The Budget

The reason we're in this mess is because there was a panic in the markets, no? The government stepped in and saved the banks, now we're in huge debt... .

Its about mortgage defaults in the sub prime market.

Loans to people who are likely to default isn't a problem per se - the higher than usual rate of interest reflects the risk to the party making the loan of default; it's analogous to insurance. The fact that the borrower is less likely than normal to actually be able to repay you is priced into the loan repayment. (obviously I'm ignoring the very convincing argument that this is really quite immoral).

The real issue was in the rolling up of such debt with a bunch of other debts of varying risk into Collateralised Debt Obligations (CDOs) and selling them on. Basically, you take a few different debts of varying risk profiles (some very risky, like these sub-prime mortgages, some very safe, some inbetween) and sell them on.

The problem is that these CDOs break the link between the price of the asset (the interest on a mortgage, for example) and the market value of the debt. These CDOs were super complex, to the point that figuring out the actual value cost more than the CDO itself (I read this in the economist a couple of years back, so maybe I am characterising it slightly wrong).

A compounding factor is that the ratings agencies rated these CDOs too highly: they rated them based on historical default rates of sub-prime borrowers, but these default rates were artificially low because of the easy supply of credit. When US people began defaulting on their mortgage payments, the value of these CDOs (which contained as much as 70% sub-prime exposure) plummeted. But because it was so hard to figure out what they were worth, the major banks had no idea what their exposures were.

This meant that they didn't want to lend to anyone - consumers, businesses, or each other. So the money markets dried up (requiring massive injections of capital from central banks). When losses became apparent, they were huge, because the CDOs were recorded on banks' balance sheets at their (artificially inflated) market value. Since the banks are so large, and so interwoven, governments intervened on a global scale to prop up the financial system itself.

So who was to blame? I don't think that's an easy question to answer.

Banks created these exotic financial instruments to create value from risk whilst pushing loans to sub-prime borrowers
Rating agencies failed to take into account the possibility of a collapse of the housing market
Governments failed to regulate on a number of levels: the financial instruments themselves, the availability of credit (esp to sub-prime borrowers), and the formation of bubbles in the housing and financial markets.
People who took out 120% mortgages paying back only the interest payments each month

IMO, it's a question of incentives.

Banks were incentivised to loan to sub-prime customers, because they could make money from selling their debt as CDOs.
Rating agencies were incentivised to give good ratings, because they are paid by the banks for their services.
Governments were incentivised to have lax regulations, because they were collecting a boatload of tax revenue from the financial and housing markets
Consumers were incentivised to take the credit, because that's pretty much how humans operate: behavioural economics shows that people don't act rationally when it comes to offers of loans.

So the real question is how to alter these incentives, so that it doesn't happen again?
Or maybe the underlying question is whose responsibility is it to alter the incentives so that it doesn't happen again?

NB - just my take on things; I'm not a financier, so I probably got a few bits wrong.

He should have scrapped the trident replacement, but ofcorse we are British and like to swan around like imperial masters.

He should not have cut cooperation tax, he should have made council house rents mean tested, i.e your rent is not subsided if you are earning well.

Yeah. Accident. Right.

Yeah, accident. I was an accident and so was one of my sisters, and i come from a relatively comfortable lower-middle-class, fairly well-educated background. It happens a lot, to a lot of people. Condom breaks, incorrectly fitted cap, missed the pill a few nights on the trot... it easily happens regardless of perceived social stigma around benefits.

That sounds like irresponsible behaviour, as opposed to accidental. Not getting pregnant is pretty easy.

.... when you're a man.

He should have scrapped the trident replacement, but ofcorse we are British and like to swan around like imperial masters.

That's not the reason, but nice try.

Loans to people who are likely to default isn't a problem per se - the higher than usual rate of interest reflects the risk to the party making the loan of default; it's analogous to insurance. The fact that the borrower is less likely than normal to actually be able to repay you is priced into the loan repayment. (obviously I'm ignoring the very convincing argument that this is really quite immoral).

The real issue was in the rolling up of such debt with a bunch of other debts of varying risk into Collateralised Debt Obligations (CDOs) and selling them on. Basically, you take a few different debts of varying risk profiles (some very risky, like these sub-prime mortgages, some very safe, some inbetween) and sell them on.

The problem is that these CDOs break the link between the price of the asset (the interest on a mortgage, for example) and the market value of the debt. These CDOs were super complex, to the point that figuring out the actual value cost more than the CDO itself (I read this in the economist a couple of years back, so maybe I am characterising it slightly wrong).

A compounding factor is that the ratings agencies rated these CDOs too highly: they rated them based on historical default rates of sub-prime borrowers, but these default rates were artificially low because of the easy supply of credit. When US people began defaulting on their mortgage payments, the value of these CDOs (which contained as much as 70% sub-prime exposure) plummeted. But because it was so hard to figure out what they were worth, the major banks had no idea what their exposures were.

This meant that they didn't want to lend to anyone - consumers, businesses, or each other. So the money markets dried up (requiring massive injections of capital from central banks). When losses became apparent, they were huge, because the CDOs were recorded on banks' balance sheets at their (artificially inflated) market value. Since the banks are so large, and so interwoven, governments intervened on a global scale to prop up the financial system itself.

So who was to blame? I don't think that's an easy question to answer.

Banks created these exotic financial instruments to create value from risk whilst pushing loans to sub-prime borrowers
Rating agencies failed to take into account the possibility of a collapse of the housing market
Governments failed to regulate on a number of levels: the financial instruments themselves, the availability of credit (esp to sub-prime borrowers), and the formation of bubbles in the housing and financial markets.
People who took out 120% mortgages paying back only the interest payments each month

IMO, it's a question of incentives.

Banks were incentivised to loan to sub-prime customers, because they could make money from selling their debt as CDOs.
Rating agencies were incentivised to give good ratings, because they are paid by the banks for their services.
Governments were incentivised to have lax regulations, because they were collecting a boatload of tax revenue from the financial and housing markets
Consumers were incentivised to take the credit, because that's pretty much how humans operate: behavioural economics shows that people don't act rationally when it comes to offers of loans.

So the real question is how to alter these incentives, so that it doesn't happen again?
Or maybe the underlying question is whose responsibility is it to alter the incentives so that it doesn't happen again?

NB - just my take on things; I'm not a financier, so I probably got a few bits wrong.

The thing is was that the risks were 'known' pretty well years before the whole thing collapsed. I remember drinking with a mate in autumn '06 who was trading copper on the commodities market and he was saying back then that " the US mortgage market is going to fuck everybody".

Or not having sex.

Or taking some personal responsibility.

Greek style?

That's not the reason, but nice try.

We do act in a imperialistic manor but I'm sure there are other reasons too. Fill me in with the info instead of leaving me hanging!

Too slow, Balkster.

It was a bit grim.

dunno about this actually. It sounds like a lot of money, but that's per household, not per person. Let's say you live in London with your partner/spouse and 2 (or more) kids, and you're both earning 20 grand.
I earn more than that and have no dependents, and just about get by with a little bit of money left over. If i had even one kid on the wage i'm on now, i'd struggle to make ends meet, especially if my kid had to go to nursery or needed any other childcare. And what if a family had a child with serious disabilities?

Um, rape victims, accidental pregnancies... loads of people get pregnant when they don't really want to. Also lots of people find out they're pregnant too late to have an abortion.

Also on Sure Start - a major element of Sure Start involved social programmes to stop parents from breeding more than they could afford to, supporting parents to be better educated on basic household skills like finances, healthy eating, family planning etc. Sure Start was a really, really important programme that they really should have kept if they were genuinely serious about supporting young (often socially excluded and poorly educated) parents into work and off benefits.

Guess what.. you'd have to cut luxuries out if you wanted to have kids. I know people raising kids on a single income just over minimum wage. If they can do it so can anyone else. £40k is basically 4x min. wage by the way.. so a fucking joke if they are getting handouts because they 'struggle' to raise their kids. Quit the booze, ciggies, cars, tvs, playstations, dining out etc.

There are no cuts to healthcare apparently so kids with disabilities would be dealt with differently.

They are not totally removing health care for pregnancies.. just the stacked benefits for multiple children and for people earning enough to support themselves without relying on hand outs.

.... when you're a man.

Oooh I don't know, you can't be too careful these days..

The thing is was that the risks were 'known' pretty well years before the whole thing collapsed. I remember drinking with a mate in autumn '06 who was trading copper on the commodities market and he was saying back then that " the US mortgage market is going to fuck everybody".

Sure, but my point is that nobody had an incentive to do anything about it.

Sure, but my point is that nobody had an incentive to do anything about it.

Not while there was a shitload of cash to be made! Woo!

Oh wait.. I didn't make any.