus where none yet exists.

I thought the leading theory (among actual economists) for the primary cause of the bubble and inevitable collapse was the newfound prosperity of China and the dumping of that wealth into lending markets. New sources of cheap loans fuel bubbles.
hug h

Most of the items on this chart are interrelated SYMPTOMS that result from an underlying CAUSE-
The interplay of money and political influence. Our leaders have been putting off making difficult decisions that require great sacrifice and compromise, thus they end up governing from one crisis to the next.

Everything portrayed is fairly accurate, there are however a few significant pieces missing and the time line should be considerably longer.What about-

-transition from investment banks being private partnerships (with their own capital at risk) to public companies
-Mortgage Interest Deduction role in bubble inflation over time.
-Non recourse Mortgages States (only 12 states but list very significantly includes CA, AZ, FL)
-Rise of Exotic Mortgages
-Lack of basic financial education on the part of most American citizens.
-Executive Compensation changes that greatly increased risk taking and shortened business decision time horizons.
-China, China, China
-Energy price instability.
-Rise of rampant Consumerism
Ernunnos

Notably missing: “Giving home loans to people who couldn’t afford to pay them back.”

Also no mention of the minority vote-buying programs of the Democrats and Republicans. The former used the CRA, and “anti-redlining” regulations that ensured that the only banks that were allowed to make acquisitions and get (too) big (to fail) were the ones that made bad loans. The latter caught up fast though, with the “ownership society”. Both used Fannie & Freddie as their bag men to dole out the bribes.

But despite all this direct, heavy-handed intervention, it’s not political pandering that gets blamed. Oh no, it’s the free market. Go figure.
- Antinous / Moderator
  
  Ernunnos,
  
  Not one citation in all that?
Anonymous

The one thing I see missing from the chart is any mention of regulation in lending guidelines (which should appear in both the ideology and housing boom categories).

The congressional mandate to push loans to low-income borrowers was ideology, and the resulting increase in home purchases fueled the housing boom.

I have a hard time with letting congress off the hook for that particular exercise in poor foresight.
KevinC

FIRST!!
I don’t get it. It really didn’t do anything for me.

At any rate, the chart makes a sh*t-ton of sense. Interesting.
Anonymous

I believe the deeper root cause is missing from that chart: efficiency.

For the last hundred years, we have used technology to amplify everything: productivity, mining activity, farming, energy availability, globalization, medicine, and essentially every human endeavor. We’re at the point where less than 25% of the population is doing enough work for all the world to comfortably live. (The fact that the wealth is not equitably spread just means the problems are felt differently by different people.) That implies the other 75% of the population is employed with “meaningless” work (in terms of survival): advertising, retailing, financing, religion, the arts, thievery, accounting, programming, etc. It’s stuff we can do because no farmer needs to hire a thousand of us to turn shovels of dirt over for a month when his efficient tractor will plow the same field in a day.

[ The United States probably has a lower percentage than most other countries of its people employed in keeping all of us sheltered, fed and clothed, having offshored almost all manufacturing. And as a society we're certainly at the saturation point, where almost everyone's basic needs are met. For example, all but the very, very poorest among us seem to be able to afford cell phones, televisions and video games -- hardly staples of a survival existence. For an extravagant example, at some point even the stupidest of us will recognize that spending a million extra dollars on a 33' boat won't make us any happier than the 30' boat they already own. (Although I'm constantly surprised by the levels of stupid opulence I see on some of the lifestyle channels, like HGTV and Food Network.) ]

So as all these other large external forces push the economy down, the traditional lever of “consumer need” isn’t pushing it back up, because we collectively have realized we don’t need all that crap we’ve done without for the past few months. I can keep taking the train instead of buying a new car this year. I can eat at home for half the price of a restaurant meal. Last year’s clothing still fits. 2007′s cell phone still works. My computers are fast enough to play Half Life 16 whenever that comes out. I have TV sets in every room that needs one.

Why? Because they were cheap to make and cheap to buy, and I don’t need any of the stuff the other 75% of the people are offering.

I’m not saying that we should outlaw efficiency as a solution, but perhaps we need to make the “real work” distributed amongst more people so the pay can be more equitably distributed. A 10 hour work week (as long as it’s “real” work) would be pretty darn nice, and we’d still have our basic survival needs met. It’s either that or get used to 50% unemployment rates, which would require either a permanent dole, or else society will collapse under all the crime and/or revolution that such an unequal system would foster.
BrooksT

Deliberate policies != deliberate crisis.

You might as well say that a traffic accident is the result of a deliberate acts on the part of a driver over many miles. It’s playing cute semantic games with the words “accident” and “deliberate” to make a point.

Yep, some intentional policies contributed to the current crisis. In hindsight, a chart like this is easy to make. Hey, the current problems were caused by the causes of the current problems! Hey, look at that!

But the evildoer cackling and intentionally implementing policies that the populace loved (at the time) with secret nefarious motives is nothing but a figment of the very, very paranoid and very, very financially uneducated.

Gah, I love Boing Boing’s cultural content. But financial and economic posts like this are on par with 9/11 deniers and flat earthers: a few real facts, total ignorance of technical details, then paranoia, distortion, and hyperbole to prove the fundamentally irrational point. Argh.
dross1260

Names and faces?
dainel

You’d think that banks wouldn’t lend you money if they didn’t think you could pay it back. Everyone believes this, but unfortunately it’s not true. They could package it and sell it on to other banks, and hope other people will be left holding the bag when everything blows up.
Ernunnos

You want cites for three paragraphs? Oh, br’er fox, don’t throw me in that briar patch!

http://www.communityinvestmentnetwork.org/nc/single-news-item-states/article/ncrc-documents-trillions-of-cra-dollars-in-communities-since-1977-cra-commitments-1977-2005/?tx_ttnewsbackPid=760&cHash=9fc71fab08

http://www.community-wealth.org/_pdfs/articles-publications/cdfis/report-ncrc.pdf

This is not a secret. They published glossy press releases. They held news conferences. They dumped $1.6 trillion in financing into the housing market in the form of CRA commitments in 2004 alone. $4.2 trillion in all, the vast bulk of it after 1996. And bragged about it openly. After all, who was going to object?

People would couldn’t afford homes got homes, the politicians got their votes, the old bankers became powerful beyond imagining, and the young bankers bought Maseratis with the commissions. Everybody else saw their housing values go up and cashed out their equity to buy Hummers. Good times.

Never mind that creating $4.2 trillion in debt isn’t quite the same thing as creating the capacity to pay it back. It was all a fantasy, and now the fantasy is over.
Antinous / Moderator

How about citations to something other than Page Load Error and Page Load Error? Is it just me?
Takuan

“deliberate policies” implies people who knew better didn’t care. I find that credible.
sworm

Why yes, let’s blame the government for taking out an incredibly risky mortgage that I can’t really pay.

I’ll simplify that chart for you:

Policy that allowed people to be idiots –> collapse
jimkirk

If I deliberately leave the door to the hen house open, turn my back and walk away, I might not have intended for the foxes to get in, but I’d still be a fool.
Lobster

Sworm, you’re oversimplifying. Given, a lot of people did take out risky mortgages they couldn’t pay. The banks put a lot of time and effort into convincing them that they COULD. I’d imagine some people who got taken in were literally not smart enough to understand what they were being sold on and couldn’t afford a lawyer to make sure everything was kosher. I don’t know if those people should not be allowed to buy a home, or if it’s entirely their fault if the banks trick them into buying a bigger one than they can afford.

And some people were just stupid and should have to live with the consequences of their actions.

I think we can all agree that taxpayers like me, people who have a mortgage we can afford and work our asses off to pay it, should not have to subsidize people who made bad choices OR the banks that encouraged them to for a cheap buck. Otherwise, I want to know how much of my money went to those banks, and I want to own an equivalent amount of stock. If I’m financing them, I deserve a cut of the profits.
tetron

Well, to use the car analogy (what is this, slashdot?) you could say you had a “deliberate policy” of driving 90 mph on the highway with no seat belt, drunk, and having lobbied the government such that there is only one traffic cop for a hundred billion miles of roadway. Sure, as long as the road remains straight and flat you might be able to avoid an accident, but when the road starts to curve and the going gets rough, the crash is going to be gruesome.

Bailouts would be when the the cop finally shows up at the accident site, he hands you the keys to his police cruiser so you can keep going…
Takuan

http://www.salon.com/tech/htww/2009/06/04/mozilo_sued_by_sec/
Freddybear

The “ideology” section needs another tag: “Community organizers use CRA to pressure banks to make risky loans.”
Anonymous

To all those expounding complicated reasons, consider that in our lifetimes:

1982: Savings and Loan (banking shenanigans)
1989: stock markets (lotsa mining) combined with real estate bubble
2000/2001: dot-com bubble (kinda stocks again)
2008: real estate again (with insanely obvious banking shenanigans)

And if you look backwards this pattern has been going on for over 100 years. Granted, it’s not clockwork, but it is a pattern of regulation followed by relaxation after every cycle. With relaxation, some brilliant young financial mind comes up with a rape-and-pillage strategy that in recent years has taken the form of ‘invest in something that will not generate a return, hype it to create demand, and sell at an inflated price to the competition’

But many of the people at the top of the banking structure have to know this — they’re much older and have seen it happen many times. So they have good timing for getting in and out.
Anonymous

Barry writing here.

Wow, some really um, interesting responses and quite a few misinterpretations. Allow me to clarify:

1) The chart originally covered 25 years — pre-1987-09 — but it was unreadable. Jess (the graphic artist) suggested working within only a decade, and visually, it worked MUCH better.

2) In the book, Clinton (along with Rubin & Summers) get lots of the blame in addition to Greenspan, Phil Gramm and Bush — indeed, a huge list of people.

3) The chart is a visual depiction of what took over 300 pages to explain in the book. It is not the be all end all of the issue;

4) By deliberate, I mean PURPOSEFUL decisions. More specifically, these were not random accidents, perfect storms, or other rare events.

5) I am NOT suggesting CEOs, Bankers and regulators wanted this result to happen — rather, their decision-making was willful — and what occurred was the result of those decisions. (Too subtle for some, I know)

6) The CRA argument is a thoroughly debunked talking point. The argument that “CRA/Fannie/Freddie caused all this” gets its own chapter, “Misplaced Fault.”

7) The repeal of Glass Steagall is under “Finacial leverage” pointing backwards to 1999; The CFMA is under Derivatives pointing to 2000.

-Barry Ritholtz
MadAir

It looked great until I got to the bottom line: “Behavioral economics reveals traditional economics–Humans are rational, markets are efficient–is terribly wrong.” Total non sequitur.
Anonymous

This is instuctional, because of the causes which have drug everyone to this place. Yes, NUMEROUS people knew that they were harming other people, but we just didn’t care, and according to the endless insipid comments – we still don’t care. The delusion thinking seems to be that: if I was lucky enough to step over the mines, it’s not MY problem that the overwhelming number people of this country are hurting. Were doesn’t this stupidity come from? Our schools? Our government? Our misplaced sense of self preservation? The “Secret”?
Isn’t it telling that we are spending trillions of dollars to prop up the banking system and heinously overcompensated CEO’s, at the same time that we are CUTTING our Social Security benefits for the elder and disabled? Of course, we are not cutting the medicare and medicaid fraud and waste, we are ONLY cutting benefits to LIVE, forcing even more into nursing homes and drug fogs.
Yes, I agree that Bush did much to harm this country – INCLUDING the heinous FDA preemption legislation. Of course, Obama has forgotten (along with the media and society) that this is one of the Bushisms that he has promised to repeal. Now he is more Bush than the bushisms that he promised to repeal. NOBODY can remember this was the “trigger” of our overwhelming pain that has CAUSED the rise of the foreclosures and bankruptcies. Nobody at all was complaining at the time, because they thought that they had an “out”. The same as now – we believe that “we” are somehow entitled to get out of the fray without a scrape.
Is Obama better that Bush? Hardly. He has spent borrowed trillions to pump up the fraudulent bank system and wasteful, harmful, fraudulent medical industry. Are we trying to get Obama to keep his promises? No, we are a forgiving society, we are even giving blessings to Bush to be the scammer that he was – hoping that Obama’s make-believe money will trickle down, someday, somewhere.
sworm

@7: and of course, if the cpp doesn’t hand you the keys he gets fired, would be democracy in action