Econ Reviews of "The Big Short"

many actors involved in the securitization chain deepened their own exposures to the housing market by buying during 2004-06.

These securities were not particularly opaque to anybody willing to look.

instead simply relying on the securities’ AAA rating.

some New York Fed colleagues have found an important role for “undeclared” investors—borrowers who pretended to live in the property when applying for the loan but subsequently rented out the property or just hoped to flip it quickly. These accounted for a substantial share of new mortgage originations, especially in “bubbly” areas, and subsequent defaults. Other research has focused on the misreporting of income or assets.

The authors find an important role for originators in underreporting second liens, for borrowers in misreporting their intended occupancy, and for appraisers in “hitting the number” the loan officer wanted.

An intriguing finding is that by and large, the incidence of misreporting did not substantially change over the course of the boom, as one might have expected

This reliance on models based on data from a different environment is what opened the door for the proverbial “liar loans.”

the relative increase in foreclosures was actually larger for “prime” than for subprime borrowers.

many of the “simple” AAA subprime MBS tranches did not end up suffering losses.

People paid attention to the ratings in part because many investors, such as pension funds, are required to invest in only the highest-rated securities. And it is likely that at least some investors were not sufficiently aware of the issues surrounding the ratings.

surprisingly, almost uncorrelated with changes in the expected credit performance of the underlying mortgages. Instead, these prices seem affected by the strength of demand for insurance and the risk-bearing capacity of the insurance providers.

There is still debate about this among researchers, but it does seem like this bubble mentality was a key root cause of the crisis. But of course, many other factors may have contributed to the bubble forming and then sustaining itself for so long: low interest rates (due to monetary policy and the global demand for safe assets), U.S. housing policy, lender regulation, financial innovation, the ratings agencies, and others.

if there wasn’t dramatic reform in the heat of the moment, when everybody was really really pissed off, when the banks had no political standing whatsoever, it’s not going to happen now

is it’s really clear from his memoir was that having rescued these places that they would turn right around and exert maximum political pressure to have any reform of them

If you asked Tim Geithner why it didn’t happen, he would say how am I going to do that?

But then once they were resurrected they were impossible to deal with politically

even if they aren’t thinking about it consciously, cannot help but consider the likelihood that the way they are going to make a living, a very good living, when they get done with government work, is to go work for one of these places.

It’s not just the SEC and the CFTC that’s a problem, because those guys who directly regulate the sector know that they are going to get jobs on Wall Street of they don’t alienate too many people.

Had it played itself out in the way it would have, if the Fed didn’t know what it was doing, like in 1929, we would have had so much pain and so much unemployment, that people would have been forced to deal with it.

Are people knowingly lying and deceiving to get money, or they just ignoring to get money?

“You tell me the difference between corrupt and stupid and I’ll have my wife’s brother arrested.”

the mixture of corruption and ignorance. And at some point, of course, it doesn’t even matter.

“This doesn’t have to last very long for me to do well. And if it all goes down it’s not going to affect me. So why think about it too much?”

did the crash result in any positive changes? 

The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger.

Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire.

The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough.

And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises

Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done.

The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial.

The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision.

Yet so few took responsibility for having any part in it

we are right back at it: trying to stimulate growth through easy money.

Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington.

What makes you most nervous about the future? Debt.

I am shocked that executives at some of the worst lenders were not punished for what they did.