The Financial Crisis In 4000 Words

by Steven J. Owens (unless otherwise attributed)

The Financial Crisis In 4000 Words Or Less

NOTE:Another new article, this one an analysis of how house flippers, not subprime lenders, caused the housing crash. It also has some interesting comparisons to similarities between the 2008 housing market and the 2017 housing market.

NOTE:This was originally written in 2009. It's now Nov 24, 2013 and the latest permutation of this mess is real estate "flopping":

We now return you to your regularly scheduled rant:

This is an attempt to sum up, in some fashion vaguely useful to a normal human being (i.e. not a political or financial pundit), the financial mess that dominated the news for some months in 2008 and has recurringly cropped up in political coverage ever since.

It was actually three different-but-interconnected financial crises, so the topic is insanely complex; the mortgage crisis, the subprime derivative bubble, and the credit crunch. The subprime derivative bubble is the real linchpin, the key to what happened.

Although there are some excellent resources out there that go into it in depth (particularly a pair of This American Life shows, see Primary Sources at the end), most people just don't have the time and energy to sift through it all and understand it.

Unfortunately, that has left a lot of opportunity for all sorts of idiots to make political hay out of it and hold this mess up as proof that their political ideology should have been followed - even if it was their political party and officeholders that messed it all up. Even this explanation is probably too complex, so I'm going to try to boil it down to a short summary, here at the top. Meanwhile, at the end I have a section about sources of information, so you don't have to just take my word for the facts.

Note: A note about language. If you browse the other pages of this site, you'll notice I tend to use some pretty, uh, "direct" language. I'm trying not to here, because the topic affects such a large cross-section of society, many of whom may be struggling with this topic, and the last thing they need right now is the distraction of harsh language. Please bear with me as I attempt to find sufficiently evocative alternatives to certain popular (but condemned by the FCC) adjectives.

Table of Contents

My Axe Summary of The Summary Three Crises for the price of One! Banks for the Memories Some Hotshot Let's Get Down To It Three Crises In a Nutshell The Credit Crunch It's Not Pick-Your-Favorite-Bugaboo's Fault Hey, she was asking for it... Yes Virginia, The Sky Really Is Blue We Can Never Really, REALLY Know... My Axe, Take II It's the Organization, Stupid The Solution Back To Work And finally... Primary Sources The Sources Sources Discussed In Detail

My Axe

Everybody has an axe to grind, an agenda, or at the very least their own take on things, their perspective, their idea of the story that makes all of the facts come together. Here's mine. I think it's pretty close to reality, but you can read the rest and judge for yourself.

Trying to boil it down...

After sixty-six years of keeping mortgages and wall street well separated, in 1999 Glass-Stegall was undone. Wall street started playing fast and loose with mortgages.

A whole lot of shady mortgages were created - and by "shady" I mean wall street used car salesmen who were supposed to owe a fiduciary duty to the home buyer and keep them safe instead used it as an opportunity to get rich, selling bad mortgages with hidden gotchas to people who mostly didn't need them (and mostly weren't minorities, by the way, though the con artists did target minorities more heavily).

The result is that about 2 million people are looking at losing their homes. Now, that's bad enough, in fact that's very, very bad. But....

While they were selling bad mortgages with one hand, wall street was really going off the deep end with the other. They were building the mortgage equivalent of junk bonds. It's like saying, "Hey, this financial hand grenade is kinda dangerous... I know, let's wrap plastic explosive around it! That'll be great!"

They were literally taking a bunch of risky bets, problems waiting to happen, and creating financial instruments (mortgage-backed securities, collateralized debt obligations (CDOs), and credit default swaps) that multiplied the impact of bad outcome TENS or HUNDREDS of times.

Then they sold these instruments all over the place, in a way we didn't keep track of, so we have no idea who has them, or how much, who's at risk, and who's going to lose their life savings because their very safe pension investment is being run through a wall street firm that has a department, on another floor, full of people doing crazy stupid tricks with hand grenades and plastic explosives.

Again, this multiplies the impact. To the point where the ka-boom would be big enough to blow up the entire global economy.

Which it damn near did.

Summary of The Summary

Okay, so let's look at how the above happened (and knock down some of the stupid excuses and rationalizations people have come up with).

Three Crises for the price of One!

First, for all the fractured reporting, there are (or were) three distinct crises, three different things happening. They're interconnected, but they're also distinct enough that it's useful to separate them out when you try to understand them. The Credit Crunch, caused by the bursting of the Subprime Derivative Bubble, caused by the impending mortgage default crisis.

Banks for the Memories

Second, lots of people are talking about bank this and bank that, and it's kind of confusing things. The ordinary person hears "bank" and they think about that marble-columned building down the block. That's technically called a "commercial bank", meaning they offer services like checking accounts and savings accounts and such to the general public.

But the vast majority of "banks" in this whole mess are "investment banks", which have almost nothing in common with traditional banks and much more in common with wall street stock speculators.

Some Hotshot

In fact, you could make a strong case that the whole mess is a direct result of letting wall street hotshots play fast and loose in territory that for sixty-six years was reserved solely for the stodgy bankers, specifically because they were stodgy and therefore safer than wall street hotshots.


  • the old days
  • banks
  • mortgage officers
  • calamity
  • 3 crises for the price one
  • huge wave of mortgage failures
  • subprime derivatives crash
  • credit crunch
  • net effect: economy in freefall
  • the blame-the-victim game
  • it's not the homeowners (mostly)
  • follow the money
  • blame-the-victim claims
  • overreguation (CRA), subprime borrowers, minorities,
  • the sky is blue
  • we can never REALLY know
  • my axe
  • organizational adaptibility
  • financial disaster area calls for financial martial law
  • back to work
  • primary sources

    Let's Get Down To It

    Working backwards, the financial crisis really took over our imaginations with the Credit Crunch, when all the news could talk about was the crisis and candidates and politicans were running around trying to look busy.

    A credit crunch is sort of like a run on a bank, where everybody freaks out and thinks their money isn't safe, so they withdraw it all.

    A bank run happens because a real bank isn't in business to rent you vault space to store your money in, they're actually in business to do the safest sort of money management. They figure out who's safe to loan it to, and then charge interest to make a profit. They're supposed to be good enough at it, and careful enough, that the wins outweigh the losses, and no one loss is big enough to threaten the whole deal.

    Because that money is being loaned out and repaid at interest, not all of the money is in the real bank at any one time. If everybody freaks out and tries to withdraw their money at once, the real bank can't pay them all at once... and of course, that means they freak out even more.

    The recent Credit Crunch was like that, only on a much bigger scale, involving gigantic corporations and vast sums of money. Unlike most credit crunches, this one was kicked off by a very specific thing, which is Lehman Brothers going completely under.

    Three Crises In a Nutshell

    When it gets right down to it, we have three distinct financial crises (or crisises) going on:

  • The Mortgage Crisis
  • The Subprime Derivative Crisis
  • The Credit Crunch

    The mortgage default crisis is the first domino, but it hasn't actually hit the floor yet, though it's been slowly toppling for the past year or two as I write this (and will continue to topple for years to come). As the mortgage default crisis has become more real, however, its impending reality has, like the rays of a dawning sun, burned away the mist of lies that were propping up the subprime derivative bubble, thus kicking off that credit crunch.

    Don't get me wrong, we are indeed having a mortgage crisis; a crisis of what looks likely to be 2 million americans losing their homes, due mostly to shady lending practices. A lot of people are trying to distract you from the real culprits by blaming the victims, so let me say that again, SHADY LENDING PRACTICES.

    We'll talk more about those shady lending practices later. But the subprime derivative bubble didn't result just from subprime mortgages. That "subprime" means, "not the best", which is a nice financial euphemism for "risky". So, what do you do with something risky?

    A security is sort of like a company with stock; people buy shares and if the company makes money, the money is distributed according to how many shares each shareholder has. Except, in this case it's not shares in a company, it's shares in a loan, and the profit comes from the loan (and interest) being repaid.

    And finally, we get to the Credit Crunch, which is what happens when the Subprime Derivative bubble bursts and it's not just the wall street used car salesmen who get hurt. "Unsinkable" investment firms like Lehman Brothers find out that the guys in the subprime derivatives office have written checks that their company's ass can't cash. The company disappears in a puff of debt, but the problem is that it takes money in very "safe" investments with it.

    People panic. There's plenty of money "in the system", but the people who have it are looking across the street at their neighbor who lost his shirt doing something incredibly safe and cautious, and they're holding onto that cash as tightly as possible and waiting for the storm to blow over.

    The Credit Crunch

    The credit crunch was what the whole $700 billion bailout was supposed to be about. The system got into a financial gridlock where everybody's afraid to move, so nobody can get anything done. This is bad at any time, but it's especially bad when everybody's already worried about the economy. The $700 billion is supposed to un-stick things and get the game of economics going again.

    In a little more depth, it works like this:

    In a simple world, everybody would just buy for cash and sell for cash and nobody would ever have multiple balls in the air and be in danger of dropping them.

    Then again, in a really simple world, we'd all just barter chickens for grain & etc. We use money as an abstraction mechanism, so we don't have to do stupid things like lug a box o' chickens around, or trade people one and a half chickens for one steak. Money flows more easily and can be divided and combined more easily. That's one abstraction mechanism*.

    Note: One abstraction mechanism of many, and its these abstraction mechanisms that make our economy much, much better at adapting and working better and, ultimately, making everything work more effectively and thus creating more value -- and making some people a lot richer, but at the same time making the rest of us a little richer, too, and that's what makes it all worth while.

    So, back to "multiple balls in the air": lots of businesses have money coming in and going out at the same time, and it's hard to make it all match up perfectly, every day. So we have a similar (in principle) abstraction mechanism to make commerce flow more evenly, except that this abstraction mechanism is bridging gaps across time instead of across physical goods.

    Besides the companies that need to even out the ebb and flow of money, there's another side to the abstraction mechanism, companies with large amounts of cash reserves. They need these reserves to stay fairly liquid (spendable) and reliable. But just letting the money sit around collecting dust and costing overhead to protect is missing an opportunity. Even a tiny overnight investment profit can be a heck of a lot of money when you're juggling billions. So they invest it in very liquid (i.e. can put the money in and pull it back out pretty quickly) but extremely safe investments.

    However, this abstraction mechanism, like almost all investing, relies on reliable middlemen. Part of what makes those investments extremely safe is that they're spread around, like mutual funds. That's where the reliable middlemen come in.

    But those reliable middlemen are stuck with brother-in-law partners who, as it turns out, have been sniffing the cocaine of the subprime derivative scams. Now those reliable middlemen go to the safe and find it empty (e.g. Lehman Brothers going bankrupt, not because those extremely safe investments were bad, but because an entirely different department did something idiotic; trouble is, this department or that department, Lehman Brothers still has to foot the bill).

    So now the companies with large reserves are stuffing the money in their mattress and sitting on it with a loaded shotgun. And meanwhile, business grinds to a halt, in the middle of an already-dicey economy. This is a Bad Thing. That's why the US government got involved in this whole mess.

    It's Not Pick-Your-Favorite-Bugaboo's Fault

    As I say above, some people are trying to distract attention from the fact that their favorite political ideology (deregulation) created this mess. As a result, they're scrambling around for somebody, anybody to blame but themselves. I'll get to that in more detail below.

    But another detail I think a lot of folks didn't quite catch - the really toxic derivatives aren't just securities backed by risky subprime mortgages. They're securities backed by insurance payments on risky subprime mortgages, as if this insurance was never, ever going to have to pay out. These are the Collateralized Debt Obligations and Credit Default Swaps you may have heard mention of, in passing.

    This is also why AIG got caught in the middle - they were the clearinghouse for this sort of insurance. If they evaporate in a puff of bankruptcy, it's not just them going down, it's everybody and his brother who got a "just in case the sky falls" backup plan from AIG. And that is, well, everybody (at least in the financial world). That's why the US government got involved in AIG.

    Hey, she was asking for it...

    Note: I know I said I'm going to try to avoid the more "direct" adjectives, but sometimes you just have to call it what it is: bullshit.

    Okay, so now the blame-the-victim-game. Here is a list of bullshit excuses made up by people who don't want to take responsibility for creating this mess. For specifics to back up the following, see the "Primary Sources" section at the end.

    a) "banks being forced to loosen regulation" is bullshit, since most of these loans were made by non-banks (aka "investment banks", not the marble-columned traditional bank down the street, but wall street hotshots and used car salesmen). They were never subject to most of the regulation, and that lack of regulation is what lead to the bad loans.

    b) "people buying houses they couldn't afford" is bullshit. According to a 2006 report by that bastion of liberal journalism, the Wall Street Journal, 61% of those subprime loans were to people who qualified for regular loans, but were conned into taking subprime loans instead.

    Update: And, not too surprisingly, according to this recent New York Times article, mortgage defaults are now much higher - nearly twice! - among the rich (1 in 7 for million-dollar mortgages, versus 1 in 12 for sub-million-dollar mortgages). When you get to "investment homes", you can drop the "nearly": 23 percent versus 10 percent.

    Note that the article above is mainly focused on what these people are doing about their underwater mortgages - walking away, aka "strategic default". Cue much hysteria by pundits and financial people (who stand to lose a lot of money from these strategic defaults) about the "moral implications" of this.

    This is, of course, old news. All of these folks shaking their finger and scolding home-owners are quite used to turning around and doing the same thing they're now shaking their finger over.

    c) "darkies buying houses they couldn't afford" is bullshit, since the statistics actually show that minorities are more reliable mortgage holders.

    d) "government regulations (CRA) forced banks to make bad loans (with a strongly implied "to darkies")" is bullshit, because CRA loans actually performed better in all categories.

    d1) CRA-governed loans are literally not the loans causing problems

    d2) CRA loans have a much better default rate.

    d3) CRA loans in general are mostly (94%) not subprime loans.

    e) Amazingly, somebody managed to come up with yet another bullshit excuse. They blamed it on Fannie Mae and Freddie Mac. This is (all together now) bullshit, that conveniently ignores some big, fat, annoying facts:

    e1) Like the fact that Fannie/Freddie were late to the party, generally getting squeezed out of the market during the peak years of the bubble and only getting back into it at the tail end.

    e2) Like the fact that Fannie/Freddie are residential only, while the commercial real estate market also had a huge bubble.

    e3) Like the fact that Fannie/Freddie is domestic only, while the bubble was global.

    f) And now the "it's all the minorities fault" bullshit is coming back around for a second try. This time they're pointing out that there are a lot more minority defaults and foreclosures, ignoring the well-established statistical fact that the subprime used car salesmen heavily targeted minorities. (What should we call this, reverse red-lining?)

    To be clear, two distinct facts:

    1) minority loans statistically did better

    2) minorities were particularly heavily targeted by the used car salesmen

    By the by, when I first wrote the above (particularly excuse d) in a discussion on an internet forum, some folks who read it got their back up at the implied accusations. Those accusations are based on facts that have already been proven repeatedly (see "Primary Sources"). Some of the URLs given at the end provide those facts, or link to the direct sources of those facts.

    Other folks (perhaps somewhat more reasonably) got their backs up at the casual dismissal of an entire class of possible culprits that their pet ideology prefers to blame: government overregulation.

    I'm not going to worry overmuch, here, about proving those accusations, and re-proving those facts. Although I believe in the honest intentions of the folks in the discussion above, I think they're a bit asleep at the wheel here, and buying the snake oil being sold by certain politicians.

    Is it fair to discuss whether any given law had an effect or not?


    Is the CRA or Fannie Mae or Freddie Mac relevant to the current financial fiasco?

    No (see above).

    Is it fair to indulge in fantasies about the CRA/Fannie/Freddie indirectly contributing to the financial crisis, instead of actually looking at the facts?

    No, no more than it is fair to devote serious attention to whether or not Santa Clause had something to do with the financial crisis.

    Yes Virginia, The Sky Really Is Blue

    Because when it comes right down to it, the points have already been refuted and it's a core strategy of certain types to just keep repeating the lies, over and over. At best, people believe them. At worst, they trick you into wasting your time in refuting them, and by engaging them again and again, you grant them credibility.

    "Scientists say the sky is blue, however, some scientists disagree" is not "fair and balanced."

    The proper response to inane insistence that "the sky is green" is not to explain how light is scattered in the upper atmosphere and blue is scattered more because it's a shorter wavelength, resulting in the sky looking blue.

    The proper response, particularly when you recognize that the green sky crap is a deliberate tactic, is to point and laugh, loudly and publically, and invite the proper public ridicule of these clowns.

    I think it's possible for reasonable people to honestly disagree. I am, however, quite willing to brand others as liars, quite possibly with underhanded motives, or as gullible tools of such liars, or as self-deluded fools too in love with their pet ideology to see when they're being used as tools, if I see evidence of such.

    If they insist that the sky is green, I will not engage them in reasonable debate about the possibility that it might indeed be green. Nor will I enquire if they happen to be wearing tinted glasses, and what color might those glasses be.

    We Can Never Really, REALLY Know...

    Some people are making noises about "We can never know for certain how much of this could have been avoided with even less regulation than the weakened, and even more weakly enforced regulations we did have."


    What we choose to spend our attention on can be just as important as how we conduct that expenditure. We may not have it down to a science, but we have a heck of a lot of perspective and data, and certainly enough to say definitively that the "blame-the-victim" mentality is horse manure.

    My Axe, Take II

    Now, since everybody has an axe to grind, I'm going to state my own axe up front. Here's what I think should be done about the crisis:

    Fix the mortgage crisis first, and do it with brute force and the heavy hand of government; the problem is fundamentally a problem of gridlock, so we need a traffic cop to come in and sort it out.

    Treat it as a financial disaster area and declare financial martial law long enough to sort out the gridlock, make sure the safeguards that were torn down to allow wall street into the mortgage game are put back in place, then let traffic flow.

    While the vast wave of failing mortgages is not the actual cause of the crisis, it is one of the earliest dominos to fall. It's also one of the areas where just about everybody involved -- even the people who are owed money from the mortgages -- would really rather have some money than no money at all. In the current situation, when a mortgage defaults, everybody loses, not just the homeowner:

  • Homeowners lose their life savings and get kicked out on the street.
  • Holders of the mortgages lose most of the mortgage value; foreclosure sales make a tiny fraction of the cost back.
  • Holders of securities backed by the mortgages end up with a worthless piece of paper.
  • The taxpayers end up with an economy and financial system in freefall.

    For the majority of foreclosures, the actual financial shortfall that caused the foreclosure and the mortgage default is relatively minor compared to the cost for everybody (even leaving out the impact on the economy).

    It's the Organization, Stupid

    The problem is really organizational and political, not practical.

    Almost every bank would have a much better bottom line if they could "work out" the mortgages in that majority of cases where the shortfall is relatively minor, before forefeiture. But almost no banks are set up to actually do this, in terms of organization, training, software, etc.

    There are a very few banks who are, and they're doing very well by taking on other banks' problem cases and sorting them out. Unfortunately, they're relatively small organizations, and the big boys are much slower to react and adapt. This is generally a good thing - we want the people handling our money to be stodgy and boring and reliable and slow to change. We don't want banks reinventing themselves every week. But now we're in a crisis and it's getting in the way.

    But a bigger problem is, even if you could do something, it's very hard to sort out who actually owns the mortgages. We can't even figure out who all the owners of a particular piece of paper are. There are no regulations requiring companies to disclose ownership of mortgages or of mortgage-backed securities, or CDOs or Credit Default Swaps. We literally don't know who is involved in a given mortgage and securities backed by it, let alone get them all in the same room to discuss working something out.

    The Solution

    So the right answer is for the government to exercise a sort of financial martial law, or (metaphorical) eminent domain, and take over those mortgages. Establish some basically sound financial equations for the value of the mortgage and the payments. They will be a little suboptimal. Stricter than what some homeowners who don't qualify would hope. Riskier than what a (sane, non-wall-street-hotshot) loan officer would like on the homeowner end. Not as lucrative as the criminally stupid derivatives buyers thought. But at least the whole thing won't fall apart.

    Net result: Most homeowners will get a chance to renegotiate to a sustainable loan. Most securities holders won't have to write it all off. The cost of writing off the securities will no longer threaten to randomly destroy long-trusted investment banks. The government won't be just dumping money in a huge hole. The financial industry gridlock will end. And the rest of us can be done with the panicking and get back to work.

    Note: Of course, now it's several months later and we know what's happened... with the wall street used car salesmen. We still don't know how it's all going to work out for the mortgages.

    Back To Work

    I think McCain's "fundamentally sound" soundbite is regrettable, because he's right. The media jumped all over it and the results made him look stupid. But I think he's fundamentally right:

  • We still have a generally strong, highly educated, hard-working workforce.
  • We still have a lot of great technology.
  • We still have a lot of good assets, both raw and developed.
  • We still have (even after Bush) a heck of a lot of good government -- cue Heinlein's essay This I Believe
  • We still have (despite the dilbertian stupidity of corporate america) basically good management.
  • We still have, even, plenty of honesty - yes, even in government and in the financial world - to go around.

    The subprime derivatives mess doesn't change that, and it can only kill our economy if we buy into the idea that it can.

    And finally...

    We have to make the current stupidity somehow more illegal, going forward, to make the problem finite. I'm not sure how to accomplish that, because we had plenty of laws and processes that should have made the current mess illegal. All the unenforced laws in the world won't make a squat of difference.

    We had regulation and oversight in place for decades before 1996 and it worked fine, but we're already seeing yammerheads come out of the woodworks and claiming that not only was deregulation not at fault, but we didn't have enough deregulation (see everything I wrote above). What's to stop these yammerheads from popping back up a few years down the road and repealing the next set of safeguards? Who regulates the regulators?

    We do have regulations to tell the regulators to enforce the regulations. They don't work very well when the president has the DOJ out chasing imaginary "fraudulent voters" instead of doing their jobs, and voters buy nonsense like "we're fighting them over there so we don't have to fight them here."

    What happens when we get another administration that looks the other way?

    How do we keep it from being sabotaged from above the next time?

    One possibility is to find a pressure point here - some very specific, easily identifiable, strategically absolutely necessary practice that can be pin-pointed and made illegal.

    Or, alternatively, something systemic, like making key players more criminally liable for their actions, in the future.

    Or some other way of decreasing their ability to insulate themselves from the consequences of their laxness.

    I doubt we'll see anything that sane come out of congress, but one can hope...

    Note: This Harvard Business Review article from 2014 makes some interesting and useful observations about how banking and "financialization" distort the entire system:

    Primary Sources

    At the bottom of this section is a list of resources that you can follow up on your own, to see for yourself where I'm getting the facts above.

    Note that several of these sites are not, in fact, facts, but are something I normally despise: people talking about people who are talking about facts.

    However, this situation is just that complex and twisty -- not to mention polluted with plenty of idiots trying to twist the facts to their own ends -- that it's better to start with some coherent summaries. These sites are the best I've found, not because they confirm my own beliefs (I shaped my beliefs based on the facts, I didn't choose the facts to confirm my beliefs) but because, on the whole, I found the fewest errors, misunderstandings or lies in them.

    So if you want to see for yourself, follow the links and try to follow them at least three levels deep, so you see for yourself that the original and actual facts actually are, in the primary sources, and that the facts in the primary sources match what was reported in the secondary sources.

    You have to read a lot of sources and cross-correlate the facts, and you have to know that "source" doesn't mean some idiot's opinion, it means some idiot's citation of actual fact, and you have to assess the credibility of that claim...

  • that the fact cited is actually in the source cited
  • that the fact cited is actually a fact
  • that the fact cited actually means what the citation claims it means

    You assess credibility both by the tone and content of the writing. It's amazing how often somebody will cite a fact as supporting a theory or opinion that it actually directly contradicts. When it does so, that's a pretty strong clue that any other facts might be mis-cited, misinterpreted or flat out made up.

    You also assess credibility of a by the credibility of the organizations and associations of the writer.

    And also by the other writings and actions of the writer.

    And finally, yes, their own political beliefs are a factor in assessing credibility. If a cited fact happens to dovetail nicely with the writer's ideology, look carefully and hard to make sure they aren't engaging in wishful thinking (even my own citations; I'm only human).

    There's a classic speech by famous scientist Richard Feynman, from the 1974 Commencement at Caltech, titled "Cargo Cult Science". It's a great speech, I've linked t ti below and I recommend you read it. It's very readable, it's even fun to read -- one of Feynman's great strengths. But the key idea, the core idea of the speech, in my opinion is in this quote, which I think should apply to a great many more things in life, including written works like this one, which you're reading right now:

    "It’s a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty—a kind of leaning over backwards. For example, if you’re doing an experiment, you should report everything that you think might make it invalid—not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you’ve eliminated by some other experiment, and how they worked—to make sure the other fellow can tell they have been eliminated.

    Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can—if you know anything at all wrong, or possibly wrong—to explain it. If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it. There is also a more subtle problem. When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory; but that the finished theory makes something else come out right, in addition.

    In summary, the idea is to try to give all of the information to help others to judge the value of your contribution; not just the information that leads to judgment in one particular direction or another."

    The Sources

    (These links are discussed in more detail below).

    This American Life 355: The Giant Pool of Money
    This American Life 365: Another Frightening Show About The Economy
    This American Life 380: No Map, Act 1, The Mod Squad
    Google Talk by Nobel-Prize-Winning Economist Paul Krugman

    These two are a pair, the second has some really interesting followup conversation of the first:

    Note, above link is gone, but an archive copy is available at:

    Which references:

    And finally:

    Sources Discussed In Detail

    If you're not up to reading and you just want to hear it explained in an articulate, accessible way, I can't highly enough recommend the following recordings:

    This American Life 355, The Giant Pool of Money and This American Life 365 Another Frightening Show About The Economy are two great shows explaining this stuff.

    This American Life 355: The Giant Pool of Money
    This American Life 365: Another Frightening Show About The Economy

    You might also find interesting This American Life 380, No Map, Act 1, The Mod Squad, which is about how banks are trying to react to and prevent mortgage foreclosures. To make a long story short, they'd save a ton if they could renegotiate them (and the home owners would love it too), but the banks just can't manage to do it, organizationally:

    This American Life 380: No Map, Act 1, The Mod Squad

    For a less rounded, but more acerbic commentary, check out New York Times columnist Paul Krugman's "Google Talk" lecture. The google talk video is misleadingly titled with the title of his new book, Conscience of a Liberal, because the original plan was to talk about the book. However, the subprime derivative crisis boiled over that day (to quote from the talk, "these are interesting times"), so of course he ended up talking about subprime derivatives instead.

    Google Talk, Paul Krugman

    (Or go to youtube and search for authors@Google: Paul Krugman)

    This one's pretty sharply left-slanted, of course, but it's also the shortest and simplest one, and, like the rest of these URLs, it includes plenty of links to more specifics and real, concrete data:

    This one gets more into the numbers:

    This one is a copy of the article directly above, with an extensive followup discussion, so you can see some back and forth between economist types. There are some interesting dissenting replies, but I notice that most of the dissenting replies lack hard data.

    Here's a post about Kroszner's (the Fed governor) speech about the Fed report on the CRA, and the links to the full speech transcript and full report:

    "Krozner's speech summarized research the Fed has been doing on two basic questions: (1) What share of subprime loans were related to CRA? Loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage (2) How have CRA-related subprime loans performed relative to other loans. [D]elinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans.

    Fed economists found that about 60% of higher-priced loan originations -- the technical definition of subprime -- went to middle- or higher-income borrowers or neighborhoods who aren't targeted by CRA. More than 20% of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by institutions that aren't banks -- and aren't covered by CRA.

    "The striking result", Kroszner said: "Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluatio purposes."

    "This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions."

    "UNC Center for Community Capital research found the default rate for CRA loans was 70% less than for a subprime loans made to borrowers with similar risk characteristics. Similarly, Federal Reserve Bank of San Francisco research found that loans made by a CRA-regulated lender in its assessment area were more than 60% less likely to be in foreclosure than loans made by an independent mortgage company to a comparable borrower."

    Here's a pretty good BBC article about the shift from the traditional mortgage approach to the approach that resulted in the fiasco, with lots of graphs to make the hard data more accessible:

    Here's an interesting article from a unique perspective, one of the guys who worked as a relative peon inside the system, giving his account of how the whole mortgage-backed scheme came about:

    I don't think I gave a URL for the 2006 Wall Street journal article that reported that 61% of the subprime mortgagees qualified for normal, prime mortgages, but that's enough detail to dig it up and verify it yourself. Likewise, you can probably do a little digging yourself to find backing for the facts that minority loans perform better (i.e. they default less often).

    Here's a link about a study by the National Community Reinvestment Coalition. Caveat: it looks worth reading but I haven't yet had time to fully research the NCRC and make sure they're a credible source:

    Recent Updates:

    March 14, 2014:

    The justice department just released an audit on mortgage fraud prosecutions. Long story short, they're not doing a very good job, because they're not really trying:

    Feb 1, 2014:

    Somebody just forwarded me this link about the "Lehman Black Hole". Looks like a good read.

    Also, Krugman recently (June 3, 2010) again addressed some of the common bullshit explanations claimed for the crisis:

    Also, in regards to the latest idiotic excuse, blaming Fannie Mae and Freddie Mac, this is an excellent essay, with mostly-excellent followup comments (except for the occasional idiot, who quickly gets trounced):


    Some more resources that I haven't had time to write into the main article, above, mostly linked from this essay:

    This is a pretty good article, and more importantly it, and the other articles that it links to, links to a lot of primary sources. Some examples:

    The FBI warned in 2004 about the mortgage fraud epidemic:

    'Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

    "It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "'

    The FBI's 2007 Financial Crimes report:

    "The FBI investigates mortgage fraud in two distinct areas: fraud for profit and fraud for housing. Fraud for profit is sometimes referred to as "Industry Insider Fraud," and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders."

    The Mortgage Brokers Association for Responsible Lending 2006 fact sheet:

    1. A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the "liar's loan"

    2. 37.2% of non-agency mortgage backed securities were no document loans in 2005.ii

    3. 49.3% of ARMS with interest only features originated in 2004 lacked full documentation.iii

    4. As of September 2005, Adjustable rate Mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the subprime sector.iv

    5. In 2006 97.5% of borrowers are likely to face a payment shock of at least 25% and 75% of borrowers could face a shock of 50% or more.v These changes neglect additional shocks that would result from the repayment of principal because of current interest only payments!

    CalculatedRiskBlog's collection of essays on the inner workings of the mortgage industry:

    Fairness & Accuracy In Reporting's roundup of the CRA nonsense:

    An interesting blog post about the legal obligations of a mortgage broker to act in the borrower's interest, and not be a scum used car salesman:

    Note, above link broken, here's the cache from the Wayback Machine at

    Speaking of the wayback machine, a recent fire did some serious financial harm to the Internet Archive. This is an awesome resource and they need your help, so donate!

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