Rethink The Big Short and the 2008 Financial Crisis | reTHINK TANK

Rethink The Big Short and the 2008 Financial Crisis | reTHINK TANK


The arrival of The Big Short in theaters a
few weeks ago, and its subsequent win at the 88th Academy Awards, has reignited interest
in the causes of the 2008 financial crisis. The film would have you think that private
greed on Wall Street and a lack of regulation caused the economic crash. This is a story
that is simple to describe and easy to believe. The government likes it because it places
most of the blame on the private sector, and Hollywood likes it because it is easy to blame
human foibles—like greed—as the source of much more complicated problems. But while
stories like this might make for a fun movie, The Big Short fails to align with the facts.
The reality is that government housing policies led to a general deterioration in all mortgage
underwriting standards, to the “mortgage meltdown” of 2007 and 2008, and ultimately
to the market crash that we know as the 2008 financial crisis. To get an accurate perspective
on what led to the financial crash, we have to wind the clock back to 1992. Despite many
government subsidies the homeownership rate in the U.S. had been stalled at 64 percent
for 30 years. Congress blamed this on two government-sponsored enterprises or GSEs,
Fannie Mae and Freddie Mac. These GSEs had government backing but were also private,
profit-making firms, and insisted on acquiring only prime mortgages. Thus—it was argued—by
insisting on these underwriting standards, the GSEs left a vast number of low income
Americans frozen out of the American dream of homeownership. So, in 1992, Congress adopted
a program known as the “affordable housing goals,” which required Fannie and Freddie
to acquire an annual quota of mortgages that had been made to low or moderate income borrowers,
without considering whether the mortgages were prime loans. Starting in 1993, 30 percent
of all loans the GSEs acquired in any year had to be made to home buyers who were at
or below the median income where they lived. But the Department of Housing and Urban Development,
or HUD, was given authority to raise the goals—and it did, aggressively. Between 1993 and 2000,
HUD raised the 30 percent goals to 50 percent, and between 2001 and 2008 it raised the goals
to 56 percent. Thus, by 2008, 56 percent of all mortgages the GSEs acquired had to be
made to borrowers below the median income of their communities. Notably, HUD’s relentlessly
rising quotas occurred in both Democratic and Republican administrations. Understandably,
it was difficult for the GSEs to meet these quotas and still acquire only prime loans.
Accordingly, between 1993 and 2008, they began to accept increasing numbers of nonprime and
other risky mortgages, with low or no down-payments and from borrowers with poor credit ratings.
By June 2008, before the financial crisis, more than half of all mortgages in the United
States—31 million loans—were subprime or otherwise risky, and 76 percent of these
were on the books of various government agencies, primarily Fannie Mae and Freddie Mac. The
connection between the dramatic rise in subprime mortgages and the financial crisis is clear.
Because the government-backed GSEs dominated the mortgage market, when they reduced their
underwriting standards to meet the affordable housing quotas, the rest of the market followed.
Soon, borrowers who could have afforded prime mortgages were getting loans with zero down
payments. This created an enormous housing price bubble. It is easy to see why. If a
buyer has $10,000 to buy a home, and the downpayment required is 10 percent, he can buy a $100,000
home, but if the downpayment requirement is reduced to 5 percent, the same buyer can buy
a $200,000 home. He borrows $190,000 instead of $90,000. This put great upward pressure
on home prices, causing the bubble. Also, the buyer now has less investment in the home
and more debt to repay. So when the bubble began to deflate in 2007, borrowers found
that they owed more than their homes were worth. Many of them simply walked away from
the home. Others tried to get lower cost financing but could not. The number of defaults was
unprecedented. Fannie later reported that in 2008 it was exposed to $878 billion in
subprime and risky mortgages, which caused 81 percent of its losses that year. Freddie’s
percentage exposures and losses were proportionately the same. Both organizations were taken over
by the government by the end of that year. Government blunders then turned the mortgage
meltdown into a financial crisis. First, the government rescued Bear Stearns, a Wall Street
investment bank, in March 2008, creating expectations that it would rescue other big firms if they
got into trouble. But when Lehman Brothers—a firm much larger than Bear—weakened, the
government suddenly reversed its policy, letting Lehman fail. This upended the market’s expectations,
creating doubt about the safety and soundness of every firm. The result was an unprecedented
panic that we know today as the financial crisis. Long story short—was there bad behavior
on Wall Street? Of course there have always been individuals who take advantage of the
system. But that’s not the issue here. The 2008 crisis was not caused by Wall Street
“fat cats” taking advantage of loopholes due to a lack of regulations; they were taking
advantage of market incentives that existed because of irresponsible government regulations.

45 thoughts on “Rethink The Big Short and the 2008 Financial Crisis | reTHINK TANK

  1. Why is it that whenever a government like the US one is seeing something that SHOULD be is willing to take measures that SHOULDN'T be taken to get where you want to go…
    If you want more home owners, create policies that increase purchase power of your citizens and the ownership will rise in a natural fashion.

  2. Doesn't mention the corporate side of things, especially the corporate lobbying, at all. Barely mentions Wall Street at the 6:00 mark only to declare, without justification, that "that's not the issue here".

    Thankfully, every single day that passes, more of Reagan's fans are dying of old age. Pretty soon there will be no one left to cover for his ass. Reaganomics, Bush Sr, and Clinton deregulating all contributed heavily to that crisis. It was a willful, deliberate choice to make themselves and their business interests money.

    You can't blame 200+ million Americans for not all being educated (especially when you support people who let the price of tuition rise 1,000% without giving people a reprieve) and coordinated in their endeavors in life when a handful of people entrusted with power were the ones who opened the gates in the first place. Usually while encouraging people to pursue the "American Dream".

    On one hand they promise a better life, and on the other they turn a profit by denying that life to people. This is how Republicans are functioning even right now. This is the platform of all 3 main GOP candidates. "I'll make things better! By doing things that are proven to screw over the middle and lower classes!"

    AEI is being scummy here. They don't think people have a right to a higher education. They don't think college economics SHOULD be widely available to the entire public. Only a few very bright, talented, or wealthy individuals destined for upper management. And yet they think people should've seen these outcomes coming? With no education on the matter? Bald faced hypocrisy.

  3. This video should have shown some info on conflict of interests. It seems pretty obvious when The Big Short is put aside as making things too simple, and next the big crash is basically blamed on government policies. While adding that examples of bad stuff happening in the financial industry are mainly because of a few individuals. This man's next job will be on Wallstr.

  4. lol, this is the dumbest video. So, who lobbied for this? The banks. You dug your own grave, and then you didn't have to lie in it. You can't lobby for these changes, then blame the government for your crap idea. Fuck off AEI, with your history rewriting attempt. This video is utter and total horseshit. Oh, and unsubbed ofc.

  5. The movie is too focused on the private sector and AEI is too focused on government. Whereas the fact it was both of them, government didn't force the big institutions to do anything corrupt they did it all by themselves.

  6. Laziness, corruption, stupidity and greed. This guy talks like the Government and Big Money are complete strangers. So it's either a conspiracy or the planet is run by idiots.

  7. The greedy and stupid American public are responsible for the meltdown because they kept voting for the conniving evil liars who put the regulations (conditions) into place. All any fool needs to know about life and finances is that there is "no free lunch". If you understand just that one thing then you will have a prosperous life and society.

  8. True, and yet still incomplete.
    Loans were issued on the concept of ever rising prices.
    The idea was that if the loan failed then the bank could suck up the equity in the form of fines and fees.
    The other part of that formula was the idea that lower income people could use Adjustable rate mortgages and leave before the reset, allowing them build up equity and sell.
    The problem for the financial industry is that too many people started buying with zero down. This meant no equity for them to steal and no incentive on buyers to stay and
    suffer the losses. Worse, they could stay "rent free" for years awaiting eviction.
    The credit default swap devices were insurance policies in all but name, they did not have to have the reserves a regulated insurance company had.
    When the "bets" were called on, the collapse happened.

  9. Interesting perspective. I wish I understood more of economics, it's such a nebulous field with experts on both sides explaining their side of the story.

  10. These people would have you believe it was all the government's fault, when it was really government deregulation and the repeal of the Glass–Steagall Act, (lobbied for by the banking industry) that contributed to risky behavior by banks. These actions also left them financially unprepared to weather any storms. Nice try.

  11. While the factual backing of the piece is undeniable, the conclusion does not follow from the premise. While inefficient and misguided regulation may have set the market conditions being exploited, the exploitation itself was a direct result of "wall street fat cats" pushing otherwise prime buyers into subprime loans. Bad regulation enabling catastrophic behavior is not a direct cause of catastrophic behavior; the actual cause of the bubble was the banks themselves. Incentives were implemented for branches to push good buyers into subprime loans and loans were given to buyers without consideration of the default risk. Likewise, the government creating the expectation of a bailout cannot conceal that banks continued their irresponsibly risky behavior even after the crash began.

    This piece also ignores subprime-mortgage-backed securities and their role in expanding the disaster beyond the financial markets. It's undeniable there was a rampant disregard for the risks bordering on willful misrepresentation. Likewise the piece ignores the source of the bad regulation, specifically the role played by lobbyists from the banks themselves.

    Frankly I am disappointed by this piece. While I generally respect AEI enough to ignore an occasionally partisan agenda, pieces like this chip at that. Attempting to excuse the private sector's risky behavior by blaming poor government regulation would stretch incredulity even if lobbying and junk securities weren't suspiciously omitted.

  12. I wouldn't say the Big Short was not correct. Yes, government regulation was one of the primary causes. The Big Short simply focuses what happened when wall-street and banking took advantage of the sub-prime opportunity…

  13. Yes, this is only part of the story, but it's the part no one wants to hear. Our society has bought into the foolish notion that everyone "deserves" what anyone else has. So if I can't afford a house, I cry "Not Fair!" Then when the consequences of forcing the lenders to give me a house comes crashing down, I indignantly blame it on the so-called fat cats. Just look at the comments here and you'll see what I mean. The unmitigated economic failure of every Communist system in the world has proven over and over that if you can't earn it yourself, having the government steal it from others and give it to you will only bankrupt you AND the ones you stole it from.

  14. Mr Wallison nails it. Greedy politicians FORCED the Government Sponsored Enterprises to demand subprime mortgages from banks. Banks simply responded to this demand by lowering lending standards. Otherwise, the Government would accuse a bank of "red-lining" or "discrimination" against the poor/minorities. Blame Bill Clinton, Barney Frank, and Chris Dodd.

  15. The system became too "top heavy" – leaving the majority of the population with an inability to spend money because they couldn't afford to spend it, and YES deregulation from the government played a large part in that. The financial crisis was practically due to the greed of those in power, and it was felt all around the globe. This problem was bigger than just the United States.

  16. So instead of trying to argue against the Big Short's side of the story you just completely ignore it? And "the markets followed" is somehow still 100% the governments fault, as if the financial industry had no responsibility to take risk into account?
    I agree that the government also had a very big hand in what happened but let's not pretend that this is as one sided as presented in the video.
    (Even if you don't take into account that the governments policies are massively influenced by the financial industry. I see people in the comments saying "Democrats!!" even though the video itself mentions that these quotas rose under both Dem and Rep administration. This isn't football, people, stop picking teams and look at the facts)

  17. soooo long story short they did take advantage of "irresponsible", which can also be described as "lack of", regulation.

  18. Apparently, this dude din't bother to watch the movie until its last minutes.
    While the main matter of the movie needed a long in depth explanation pointing to the real culprits, th movie DOES mention the attitude of the government, which surprised nobody at all…. in other words, no movie material there and no further explanations needed either.
    While some of us understood the movie, which required a fair amount of concentration and criticism, we are critical enough to know what a movie needs to keep you in your seat and get your full intention throughout.
    So, FUAD…

  19. This, ladies and gentlemen, is known as propaganda. It is a willful obfuscation of facts to push a specific ideology, most likely neoliberalism.
    Governments are not perfect, but they are not the evil libertardians want them to be. During WWII private enterprise in England was as low as 1% yet England finished the war with a higher standard of living than when they entered it… Is this evidence of how wonderful governments are? No, but it shows they can be a tool for a greater good if used appropriately… Same with markets… but extreme use of either tool results in failure…

  20. Thank you for posting. As always, one must hear both sides to get to the truth by blending both sides. This is a great telling of the publics fault. Watch the big short for private sector's fault. Glenda to, and you have the truth.

  21. Your criticism of The Big Short is a straw man fallacy. The movie told a story about specific investors and made the explanations it needed to in order to tell THEIR story. A hollywood movie obviously can´t get into in-depth policy history, but just because it didn´t touch on the factors considered in this video deosn´t mean that it´s claiming those weren´t factors in the crisis. It got into very specific explanations about HOW different actors took advantage of market conditions and how perverse incentives (like the well-documented effect conflict of interest had on Moody´s and S&P´s ratings) came together to contribute to and mask a massive bubble, and how those actors then colluded to try and cover their losses. That doesn´t mean they are therefore saying gov policy had no role in the crisis. I´m no expert but I did study it in college, and everything described in The Big Short is stuff I´d seen in classes given by ppl who are in fact experts (and who also talked about the factors shown in this video).

    I feel like your criticism of The Big Short here is either clickbait, or worse, political (by creating a straw man out of The Big Short´s narrative you create a clean conservative explanation for an incredibly complicated issue). You would have earned much more respect from me if you´d said "The underlying cause of the financial crisis that you won´t see in The Big Short,…" which while still debatable doesn´t create a straw man out of the legitimate portrayal/narrative you see in the movie.

  22. Rеаllу bеst mоviе. I fоund it hеrе => https://twitter.com/ea71bdbd8fc0fa08b/status/781151013071785986 rеТhink Тhе Big Shоrt аnd thе 2008 Finаnсiаl Crisis rеTHINК ТТАNK

  23. Well, that's a nice story, or half a story, as the case may be. Any reason why this "explanation" didn't mention credit default swaps or derivatives based on mortgage-backed securities? Maybe would change the narrative a touch, eh?

    If you want to assign some blame to HUD, then fine, but to do so without describing in detail how this situation was exploited for profit by the big banks is lying by omission. Moreover, to show the losses suffered by Freddie or Fannie for the calendar year of 2008 is about the dirtiest pool I've ever seen. In doing this, you conflate cause and effect — and you know it. Of course these agencies lost but that year — it's the year the market crashed. By the same token, if you conclude that a company never turned a profit because its stock price fell in 2008, then you're technically right — for that year.

    People with a reasonable case to make don't lie.

  24. It's much easier to see the truth in what Peter in saying when you realize similar stuff is happening in China right now.

    Oh well, it seems that people on the left will never fully understand that force in the name of egalitarianism always ends up exploding in people's face, and we have over 200 years since the French Revolution to see this over and over again. The Housing Crisis is just another example of a consistent thread in history.

  25. This oversimplified fairy tale is worse than a batch of wholesale lies.. A think tank?? no a propaganda machine with a clear agenda…

  26. Who are you? "Government blunders turned the mortgage meltdown into the financial crisis"? You actually have to go back to the Great Depression. Where you'd understand why it's necessary to REGULATE banks in the first place…such as, making risky investments with depositors money. Then look at the late 1980's when the government started putting former bankers in office and DEREGULATION began….

  27. How do you explain (according to Bill Black) the FBI report in 2004 that there was perverse amount of fraud in the housing industry. Liars loans, No Income No Job loans?

  28. LOL Austrian Libertarian bullshit.

    The causes of the 2008 crisis are not even controversial at this point. Its pretty obvious what the causes were. Its agreed that the subprime mortgage crisis was strongly related to the crisis itself, if not the primary cause, since it connected the housing bubble to the financial system.

    Sorry but this ancient excuse of blaming the government and saying the CRA was responsible for subprime mortgages is bullshit and has been debunked too many times. The CRA had been around for like 30 fucking years, and the subprime mortgage crisis didn't occur until the 2000's after glass steagal was repealed.

    The reason a housing bubble occured is because banks were getting more and more generous with the loans they were giving out. Near the end of the bubble, literally anyone could get a mortgage for not just 1, but 2 houses, with no income, no job, or assets whatsoever.

    Why did banks do this? Because there was an increase in the demand for mortgages. A demand from who? Investors. They wanted more mortgage backed securities because of how profitable they were, which mean a direct demand for more mortgages. Thats simple supply and demand.

  29. I'm really glad someone is saying it, but unfortunately this video is an eye-glazer. That movie has done it's job and dumbed down the people even more, all the while pretending that it is educating them.

  30. "…due to a lack of regulations" and "because of irresponsible government regulations". Where is the different. The first one is private and the second one is the government? But who makes the regulations for the private sector and for the government sector? In both cases that are maked by the gouvernment! And the problem is, that this regulations don't protect the weak… They protect the rich from loosing money! Because they're to big to fail (if you don't want to let erupt the fincancial system)… until you have no other choice (Lehmann Brothers) and then the financial system erupts. That is the conclusion of the book/movie. The problem is the insufficient regulation! Neoeconomical associations force to make profits as big as possible. The logical conclusion is that control and regulation decelerate the financial boom like discussions and considerations decelerate the democratic process. But it's not everytime the best choice to force the fastest answere to complex problems and also it's not everytime the best choice to have low regulations and controlling laws.

    I know, that's sounds conspiratorial, but instead of grumbling all time on the refugees (Mexicans in the USA or the North-Africans in Europe), the people should start to force higher regulations and control to the economical system. But it's like the movies said in the end: This topic is to complex for the averaged citizen and so it will hit the poorest people: Asylants and Refugees.

    Make America great again? Fucking presidental idiot. Then count the annual costs for refugees and the money that vanished within this economical crises. Are more then 50% for some presidental candidate that they: Heyyy, the banker of the wall street used weak regulations to cause a worldwide financial problem, let's put a fence around the wall street, lock them out and make america great again? I didn't think so! But to contribute something to the financial growth of a country is not the highest goal, that protect against every liability… or let me say it shouldn't be :'( .

  31. And it was the private sector, that decide to give credits to people that are not protected by the governmentally warrenties.

  32. http://neweconomicperspectives.org/2015/05/the-wsj-and-barrons-apologists-for-the-banksters-peddle-wallisons-fables.html

  33. This video is a half-truth. Yes, Fannie Mae and Freddie Mac being required to lower their standards was a part of the problem, but that's not the whole story by a long shot…

    Wall Street Financial institutions created Collateralized Debt Obligations (CDO's) of Mortgage Backed Securities (MBS's) in which they sliced up mortgages into tranches and then filled different levels with both highly-rated and low-rated mortgages. But how do you explain why, as time went on and the bubble grew, the Wall Street firms began irresponsibly filling the CDO's with mostly subprime mortgages in a such a way to try to fool the ratings agencies into over-rating the CDO's? It was literally like a shell game by con artists to dishonestly sell junk and no government law or agency forced them to do that.

    How do you explain why the ratings agencies (Moody's, Standard & Poor's, and Fitch) gave Triple-A ratings (the highest rating reserved for the safest investments) to CDO's that were full of risky Subprime Mortgages? If the ratings agencies had simply done their jobs and properly rated the CDO's instead of essentially rubber-stamping them with their highest rating, the whole crisis could've been avoided because investors would've known that they were unsafe junk securities and avoided investing in them.
    The ratings agencies had one job – just one job! – and all of them completely failed at it.

    How do you explain why Wall Street firms created "Synthetic CDOs" which were artificial CDOs that mirrored real CDOs, so when the real CDO failed then all of the synthetic CDOs based on the real one failed too, and hence tremendously amplified the size of the financial crisis? No government law or agency forced them to do that.

    How do you explain the overuse of Credit Default Swaps (CDS's) by Wall Street firms to essentially "insure" each other that were far in excess with what they could actually pay out? This reckless practice essentially meant one Wall Street firm failing was going to pull down all the other firms and that this chained them together was one of the main reasons why there was even a need for some sort of bailout. No government law or agency forced this incredibly bad behavior on Wall Street, it was a mess entirely of their own doing.

    Sorry, but using a half-truth explanation that omits crucial details isn't lying, per se, but it is being dishonest.

  34. Problem with this strong belief that banks are totally at fault & no blame to the govt is that this same mistake will happen again.

    I’m already hearing a lot of talk about redlining and this is the reason that the poor & minorities haven’t kept up so now a lot of people are wanting the govt to step in & get involved. When will people realize that the govt is the one that causes nearly all these crisis’s
    Look at college tuitions going through the roof for another example & now they want govt to step in & fix the disaster they helped create & of course it will be us that gets to pay for it & once again the banks will get off Scott free. I’m starting to see a pattern.

    Am I the only one?

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