The US allowed housing loans to people with no job. They also allow you to walk away from a debt by handing back the keys. It's not rocket science. What was really appalling was that knowing the debt was bad they would then onset the debt. The overall regulation in the US was very poor to say the least, probably criminal yet how many prosecutions were there?Many people should have gone to prison. Aussie banks survived primarily because of good governance and regulatory practices. Same with British banks. There was also a lot more ethical lending.
relating poorness to ability to paying back is also somewhat simplistic and naive. In the poorest of villages in places like Bangladesh, micro loans are provided to predominantly women it must be said (have to admit they are generally more responsible) to start tiny businesses that may include buying a coe to provide milk that they then sell. The success rate in loan repayment is extremely high. But to give a loan to a bogan who spends all his money on alcohol and fags and is constantly in arrears, well you'd be mad wouldn't you?
Phil, I'd add to the list of those at fault for the financial crises those who purposely over-inflated the value of homes, with financial institutions assistance, no doubt. You're right about the US banking system - as I mentioned before, Canada also escaped relatively unscathed because (not in spite of) regulations and careful governmental supervision. I also agree with you on the wonderful success of micro lending, particularly in 3rd world countries.
Difficulty score 13. No green.
I'm at a loss to understand why government regulators need to tell lenders it's a bad idea to lend money to people who are not likely to pay it back. But it is clear that if the banks expect a government bail-out then they don't need to be careful and follow good business practices.
Diane: house prices rose in the 90s because interest rates were low. So demand for houses increased and prices went up (supply and demand in a free market).
Interest rates are controlled by the Federal Reserve Bank. Another quasi-government entity meddling with the economy.
Phil: let me help you understand the concept of a bad loan. It is one which is not likely to be paid back. That could be because the person borrowing the money is a bad credit risk, they have a poor record of paying their creditors. But it could also be the result of lending too much money to a person who is otherwise a good credit risk.
Of course poorness is an indicator of ability to pay back a loan. But there are many other factors which lenders take into account. I don't think government regulators should be telling lenders which factors to take into account and how much weight to give each factor. Government regulators don't pay the price for getting it wrong, the lenders do. So let the lenders decide who to lend money to because they are the ones who pay the price for being wrong.
The run on bank mortgages started when anyone with a job could get a loan, and the reason the banks and mortgage companies like Countrywide went along with it was because the loans were being underwritten by private investors who thought mortgage backed securities were a great investment. The banks didn't start taking a hit until the private investors were cleaned out, oil went thru the roof, companies had to raise prices and cut back on employees, and people started losing their jobs. Housing sales went south and the (unemployed) folks who had tried to become the next Donald Trump by flipping houses suddenly had multiple mortgages to pay and no buyers. It was a gigantic house of cards. Everyone involved got burned except for the "investment" banks that sold the MB securites and default swaps, ie vampire squid Goldman Sachs.
EZPZ -- straight forward, one move lead to the next, but not such an abundance of available moves. 10.
People think banks make money by taking customers' deposits and loaning that money out. Wrong. Banks make money by writing loans, creating debt out of thin air and charging interest on that debt. There is no money. As long as the loan gets paid back there's no problem. Deposit money is used for the fractional reserves banks have to maintain on hand if and when any loans do get called in, a tiny percentage of the money they "loan" out on paper. Poor people were getting screwed by the banks. The banks and private investors were making a killing off of them. People were paying 1200-1300 a month on loans of 150K to 200K and were happy to pay it. What does it cost now? 400 to 500 a month? Everyone got greedy. When the economy collapsed it all came crashing down. Not the fault of poor people, IMO.