Why Canada Can Avoid Banking Crises and U.S. Can’t

[The Mad Monk]

Oerdin, did you just call Charles Calomiris right wing?

[MRT144]

No, there is a much simpler explanation. Everyone was engaged in a completely reasonable pattern of behavior and then the fed was like "lolnope we're gonna let NGDP fall by several percent oh you guys have leveraged equity investments haha sucks".

Reasonable behavior with unreasonable expectations.

[Ben Kenobi]

we had a model where we gave out loans to people who couldn't afford them because we wanted to boost home ownership for some inscrutable reason.

"Had"?

[Ben Kenobi]

You are both ignorant and wrong. Look up red lining.

And it turns out banks were right, because they weren't able to repay loans. Imagine that.

[Jon Miller]

if you crash the economy than even households who make >100k per year with mortgages <300k will also be unable to repay loans.

It's what happens when the economy crashes.

Sorry, try again.

JM

[Jon Miller]

if you crash the economy than even households who make >100k per year with mortgages <300k will also be unable to repay loans.

It's what happens when the economy crashes.

Sorry, try again.

JM

[giblets]

I can't say I'm surprised that Ben thinks the financial crisis was caused by deadbeat black people not paying their loans.

[Dinner]

Oerdin, did you just call Charles Calomiris right wing?

I have no idea who he is but what I said was that his argument is based upon a popular but completely incorrect right wing lie that some how the banking crisis was caused by government forcing banks to lend to people, which almost never happened. The only actual case where that happened was the CRA, which was passed in the 1970's, and was a direct response to past racial discrimination on the part of banks (see Redlining). The CRA literally only effected 0.01% of loans and those CRA loans had the single highest repayment rate in the entire mortgage business. It's a myth of the right wing which is completely untrue. The government didn't force banks to make loans to anyone in appreciable numbers and instead deregulation simply allowed banks to return to their old unstable and bad business practices of risky behavior.

When they're allowed to not keep as much cash on hand and are allowed to leverage up to 80:1 (where as before they were capped at 10:1) even slight downturns cause a liquidity crisis for those banks because any lose is leveraged up to be 8000% bigger in real terms. Further more because they no longer have to keep loans they originate on their books, and instead can simply sell them on to a greater fool, banks stopped being so selective because if it all goes bad they're no longer on the hook. All of those are bad business practices, things the banks themselves pushed for, and which are responsible for the vast majority of the crisis. In the last 6 years we've done absolutely nothing to change those problems so it WILL cause more financial crisis in the future. That has nothing to do with the OP's claim that government was some how picking winners and forcing banks to make loans to their friends; that was nothing but a hog wash claim.

[snoopy369]

any lose is leveraged up to be 8000 times bigger in real terms.

Oerdin, this is why people don't take you seriously. Your argument is not necessarily wrong, but this statement proves that you don't actually understand the argument. Leveraging does not multiply the effects of the loss. Leveraging means that if the bank takes many individual losses, they may not be able to cover those losses. If I have $10 and lend $1 to all 80 people left on Apolyton, and 3 of them don't pay me back, then I'm not out 8000x3 dollars. I'm out 3 dollars in real terms as well as leveraged as well as any other terms you choose.

The problem is that I can only afford to be out ten dollars [plus whatever interest I'm charging], so if I lend to 10 people I'm safe; if I lend to 20 people, then I have to get at least 50% repayment; and if I lend to 80 people I need to get at least 7/8, or 87.5%, repayment, in order to not be under water on my repayments to the Kuci Reserve (where from I borrowed the extra $70). In addition, I'm required to have at least 1/80th of the money on hand that I lent out, so as people begin to default Kuci calls in my debt when he thinks I can't manage it any more, and shuts me down. That has nothing to do with multiplying the effect of one default, though. One default is still one default; it's the fact that I can afford less of them that hurts me.

[Dinner]

Sorry, it should be 80 times or 8000%. That was an obvious mistake.

[snoopy369]

That's not the point. 80 times or 8000% are both wrong. Or didn't you read my post.

Leveraging does not multiply the effects of the loss

[The Mad Monk]

Even better.

Oerdin, did you just say that Charles Calomiris, consultant to the Fed, the IMF, the World Bank, Mexico, Brazil, Japan, and China, is basing his arguments on a right wing fallacy?

[Sava]

at least our hockey teams can win a stanley cup

[Ben Kenobi]

I can't say I'm surprised that Ben thinks the financial crisis was caused by deadbeat black people not paying their loans.

Never specified black. #youmightbearacist

[Ben Kenobi]

if you crash the economy than even households who make >100k per year with mortgages <300k will also be unable to repay loans.

Still doesn't change the fact that loaning to already risky pools isn't exactly a great loan decision. When those loans start to crater, so do the lenders. Had they simply maintained adequate standards of down payments (remember those), and income levels, then none of this would have happened.