discussion response

You must reply to at least two colleagues in a manner that extends the discussion. A simple “I agree/disagree” will not be accepted. respond in a manner that further extends the discussion. respond to the posts below,

post 1.

I believe there are several parties that are at fault for this crisis. One of the key players in the crash were the lenders. In the late 90s, Fannie Mae wanted to allow just about anyone to get a mortgage, including those with less than great credit. This meant people were being approved for mortgages that they could not actually afford. Then banks were able to take these subprime mortgages, repackage them and sell them to investors. Another group that is to blame are the credit-rating agencies and the government. These two together had a combined lack of regulation, which resulted in banks being able to repackage and rerate those subprime mortgages. This caused the bubble that would inevitably pop.

I believe that unfortunately we may be able to recognize some of the signs that something like this is happening, but it is nearly impossible to stop. Look at our current housing market. Even though there is a pandemic happening, the housing market is booming. Houses in my area that are in the $150k to $250k are staying on the market for a maximum of a few weeks unless there is something seriously wrong with it. Part of this is the fact that interest rates are so low, and people are finding it relatively easy to get a mortgage. This is concerning because this is also what we saw before the 2008 market crash. I believe that in order to prevent something like this happening again, we would need to closely monitor the housing market, and adjust rates and such as needed. I also believe that while a mortgage should not be impossible to get, there should definitely be some strict guidelines.

I think one of the most important things we can do to protect ourselves is to do our own research and stay informed. A home mortgage is a big deal and should not be taken lightly. People should understand their debt to income ratio, and what owning a home would mean for them financially. It is also important for people to recognize what is happening in the market, and maybe consider waiting out before buying a home, especially if it looks as though a bubble is forming.

https://www.wealthsimple.com/en-us/learn/2008-market-crash#who_predicted_the_market_crash_of_2008

post 2.

Whos to blame for this crisis, in your opinion? Lenders? The government (lack of regulation)? Homeowners? Investment banks (Wall Street)? Credit-ratings agencies (Moodys)?
In my opinion, I believe theyre all to blame.  Putting them in some sort of responsibility order I would say:  investment banks, credit-ratings agencies, homeowners, and the government.

Investment banks were flat out greedy during this period.  The more profits they made, the risker the investments they were willing to create.  Packaging large numbers of sub-prime loans, in theory, sounds like it would lessen the risk, but in reality, it was an anvil ready to sink.

Credit-ratings agencies forfeited their good name for greed and market share.  They essentially colluded with investment bankers to provide ratings that were not valid.  They disregarded their responsibilities to provide creditable information for individuals to make sound investments and instead created false ratings in part to compete with each other. It was completely unethical and had they provided accurate information these investments would not have gone the way they did.

The third one on my list is homeowners.  This is because as a homeowner, you are responsible for understanding the contract you are obligating yourself to.  Going into something as large as a home mortgage, it is important to understand what you can afford, what interest rates you are ok with, what types of mortgage is best for you.  Blindly jumping into a large purchase such as a home is a risky move, it is something best done educated.  No one is going to have your best interest in mind, they will always have their incentives they are looking out for.  Therefore, the homeowners that obligated themselves to homes they could not afford with interest rates they didnt understand are also a large cause of this crisis.

Lastly, I believe the government is to blame.  They are in the last place, not because they didnt play a significant role, they all did, but because they failed in their lack of oversight.  I believe this one is the easiest to do without having a full grasp as to what you are not paying attention to.  Although the movie does lead you to believe all aspects of this were evenly to blame, I think that sometimes when youre not paying attention things bite you in the butt, and that maybe what happened here.  Being so far removed from this type of thing happening ever before, the bubble was real for them.

Can we prevent something like this from happening again? If so, how?
If all the same factors are in play and credit agencies are willing to collude, then the answer would be no. Overall lessons were not truly learned because the government bailed them out.  By doing this they created moral hazard and gave the banks exactly what they perceived to be true, a backstop to their bad decisions.  We continue to see businesses that are deemed too big to fail being held together by the government.  As long as that is an option, I believe this is something we may see again in our lifetime.

What can we do, as individuals, to protect ourselves?
As individuals, we need to not assume someone else is going to do your research and make sound investments for you.  When investing do your due diligence to create diversification so that a large dip in the market will not greatly affect your investments.  For the home buyer, understand the housing market.  Understand mortgage terms and conditions, what they truly mean, and what is right for you.  Never jump into things, and never take someones word for it when theyre trying to sell you something such as an investment or mortgage, your best advocate is you, so education is the best protection.

 

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