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PaperclipPerfector  1yr ago (text post)   29600 thread views

Culture War Roundup for the week of October 2, 2023

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Firefighting by Bernanke et al. goes into the (quite technical) details of this.

One of the points that got bandied around in the aftermath of that crisis was that the US government could have simply made the mortgage repayments on every delinquent mortgage for less money than they actually ended up handing out - but furthermore, that this wouldn't actually be enough to prevent the crash from happening due to the precarious financial structure involved. Given that you seem to know a fair bit about what happened, is there any truth to this?

Three points worth considering.

  1. "Speed of Money" - It's hard to overstate how fast moving the 2008 financial crisis was. It wasn't hour to hour, it was minute to minute. We actually got lucky that some of the critical events took place late in the week so that there was a weekend (markets not open) to stop, think, and re-orient. The government paying back all of the mortgages directly would've taken too long. Remember during COVID how everyone got checks? How long did it take between announcement and the check arriving. IIRC, a couple weeks (at best). Even when Congress faces a crisis and passes a bill, the machinery of government can only go so fast. The best thing to do is what they did - telling the market to help itself out as much as possible while also passing TARP and constantly repeating "the full faith and credit of the USA is behind this."

  2. Because everything was moving so fast and the scale of the collapse was unprecedented, Congress, the Fed, and the Treasury didn't exactly know if what they were planning on doing was legal. This is also in Firefighting. It wasn't just saying, "have general counsel look at this" it was literally unknown constitutional waters with (allegedly) the potential for personal liability. You can have differences of opinion with Bernanke et al., but those guys had to make some Big Time decisions under massive stress that could've (maybe) landed them in jail no matter how noble their intent.

All of this is to say, the government blanket paying mortgages might have some legal traps within it. Even if it did come back "clean" the time taken to review it would've been catastrophic (see point number 1)

  1. Organizations don't have all of the information and sometimes getting it is illegal. Remember AIG? They were an insurance giant who collapsed in 2008. This was (to oversimplify) because they wrote a bunch of insurance policies to other financial entities that went really bad really fast. Well, why didn't AIG just do better diligence? (1) There were layers and layers of counter parties, derivatives, and reinsurance. Impossible to trace through all of it (2) In some cases, getting a complete picture of a counter-party's risk or exposure is illegal as it would involve revealing trade secrets. How do mortgages fit into this? At the time, I'm not sure it was readily apparent that mortgages were the root cause of all of this. The crisis itself was on liquidity and short term financing for big financial instiutions, everyone could see that. What caused that may have been more mysterious, so I don't think the Gov't was in a position to quickly say "let's get these mortgages figured out." And, to beat the dead horse, taking the time to figure it out would've been the wrong move.

2008 is fascinating to me for tons of reasons. People experienced a lot of pain in the years following and it has a non-trivial part in the political situation we have today. But it could've been so, so, much worse, and I think we avoided it just barely.

Thank you for the well thought out reply! Of course I actually think that the guillotines not being rolled out for the people responsible for the crisis was a societal failure, but I appreciate your analysis here.

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