A Complete Explanation of the 2008 Financial Collapse

To the Sanders-supporting socialists among us:

Well-meaning socialist politicians caused the economic downturn. This is absolutely certain. Every other explanation is entirely incorrect. You need to understand this, so I will explain it from the start.

In 1977, Jimmy Carter signed into law the Community Reinvestment Act (CRA) requiring banks to hand out housing loans on the basis of affirmative action. However, no enforcement mechanism was put in place, and the Act was mostly ignored. So in 1995, Bill Clinton pushed for and signed into law reforms to this Act, making it enforceable by the Federal Reserve, who can deny banks licenses to operate if they do not engage in sufficient affirmative action. Because the proposed customers of these loans did not qualify for ordinary housing loans, this forced banks and other finance firms to create an excessive number of subprime loans to service this market.

In 1998, Congress passed a bill to audit the Community Reinvestment Act and put together a report studying its effects. The report, released in 2000, showed that the results were atrocious. The individuals receiving these subprime loans were going bankrupt at an astronomical rate, and banks were beginning to collapse under the weight of all these junk loan contracts that would never be paid off. Clinton’s response to this was to issue an executive order demanding that Fannie Mae and Freddie Mac buy up subprime loans, increasing their balance sheets to 50% subprime, in order to try to save the collapsing banking industry without stopping the CRA.

For several years, this quick fix seemed to be working. However, this created a new problem. Now that Fannie and Freddie were a guaranteed buyer for subprime loans, these loans were no longer valued as junk, even though they were realistically nothing more than junk. So the number of subprime loans on the market exponentially multiplied, as a means of creating money from nothing. The Democrats (especially Sanders) were pretty happy about this, because these loans were being used to purchase homes for poor and minority individuals. But the lack of real value there means this was nothing more than a bubble.

In 2007, the housing bubble burst, and subprime loan customers started going bankrupt. Suddenly, the perceived value of those subprime loans dropped back to $0, where they belong. Minorities lost their homes and savings at an unprecedented scale. This wiped out half the assets held by Fannie and Freddie, sending them into bankruptcy. Other banks that had gotten heavily into the subprime lending business (e.g. Lehman Brothers) were the first private sector businesses to collapse. By 2008 the global economy was collapsing, as a broader asset bubble popped. The rest is history.

This is a clear example of socialist politicians meddling in the economy for their idea of the “greater good” and screwing it up for everyone. When you try to use government to regulate markets for some supposed social goal, you destabilize the capitalist pricing system, creating bubble/burst cycles. There is an entire field of economics devoted to studying this phenomenon (see: Austrian Economics). It is completely foolish to think that you or anyone you might vote for can out-think the capitalist free markets and create a “greater good” without inadvertently blowing up the whole thing. Jimmy Carter, Bill Clinton, Barack Obama, and Bernie Sanders are all guilty of this same type of foolishness, and that is one of the many reasons why they are dangerous.

If you still insist on refusing to believe me, then just keep an eye on the stock market. We have reached the peak of another bubble, inflated by Barack Obama’s stimulus and Quantitative Easing schemes. Before Obama leaves office, the markets will have begun an unprecedented crash that will cut all the major indices by >50%. The global economy will once again be in turmoil. If you haven’t learned from the 2008 financial collapse, hopefully you will learn from the 2016 one.

2 Responses to “A Complete Explanation of the 2008 Financial Collapse”

  1. Andrew Says:

    The first half of this post was fairly accurate but it came off the rails in the end.

    Austrian Economics has been thoroughly discredited given the low inflation we’re seeing across the world’s developed economies. According to Austrians, the increase in banking reserves would have spurred lending and caused massive inflation. This hasn’t happened, however, as it turns out lending/money creation is demand driven. Households deleveraging has more than offset any stimulative effects of lower interest rates.

    I’ll also add that

    1) QE wasn’t Obama’s idea
    2) QE has been over for months

    Lastly, I’m willing to put up $10K and bet that a US equity index of our mutual choosing will NOT being halved during 2016. Happy to coordinate via email.

    • Thomas Anderson Says:

      We saw some inflation during Obama’s stimulus programs (consistent with Austrian Economics), but It’s certainly true that we’ve seen low monetary inflation more recently. However, we’ve seen massive, ongoing equity inflation. This makes sense in an Austrian framework because QE didn’t involve ordinary money-printing and distribution, but a massive purchase of Treasury bonds and stock market assets. Effectively, these equities are the currency being created out of nothing, while the consumer markets aren’t seeing any extra dollars rolling in. This is how it’s possible for the dollar to deflate while the stock market inflates. Of course, if anything were to cause a significant equity sell-off, the dollar could inflate very rapidly.

      Indeed, QE has been over for months, and the stock market has stopped growing. In fact, it has already tipped over the edge into decline. I already have my money in the correct markets to capitalize off this.

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