what created the economic bubble that got us in the huge mess?

[trey4sports]

i know government created a massive bubble in the economy, but how exactly?did the fed lower artificially lower interest rates to a redicolous amount? did government inject too much capitol into the system?

what did government exactly do that led to all the malinvetment????

[mediahasyou]

http://www.amazon.com/exec/obidos/ASIN/0470043601/bookstorenow79-20

[Epic]

----artificially low interest rates from the fed (plowed through much needed correction in 2001-2003)
----"homeowner society" which includes CRA, Fannie, Feddie, Sallie, Ginnie, and lists of federal policies and regulations regarding housing and lending standards, edicts, and incentive structures
-----government sponsorship of ratings agencies and the moral hazard of sec

it's amazing to me that people really think, oh the problem is that we just had too much freedom at the same time that the chains are still in plain sight

also read thomas woods' book Meltdown

[Conza88]

Geezus. How can you be a Ron Paul supporter and still not know this?

Greenspan - artificially lowered rates.

Where have you been? lol. :p

[eric_cartman]

it's been building for a long time. we were not on a true gold standard after WWII, which lead to the collapse of bretton woods in 1971. once we totally got off the gold standard, the economy really started getting screwed up because the US was able to print the world's reserve currency. with all oil priced in dollars and a massive military that occupies most of the world... the US was able to prop up a phony economy and essentially enslave the rest of the world into producing and saving while the Americans got to borrow and consume.

[Xenophage]

Whenever the government intervenes economically, whether it is by passing regulations, enacting taxes, or handing out subsidies, they change the economic landscape dramatically. Investments move away from sources the government penalizes and into the ones that the government subsidizes. This can and does cause poor investment decisions, because nobody (especially an entity that is politically motivated) is capable of examining an entire economy with such foresight as to know where and when investment capital should move. Left to a free market, production and investment increases where there is demand, and decreases where there is less demand. Under a centralized economic system directed by a government, production and investment increases where it is politically convenient for the politicians to increase it. This causes economic bubbles. As a result, production and investment occur in areas where demand does not necessarily warrant it, and you end up with an oversupply of something. When the oversupply is finally noticed by the public at large, the bubble bursts and a lot of people lose their money.

The Federal Reserve is the ultimate stimulator of bubbles, because it sits at the top of our financial structure, essentially dictating how easy it is for individuals and organizations to acquire debt. These are called inflationary bubbles, because new money and credit that previously didn't exist starts to enter circulation. Bubbles are created en masse. During the rise of inflationary bubble everyone is quite happy, but when the debt collectors start to call the happiness ends.

Let's examine the housing bubble:

When you combine the inflationary bubbles of the Federal Reserve with Federal Government subsidies of home construction, and then you create regulations that change lending practices on top of that, you end up with a massive housing bubble. People invest in a glut of houses, and they keep buying them, because houses keep going up in price, with the hopes to sell for a profit. When the last buyer enters the arena and realizes nobody else is going to buy a house, the shit hits the fan! Everyone starts selling houses, and housing prices collapse. People lose their life savings.

This is just one obvious example. The fact is that market distortions occur all over the economy over long periods of time, and ultimately the people are made poorer for the economic conditions and the boom/bust cycles.

Its really a mess.

[Jeremy]

http://img7.imageshack.us/img7/2695/greenspan01147592771388.jpg

[Bradley in DC]

The government spent money it didn't have creating budget deficits (and, cumulatively, national debt). Americans don't save enough to absorb that debt so the Fed buys the debt (in its open market operations). The Fed creates that money out of thin air increasing the money supply. This is called monetizing the debt.

Simplified, "too many dollars chasing too few goods" is inflation (a rise in the general price level). Inflation is sometimes, but not always (or not immediately) accompanied by a rise in consumer prices (CPI).

In many cases, for a variety of reasons, this "extra money" creates bubbles in the real estate, art, financial or other sectors resulting in housing inflation, lower standards for lending (and the fraud we're seeing come to light now), etc.

In a more macro sense, the monetized debt affects interest rates (the price of money) below the "natural" or market rate. This intervention causes false price signals so that everyone makes decisions based on bad information.

See Hazlitt's Economics in One Lesson and Hayek's Prices and Production.

[Truth Warrior]

Answer: Stupidity. :p :rolleyes:

[Stary Hickory]

The FED created tons of fake easy credit. This was going to make a bubble somewhere. It usually is in the Stock market.


But I believe, this time, that government policy was the one who funneled the money into housing. The CRA and Fannie Mae and Freddie Mac all helped psuh funds into housing. And once money starts bidding up prices, it creates a pile on effect as other investors see it as profitable. This cycle of easy money and rising prices on investments will continue until more easy credit is no longer possible, because the economy has started to process all this fake credit.

The houses became unaffordable because there was not real wealth justifying their construction and insane prices. The market revealed this and that is why we have the problems we do now.

[Stary Hickory]

Whenever the government intervenes economically, whether it is by passing regulations, enacting taxes, or handing out subsidies, they change the economic landscape dramatically. Investments move away from sources the government penalizes and into the ones that the government subsidizes. This can and does cause poor investment decisions, because nobody (especially an entity that is politically motivated) is capable of examining an entire economy with such foresight as to know where and when investment capital should move. Left to a free market, production and investment increases where there is demand, and decreases where there is less demand. Under a centralized economic system directed by a government, production and investment increases where it is politically convenient for the politicians to increase it. This causes economic bubbles. As a result, production and investment occur in areas where demand does not necessarily warrant it, and you end up with an oversupply of something. When the oversupply is finally noticed by the public at large, the bubble bursts and a lot of people lose their money.

The Federal Reserve is the ultimate stimulator of bubbles, because it sits at the top of our financial structure, essentially dictating how easy it is for individuals and organizations to acquire debt. These are called inflationary bubbles, because new money and credit that previously didn't exist starts to enter circulation. Bubbles are created en masse. During the rise of inflationary bubble everyone is quite happy, but when the debt collectors start to call the happiness ends.

Let's examine the housing bubble:

When you combine the inflationary bubbles of the Federal Reserve with Federal Government subsidies of home construction, and then you create regulations that change lending practices on top of that, you end up with a massive housing bubble. People invest in a glut of houses, and they keep buying them, because houses keep going up in price, with the hopes to sell for a profit. When the last buyer enters the arena and realizes nobody else is going to buy a house, the shit hits the fan! Everyone starts selling houses, and housing prices collapse. People lose their life savings.

This is just one obvious example. The fact is that market distortions occur all over the economy over long periods of time, and ultimately the people are made poorer for the economic conditions and the boom/bust cycles.

Its really a mess.

very concise explanation, would you mind if I posted this somewhere else for an explanation? I always get into arguments about what caused the crisis, and I explain it but this is well written.

[powerofreason]

Buy this new book by Tom Woods!

http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1235231965&sr=8-1

Seriously, its just what you're looking for.

[Carole]

I found a few interesting articles:

As early as 1997 someone saw trouble ahead.

Freddie Mac and Fannie Mae: Corporate Welfare King & Queen

http://www.cato.org/pub_display.php?pub_id=6047

The Congressional Budget Office Assesses the Fannie Mae/Freddie Mac Assistance Plan

http://www.debatepolitics.com/economics/33741-congressional-budget-office-assesses-fannie-mae-freddie-mac-assistance-plan.html

Here is one I did not agree with the title: :)

Bill Clinton is Right about Glass-Steagall

http://bubblemeter.blogspot.com/2008/09/bill-clinton-is-right-about-glass.html


"Bill Clinton Revisits His Economic Legacy"

http://economistsview.typepad.com/economistsview/2008/09/bill-clinton-re.html


And in comments section:
"As early as 1996, the Congressional Budget Office had reported that the two companies were using government support to goose profits, rather than reducing mortgage rates as much as possible."
http://economistsview.typepad.com/economistsview/2008/09/bill-clinton-re.html


Urban Policy Brief, Number 2
August 1995
http://www.huduser.org/publications/txt/hdbrf2.txt


Can We Finally Place The Blame Where It Actually Lies?

http://reclaimyourrepublic.org/2008/09/22/can-we-finally-place-the-blame-where-it-actually-lies/



Fannie Mae and Freddie Mac: Lords of the Manor

http://gsereport.com/SSS/FannieMaeandFreddieMacLordsoftheManor.pdf

[ItsTime]

The Fed. End of story.

[jointhefightforfreedom]

i know government created a massive bubble in the economy, but how exactly?did the fed lower artificially lower interest rates to a redicolous amount? did government inject too much capitol into the system?

what did government exactly do that led to all the malinvetment????

We the people allowed the Fed to be created in the first place and haven't done anything to shut them down! We allow a private corporation to control our money and then wonder why we don't have any or any of value!

[powerofreason]

We the people allowed the Fed to be created in the first place and haven't done anything to shut them down! We allow a private corporation to control our money and then wonder why we don't have any or any of value!


Who's we? I had nothing to do with it.

[fj45lvr]

Geezus. How can you be a Ron Paul supporter and still not know this?

Greenspan - artificially lowered rates.

Where have you been? lol. :p


yeah, but don't FORGET that INDIVIDUALS had to be foolish enough to jump on board.....

so a BIGGER problem than Greenspan and the evil doers of the banking cartel is the POPULOUS itself in their IGNORANCE of economics and sound money.

We suffer from a lack of proper education tempered by men that would rather suffer evils than to throw off the YOKE (which the Declaration called our "DUTY")

time to fulfill our duty....decades late.

[Brian4Liberty]

"I have recently had several opportunities on various news programs to discuss the economy and what is wrong with the so-called economic stimulus package. I have said over and over what we shouldn’t be doing, and now I’d like to explain what we should be doing. (http://www.house.gov/htbin/blog_inc?BLOG,tx14_paul,blog,999,All,Item%20not%20 found,ID=090202_2647,TEMPLATE=postingdetail.shtml)

But to improve the situation, you must first have a solid grasp of how we got here. Government policies and central planning created the housing bubble, now going bust. About a decade ago the government made expanded homeownership and affordable housing a public goal. Through Fannie Mae, Freddie Mac and the secondary mortgage market the government incentivized creative, low down-payment, more widely available mortgage products, and discouraged the market-proven lending standards of the past. The Federal Reserve kept interest rates artificially low, which added more fuel to this fire. Many related sectors temporarily flourished because of this, and many people got into homes they otherwise could not have afforded. The increased demand for housing sent prices soaring until in many markets housing became even more unaffordable, necessitating even more creative mortgages, and impossibly leveraging homeowners. Many risky investment vehicles such as mortgage-backed securities, derivatives, credit default swaps grew out of this unsustainable situation. As the foreclosures began, the house of cards started to tumble. Too many people have confused the symptoms and the pain of the bust with the problematic policies that caused the bubble, which is really what needs to be treated.

First of all, just as the best cure for a hangover is not to drink so much, the best cure for a recession is a recession. It is time to sober up and return to free market sanity, risk and reward, supply and demand, without political intervention. Politicians are good at catering to the needs of special interests, but very bad at determining what needs to take place in the market. Government should stick to punishing fraud and enforcing contracts. When they use the tax code, bureaucratic departments and their manipulative rules and regulations to dictate social and economic behavior, we end up with distortions and malinvestments. Bailing out banks, continuing failed Fed policies and strapping the taxpayer with toxic debt will worsen the pain, and punish the innocent.

If Congress really wanted to do something helpful, it would cut taxes. Ideally, we would repeal the income tax altogether and get the IRS off the economy’s back, which would be a huge boon. We should also cut spending. Cut every unconstitutional department and program, every wasteful governmental encroachment on the people’s liberty and money, starting with our massive overseas empire. The cost of our empire is bringing us to our knees, just as the Soviets’ empire did to them. Congress should also abolish the Federal Reserve and take back its responsibilities to ensure sound money, safe from the manipulations of powerful banking interests.

These things would constitute real change, real economic stimulus. The plans being bandied about Washington are just more of the same. As long as no one seriously considers the cure, we are unfortunately destined to prolong the disease."

[TastyWheat]

See this video: http://crisisofcredit.com

It's pretty objective and unbiased but it really didn't say enough about the Federal Reserve's involvement (they started the previous Dot Com crash too) or the government programs and entities that contributed. It didn't really say where the banks got the idea to repackage and sell mortgages as investments (why didn't they do this years ago?). They probably got the idea from the trend of constantly rising home prices and home values were unusually high because of the Community Reinvestment Act (more eligibility = more demand). Also, Fannie Mae and Freddie Mac were insuring many of these mortgages (promising to pay the lenders if the buyers couldn't pay them back) and they were government backed (increasing the confidence in their ability to insure these mortgages).

Certain regulation may have prevented this crisis, but it also could've been prevented with less government interference.

[malkusm]

When talking about the function of the Fed, and whether or not we should abolish it, there should be one question that is always asked -

If the Fed didn't exist, what would have happened?

In the case of the tech bubble - banks would have acted in their own self-interest and raised interest rates, since many of them suffered from defaults when speculators took out loans and put all the money into tech stocks. That rise in interest rates would have increased the savings rate, creating more money available for borrowing for companies looking to finance expansion (which would be the companies MAKING money to begin with). The increase in liquidity in the banks would have brought the interest rates back down to a normal level in short order (after savvy individuals had locked in high rates of interests for their savings/money market accounts).

Instead, the Fed says "Oh no, people won't borrow or spend if the interest rates aren't low!" Well, sure, but that's only temporarily. It's more like "Oh no, if we don't do something, people might realize the free market works!"

[Xenophage]

very concise explanation, would you mind if I posted this somewhere else for an explanation? I always get into arguments about what caused the crisis, and I explain it but this is well written.

I don't mind, but I'm sure there are probably better explanations. :)