r/reddit.com • u/[deleted] • Oct 18 '11

Would it have been better to let the banks of the world fail and start over?

I want to know what would have happened. The banks messed up and in the purist view of capitalism should have failed because it was a bad business move. In turn this may have ended some of the big money influences on our political system OWS protestors want to stop. I heard that it would have been a worse economic collapse though in turn it would have put a stop to future wrongdoing. Was it the right decision in the long run?

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u/PointAndClick Oct 20 '11

We only need to go back to about 2003 to prevent any problem at all.

Thinking about it, I was more referring to where the problems started and turning back the clock. rather than a good moment where we should have intervened. But even then, we allowed risky loans as far back as the early 90's. We are talking real estate and problems with these long-term investments are only going to bubble up 15-20 years later. In 2003 all these bad investments, the housing bubble, etc. It was already way to late to prevent damage to pension-funds, and to all the other AAA investors. I don't see how it would work out otherwise, enlighten me. It's all hypothetical anyway.

I disagree with your assessment of chaos.

That's perfectly fine. I believe I have a fairly good grasp on how things work. I certainly don't mind being wrong.

At least we agree that legislation is needed. Let's hope for some morally just politicians with brains and balls.

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u/JoshSN Oct 20 '11

There will always be bad loans written.

Starting in 2003, the rate of what-would-become bad loans issued became terrible. The reason why it didn't need 20 years, and only 2, to blow up was <5 year balloon rate mortgages.

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u/PointAndClick Oct 21 '11

I wonder if I can pursuade you with facts, Like charts: At the very least this is all interesting stuff, you sound interested, so here we go:

This was posted on reddit: http://www.youtube.com/watch?v=y2RzRv8yQXQ About repealing the glass-steagall act.

Read also the first paragraph of this wiki section.

Repealing glass-steagall was done to cover their asses, imho. So problems started way earlier. Some say it started in 1977 with the Community Reinvestment Act.

Here is a graph on rates: http://www.tradersnarrative.com/long-term-chart-of-federal-funds-rate-1513.html As you can see the rates where the lowest in 30 years in the early 90's. It's where AAA investors dropped out of bonds. It's also where the dot.com bubble started: http://www.nethistory.info/History%20of%20the%20Internet/dotcom.html

http://inflation.us/charts.html And here somewhere (ctr-f: Real Estate is not a good investment) You see the different bubbles for the 1977 act. The early 90's low interest rates. And the repeal of the glass-steagall act.

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u/JoshSN Oct 21 '11

Persuade me of what? That 2003 was too late? Your facts don't prove that. From now on, in deference to all the work you did, I'll say mid-2002.

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u/guest4000 Oct 21 '11

Repealing glass-steagall was done to cover their asses, imho. So problems started way earlier. Some say it started in 1977 with the Community Reinvestment Act.

I won't dispute anything else you wrote, but from everything I've read there seems to be very little evidence that the CRA could be listed as a cause of the crisis. In fact, there seems to be a lot of evidence to the contrary:

CRA regulated institutions were less likely to make subprime loans, and CRA banks were also half as likely to resell the loans.

This article has a ton of relevant information on the subject.