Financial Derivatives: What are They? - Housing Bubble Collapse - Unregulated Insurance

Was the lack of regulation on financial derivatives the main cause of our economic collapse? Or was it the easy money that Fanny Mae and Freddie Mac were giving out for home mortgages like there was no tomorrow? I would say that it was both, but there were other factors involved as well.

The way I see it is that there was overregulation on one hand, Fanny and Freddie, while on the other hand there was under regulation when it came to these derivatives.

I believe that this economic crisis we find ourselves in can be laid squarely on the shoulders of our federal government. They were the ones, along with the Feds, who made regulations that provided easy money for the taking, which was the cause of the housing bubble, which would have to collapse eventually, that is why they call it a bubble, because it is unsustainable.

I believe it's good that they are now proposing regulations on these insane casino style derivatives that have no economic value for our country. I just hope that congress does not do what it is famous for, which is to overreact to a problem, and in the process, make it worse.
jbranstetter04

Category:

News & Politics

Tags:

• Financial
• Derivatives
• What
• are
• They
• Housing
• Bubble
• Collapse
• Unregulated
• Insurance
• fanny
• mae
• Freddie
• mac
• home
• mortgages
• feds
• regulations
• banks
• crisis
• housing
• economic
• government
• barney
• Frank
• Chris
• Dodd

[joae1975]

Does anyone think the Community Reinvestment Act had anything to do with this in the first place? The government forced banks to give loans to people that could not afford them. Therefore it was not hard to predict that the majority of mortgages would default. Investors took advantage of this knowledge and exploited it. Anyone?

[jbranstetter04]

@joae1975 It was more like this, and I know from experience. Fannie Mae and Freddy Mac would buy almost any mortgage from a bank, that is if the person taking out the loan was still breathing. In this way the banks went by the rules, but they pushed it. They gave out as many loans as possible, then dumped them off on the GSE's. The banks were out to take advantage of the GSE's buying up the mortgages; a natural thing to do. Then Wall Street got involved.

[Holowachuk]

derivatives means speculating about the price in the future.

it's simple. aristoteles bought any olive squeezer he could find and when the harvest came every farmer had to hire to squeezers from him.

if someone else had constructed more squeezers in the mean time he would have failed.

clear?

[jbranstetter04]

@Holowachuk I think people would understand better if you said that the olive crop failed and he lost all of his wealth because he was stuck with olive squeezers that no one wanted, and no cash. It's like he cornered the market on the squeezers, but there ended up being no market for them. But would it not be more accurate to say that someone was betting that he would fail, and that is a derivative of the kind we are speaking of?

[Evry1LuvsJennieO]

Someone explain these two questions to me...One, how is this not illegal? Two why aren't these scumbags in federal prison?

[jbranstetter04]

@Evry1LuvsJennieO Over 30% of federal prisoners are illegal aliens. There is no room. How can we fix this?

[FortNikitaBullion]

so Wall Street is a casino?

[syk4ryo]

I know. I know: Financial Derivatives is a JOKE!

[sketchables]

@FortNikitaBullion Apparently.

[taeonu]

@joae1975

Search: "Subprime Debacle Traps Even Very Credit-Worthy" for full article on Wall Street Journal Online



[taeonu]

@joae1975

A 2007 Wall Street Journal study showed hat in 2005, the peak of the sub-prime boom, borrowers with good credit scores got 55% of all sub-prime mortgages.  Coincidentally, the banker's commission on sub prime loans was multiple times higher than regular loans.

[hotwelder2010]

Alan Greenspan and his band of deregulating demons are respsonsible for this mess. Greenspan was in for way too long and had too much power........

everyone had too much belief and confidence in him.

[Juands10]

they didnt have a utopian view neccesarily but that is just a way to simplyfy their view. what they essentially were doing is dancing while the music was still playing.this was mentioned in john cassidy's book "how markets fail, the logic of economic calamitites" check it out its a great read and loads of insight on utopian and real economics

[BonesRemix]

@joae1975 Yes, it certainly did not help. BUT, the majority of the banks who were playing risky had nothing to do with the CRA. But as for banks that were affected by this law, they should make FIXED INTEREST RATE payments only. When Bernanke raised the interest rate form 1% to 5%, all these loans blown up, but they would be fine if it was a fixed contract. Sorry for my bad english bro, i'm french XD

[dookdawg214]

@Evry1LuvsJennieO

It's not illegal because deregulation made it not illegal. That's the problem with lax regulation on Wall Street. Banks used to be obliged to invest no more than 10 times the amount of cash they're holding. That's 10/1. Today, some banks are undercapitalized by 40/1. This is what AIG was doing with bogus loans. It's easy to collect premiums when you know you'll never be able to pay anything out.

[ScottBrown666]

@jbranstetter04 Ding ding ding. I think it was about half of all sub prime mortgages in the US were backed by Fannie and Freddie. The other half ended up insured by AIG and/or fraudulently labeled AAA and sold to pension funds and hedge funds.

[ScottBrown666]

@jbranstetter04 Something tells me that's not true...