What Caused the Recent Economic Crisis?

[Hawk5]

Hey everybody,

My chapter of YAL is having a debate against the socialist club at my school and the topic is

What Caused the Economic Crisis?


If anybody wants to give some suggestions of things we should remember to bring up it would be appreciated! We are going to school these socialists.

[oyarde]

Competition for available oil drove up fuel prices . This drove up food costs . All food was being delivered to grocery store on five dollar diesel . Debt . Inflated housing , property prices .......

[TheState]

They are definitely going to blame wall street and "the market". Make sure you keep turning the discussion to how wall street worked WITH the government. Focus on Fannie Mae and Freddie Mac and interest rates. Just stick to very basic economic truths that have to do with interest rates.

Ex, the Fed held rates too low after the tech bubble burst. That caused malinvestment, that money had to go somewhere, so a new bubble was created.

Keep going back to monetary policy. They will have no answer for it.

[cswake]

Let me highly recommend this long debate on who is to blame for the crisis (bankers or the government):

YouTube - Financial Crisis Debate (1 of 13) Intro (http://www.youtube.com/watch?v=2_u9BkQE5pw)

This should give a good starting point.

[Agorism]

Four words.

Oksana Grigorieva did it.

[pcosmar]

Fake Money.

[Ekrub]

The socialists called for the housing bubble.

http://mises.org/daily/3539

[ItsTime]

Government.

[SilentBull]

Compare a TRULY free market to what we have today when it comes to interest rates:

FREE MARKET:
When people in a society are not saving enough, interest rates would normally rise. This is because banks don't have enough money to lend out. So they raise interest rates to encourage people to save more, since they will make money by lending out the money people save.

Interest rates also serve as a signal to businesses. If interest rates are high, businesses don't want to AND SHOULD NOT expand and invest, because it means people are not saving money, so they will not have money in the future to consume their products.

On the other hand, if people are saving a lot of money, banks will lower interest rates (since the supply of money is high). The signal to businesses in this case is BORROW MONEY AND EXPAND BECAUSE THE PEOPLE ARE SAVING MONEY, meaning they WILL have money in the future to consume your products after you have expanded and invested.

NON-FREE MARKET
What I explain above is how it SHOULD work. Interest rates serve as signals that tell businesses how the saving of the whole society is going. Instead, the FED interfered with the rates. People were not saving AND they lowered interest rates ANYWAY. This sent a signal to businesses to borrow more, even though people really were not saving money.

It sent a false signal. Low interest rates are supposed to mean there are a lot of savings. In this case, it was a fake signal. If the FED had not interfered, interest rates would not have been low in the first place. They would have risen, which would have caused people to save more money instead of spending and getting into debt all the time.

ONLY AFTER PEOPLE SAVE, should businesses then invest, and expand.

[Teaser Rate]

If you're willing to put in a few hours into your preparation, I strongly recommend you read this paper (http://mercatus.org/sites/default/files/publication/RUSS-final.pdf) (PDF warning), which explains the root causes of the crisis in great depth.

[awake]

Socialist central planning of fiat currencies causes all of this.

[SilentBull]

I also recommend chapter 6 (I believe it's 6) of "Meltdown" by Tom Woods.

[cindy25]

high gas prices, which effected everyone's budgets. credit cards and home equity loans could no longer cover it; people began to default, housing prices dropped, loans stopped, housing prices fell more.

[Dissident]

Considering you are debating members of a socialist club, they will likely blame the markets, lack of regulations, and perhaps capitalism itself for the cause of the crisis. Their answer will be for more government regulations.

The Fed setting interests artificially low for a prolonged period of time resulted in cheap money that promoted speculation while punishing savings and investment. The bubble took form in real estate and later speculative financial securities. Through government intervention in the mortgage market by Fannie and Freddie guaranteeing loans, the risk to the underwriter was greatly reduced. As a result of this moral hazard, NINJA (No Income No Job No Assets) loans and loans made to traditionally unqualified applicants were common practice. Housing prices soared because of increased demand through the widespread availability of credit at low interest. Many bought into the fallacy of "real estate as an investment" and housing prices rising in perpetuity which further encouraged highly leveraged and speculative investment by those looking to make easy money flipping real estate. Wall Street firms purchased these subprime mortgages and securitized them. They were sold to various investors also misguided that housing prices would continue to rise and foolish enough to place faith in the wisdom of rating agencies and biased investment banks. Inevitably, when interest rates started to rise, demand in the real estate market dried up and housing prices fell drastically. Considering many people were suckered in to mortgages with teaser and adjustable rates while putting little to no money down, when their rates adjusted and the equity in their homes diminished, they either could no longer afford to make payments or strategically defaulted. Since the value of CDOs and mortgage-backed securities were tied to the performance of these subprime loans, the securities were rendered essentially worthless and the house of cards collapsed.

I would focus on how the free market was not allowed to fully operate. A free market imposes natural regulations through risk and reward, much of which was disrupted due to government intervention. Points to consider:
- the Fed meddling in interest rates and obstructing critical pricing signals
- Gov't intervention in the housing market removing the risk from the lender and incentivizing subprime lending
- The repeal of Glass Steagal which allowed banks to take on greater risk with depositor's money. However, the government did not repeal the FDIC insuring bank deposits. Therefore, banks took on far greater risk to speculate with its deposits since they were insured by the government.

[inibo]

This is by far the best non-technical explanation I've seen. Pure ABCT.

http://webcache.googleusercontent.com/search?q=cache:Bt2o-zaualsJ:online.barrons.com/article/SB126167814839704681.html+site:barrons.com&cd=7&hl=en&ct=clnk&gl=us

[Brian4Liberty]

Here's a list (not completely "Austrian"):

- Government/Corporate partnership in crime.
- Cheap money from the Fed (monetary inflation).
- Excessive Debt (personal and government).
- Massive importation of cheap labor reducing wages, creating unemployment.
- Outsourcing of industries that produce actual products, and thus create real capital.
- Moral hazard of government backing loans (Freddie, Fannie, etc).
- Real estate mania.
- Fraudulent and risky real estate loans (liar loans. non-qualified loans).
- Fraudulent financial products which created an additional moral hazard (bad loans packaged, rated as if they were AAA, and passed off on suckers. CDOs, CDSs, etc).
- Non-enforcement of existing financial laws.
- Moral hazard of government bailing out failed corporations (bailouts, too big to fail, etc).

[Brian4Liberty]

This is by far the best non-technical explanation I've seen. Pure ABCT.

http://webcache.googleusercontent.com/search?q=cache:Bt2o-zaualsJ:online.barrons.com/article/SB126167814839704681.html+site:barrons.com&cd=7&hl=en&ct=clnk&gl=us



In a recent 60 Minutes interview, Obama blamed "fat cat bankers" for causing the crisis, putting America through its "worst economic year...in decades." He went on to chide Wall Street banks for "fighting tooth and nail" the new regulations he believes would be vital in preventing future crises.

Obama met with those "fat cat" bankers the very next day to assure them that what he said was pure political rhetoric for the ignorant masses. The bankers didn't like it, but they were happy in the long run, as the "new regulations" were toothless, and didn't effect their business at all.

[akforme]

It was de-regulation of course.... The de-regulation of a free market principle called failure because government was powerful enough to use our tax dollars to do it..

When they mention that without government we would have corporate masters remind them that we have a corporate master by force of government. The Fed and our wonderful tax and legal tender laws.

[RonPaulGetsIt]

Socialist central planning of fiat currencies causes all of this.

Exactly....and it is also why we will not recover until they stop.

See here: (http://www.freemarketfan.com/2010/10/government-is-doing-everything-wrong-to.html)