MovieChat Forums > The Big Short (2015) Discussion > What really caused the crash. What was t...

What really caused the crash. What was the bubble.


I live in Westchester, work in NYC. In 2001, right after 911 business was bad, people were afraid. But the suburbs seemed safer so housing started to go up because people who owned houses started getting offers for double what they paid. The average 2,400 sq ft house in the burbs in 1995 was 350k, in 2000 it was 500k, in 2003 700k, in 2006-7 800k. This was the second time prices doubled in a 5 year period.

In 1980 to 1984, the same house sold for 65k, but by 1986 it sold for double, 130k, This was because the interest rate for a 30 year mortgage went from 18% to 7%. Lower interest, higher prices, easier lending. But because prices had doubled then, and again in the early 2000's, people who had decent jobs had to borrow more. The basic premise, and belief, was that the banks could lend money because the house was the equity that would double in value every 5 years. Even though that was true for a moment, the only way to sustain that level of borrowing, was for the house to double continuously every 5 to 7 years.

But the problem was, that house was never worth double, it was only double for that brief period because people believed it would double again. But it didn't double again, and it wasn't because the banks cheated or created a false bubble. It was because people believed their house purchase would double every 5 years and therefore they could refi or take a second mortgage to pay for the first which they could never have afforded unless the house doubled in value every 5 years. People also believed that because prices were spiking so rapidly, if you didn't buy now you would never be able to afford the next doubling. As soon the next 5 year period, starting in 2007, started to show that it wasn't going to double, the house of cards fell. Yes, in 2007, people with a 600k house for sale would put it on the market and tell potential buyers that in 5 years it would be worth 1.2 million, and the buyers believed that, for a while, then they didn't, at least wary buyers didn't.

People had borrowed too much for the house, and paid too much for the house, and the house did not double again because it couldn't, meaning no one could or would pay the doubled asking price, and no bank would lend more because it wasn't going to double again. Simple as that, it wasn't the banks fault, it was simply a tipping point for people who believed that the 5 year growth they just saw would happen again in the next 5 years, and it didn't.

Yes, it was greed, and recklessness, and the credit bill became due and no one could pay, so it defaulted. Why did houses double every 5 years before 2007, 2008? Perhaps it was a convergence of several beliefs. One, people thought they were going to make more money at their jobs in the 1990's as they did in the 1980's. Two, people thought they could always just borrow more money to buy more expensive houses. Three, if you wanted a house, you had to pay the price, there was no other option, ALL houses were wildly overpriced in 2006-7.

The movie did not really cover this obvious reality, it was too busy blaming banks and being "complicated." It's not complicated at all. After all, what happened after the crash? Right, prices came way down and stayed down and your average person no longer qualified to borrow money. No buyers with credit, no sale at any price, therefore prices come down, deflation. People say salary stagnation is to blame for the continuing hardship but why are salaries the same as the late 80's? That's a whole other movie, isn't? But there is a reason for that, albeit, a complex reason.

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The market crashed in 2000, first tech and then broader equities markets, due to a bubble. To get the markets moving again, the Fed flooded the economy with money, as it had done in the crash of 1987. Stocks rebounded. The free and easy money saved the equities markets, but caused a bubble in the housing market.

People who bought with adjustable rate mortgages believed they could either refinance to a fixed rate product before the adjustments kicked in, or they believed they could sell their homes and cash in the equity if necessary. These options looked strong during the bubble, but became non-existent afterwards.

By 2004, all indicators showed it was time to raise rates again, but people were using their homes as ATMs because their incomes had stagnated. Raising rates, cooling the economy, and correcting the housing market at that time would have meant the ouster of the GOP from the White House and a change in our Iraq policy. So rates were held down, a real bubble ensued, but we continued onward in Iraq.

I'm not agitating against the GOP or our Iraq policy or anything like that. We've been through times in our history when public opinion has been directly manipulated to build support for an ultimately successful policy -- encouraging an attack on Pearl Harbor is one example. A more recent example is equivocating on Saddam's threat to invade Kuwait in July 1990. When we hesitated, Saddam acted, but we used his invasion to mobilize public support for a counter-strike.

Back to the economy. In August 2007, credit markets seized up one weekend. A quick fix was implemented, but the news was out, and it was bad news. The layoffs began in January 2008. While the economy shed millions of jobs, the presidential candidates said nothing. In April, 2008, the Fed Chairman suggested we might be in a recession. The candidates said nothing. In September, everything came crashing down in an obvious way. Voters ousted the incumbent party. In 2009, a trillion-dollar bailout package sailed through congress in days and without debate.

If you're looking for a really obvious bellwether that insiders knew trouble was ahead, look no further than the Fed itself. In February 2006, a previous unknown economist, Ben Bernanke, was approved as the incoming Chairman of the Federal Reserve. What was his specialty? Ben Bernanke was a Princeton professor whose specialty was understanding how the government righted the economy during the Great Depression. That was his only claim to fame.


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Economic crises happen when the government makes money out of thin air... that's it. That's the bubble. Picture an empty balloon, and the rubber is world wealth. Inflate the balloon, and it looks bigger, but it only looks bigger because the rubber is stretched out by air. This is the bubble. It's always as simple as that, regardless of responding influences. If you don't make money out of thin air, there is no bubble. Bankers purposefully inflated the value of the housing market to create the illusion of wealth, then knowingly traded their air for our rubber. The people buying houses, while incredibly dumb, were not the ones in government who willfully allowed the creation of money with no value, knowing what would happen, but not caring, so long as they got theirs.

Today is the day to say I love you to your best friend - chinese proverb

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Some education might strengthen the content of your analysis, but I can't entirely blame you if you prefer Glenn Beck over Alan Greenspan. After all, just yesterday, the President of the United States, a graduate of Harvard Law and Columbia, told the public that the $400 million which arrived in Tehran on the morning that 4 hostages were set free was not ransom.

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Once you know the whole thing's rigged, it's really hard paying attention to the dogs running around the track. It's just boring. There's no real story there.

Today is the day to say I love you to your best friend - chinese proverb

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By 2004, all indicators showed it was time to raise rates again, but people were using their homes as ATMs because their incomes had stagnated. Raising rates, cooling the economy, and correcting the housing market at that time would have meant the ouster of the GOP from the White House and a change in our Iraq policy. So rates were held down, a real bubble ensued, but we continued onward in Iraq.


Well said.

 Entropy ain't what it used to be.

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Raising rates, cooling the economy, and correcting the housing market at that time would have meant the ouster of the GOP from the White House and a change in our Iraq policy. So rates were held down, a real bubble ensued, but we continued onward in Iraq.


I get that higher rates would discourage some from borrowing..... but all? I can't see how failing to realize that your spending is out of line with your income is the fault of whatever the Federal Govt is doing. Do people believe they can spend like the Govt now?

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With the money that the banks were making on the MBSs, they had one hell of an incentive to get people to sign. Whether it was through robo-signing, not clearly explaining what an ARM was...we know for a fact that the banks were fraudulent in making sure these loans were processed for people who were clearly unqualified. So why would we assume that they were up front with borrowers when it came to explaining the risk behind these loans? Isn't it much more likely that the opposite is true?

I just don't get how Fox News et al was so quick to blame the borrowers in this scenario. The banks had a responsibility to make sure that their loans were covered...a responsibility that was clearly diminished considering that these loans were being bundled and sold off to become another entity's responsibility. You can clearly see the conflict of interest here and we've come to clearly see that the banks operated fraudulently in their own best interest.

Yet so many people were still so quick to blame the people who took the loans, needing to first assume that these people weren't misled...and that they should have been aware of what they were getting into.

In the end, I think it boils down to a misplaced trust in the banking system for these borrowers. All you'd need is one mortgage broker handing you a pen, assuring you that its within your means to meet the loan's obligations. Owning your own home is the epitome of the American dream...its what its all about. It's always been the bank's responsibility to ensure the buyer's financial legitimacy. I believe its most likely that it was people operating off this misconception, the assumption that the banks knew what they were doing, that they wouldn't sign off on loans they weren't confident in...that otherwise wouldn't have signed had they known the financial trade-off these lenders were participating in (in the form of MBSs).

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Yes there was a real estate bubble as can happen in many different financial markets, but the banks (and others in the whole mortgage-backed security supply chain) were the ones with the high pressure pump blowing air into that bubble.

The banks wanted to keep making money selling mortgage-backed securities, and in order to keep the supply chain going (you need mortgages to sell mortgage-backed securities) they started taking on lower and lower qualified loans. Meanwhile the ratings agencies were continuing to give these securities high ratings, despite being increasingly filled with crappy loans (hence the analogy of the Jenga tower of dog doo doo.) Loan agents (like the guys in the bar) were happy to keep it up, they just wanted to keep getting paid great commissions as sketchier and sketchier loans were getting approved. Basically not one was really financially motivated in the short term to care about what was going on. They were too busy making money selling loans and competing against each other, and the way to get more business than the next company was to continue lower your loan standards.

On top of that, some of the banks ended up finally catching on, and betting AGAINST the very mortgage-backed securities they were selling to their clients!!

Low interest rates definitely spur the real estate market and can drive increase in real estate prices. But if it was only that alone, we wouldn't have had a historic collapse of not only the real estate market but almost the entire US financial system.

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it wasn't the banks [sic] fault

Are you really that ignorant? Were you asleep when the it was explained that banks gave mortgages to people they didn't even qualify, and then sold bonds backed by those subprime mortgages? The banks bear plenty of responsibility.

Yes, it was greed, and recklessness, and the credit bill became due and no one could pay, so it defaulted.

How do you spell "incoherent"?

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Everybody bet on rising prices as the safety net if a borrower couldn't keep up payments. Mortgage brokers were making money on each loan placed and didn't care what happened next year as they were not expected to refund their commissions if the loan went sour. Real estate brokers made money on each sale. If buyers couldn't afford the house even with 100% financing, the brokers arranged to have the listed price raised above the real price and had the seller give the buyer a credit at closing for the inflated amount which the buyer could use to pay his closing costs. Their biggest worry was getting a bank appraiser to appraise at the inflated price. Those appraisers became easier to find as they didn't get the business if they didn't play ball. At first, the seller's credit at closing went as the sole item on the last page of the contract and, presumably, the mortgage broker ripped that page off before submitting the contract to the bank. Within a short while, the brokers didn't care any more and the credit went right in the contract, and the buyer got a mortgage loan of 100% of the price plus the credit. Even at the outset, the loans were underwater.

In the past, banks had handled the servicing of the loans they had extended but, now it became more profitable to sell packages of mortgages as securities to big investors like pension funds. The mortgages in the package all had to meet uniform criteria, presumably so that the computer reviewing the package would see that some standards had been uniformly adhered to. So, if a husband and wife wanted to buy a home, but the wife had bad credit, her name was taken off the contract and her husband's name was the only one on the mortgage. No matter that adding the wife did not reduce the husband's obligation to repay.

Not unexpectedly, when the foreclosures began piling up, the banks blamed the unqualified buyers for tricking them. Yeah, right.

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It's interesting that a lot of people see one side to blame when really it was people from every side. I remember Bill Clinton saying everyone should be able to buy a home. I remember the whole deal (much like we're doing with college) is from the top down we said that it was everyone's "right" to own a home, no matter what. Of course the banks saw a way to exploit it, and not care about the future of the homeowner. The FHA loans at the time were qualifying homes for loans that could barely keep four walls together. And consumers were stupid enough not to read the contracts they were signing where variable rates were concerned. True, the banks have no scruples and have no souls, but if anyone had something illegal done to them by a bank, I don't know, I never really heard about that happening. The banks took advantage of totally relaxed regulations and their greed worked hand in hand with greedy consumers bent on flipping houses or people who, despite what the president said, were not in a financial position to buy a house.

Oh but we can't blame immigrants or the poor. They can't help it if they're easily separated from their money, right? Bull. Give poor people and immigrants credit. It's greedy gullible actions, no more no less. To the governments credit, loosening regulations ought to strengthen the economy for a million reasons. But when super greed kicks in it's going to blow up.

I love the movie, but like the movie Traffic, it ignores the role of the so-called victims completely.

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Good discussion & background. I think cashmcall said it well. There were also government policies in place that urged the banking community to lend to unqualified borrowers. The movie sensationalized the endgame of a process that had been coming for years. Hey, it was a movie...

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I guess the major problem was in Rating agencies, those, who suppose to be transparent about their data and suppose to be the shield for anyone ask about any investment ... But the expression used in the movie was "Rating Shop" was justifiable!

Gentlemen, Rating is suppose to be independent institution, which not related neither to US Government, or Wall Street Banks, or whoever but seems that they were attracted to fees they get from the banks for every justifiable load contract they have ... so I must say that was the point.

a house buyer, would go to a lender to get the money the needed to buy that house, and after some paperwork, those papers were sent to Rating company that, it check and investigate whether that loaner can pay back? ... Does he have bad credits? ... Does he have more mortgages? ... Does he have a steady job? ... etc, and after all that question answered, something called FICO number, is estimated, and based on that number you can get a loan (and how much in that loan and for how long you can't have a million dollar loan on a low FICO for 5 years but you can have a million dollar loan if you will have it over 20 years ... That's the idea).... that's for credits ...

Now for Investment Rating ... Investment could be dangerous, because of risks, So Rating companies should tell anyone, is that investment is safe, or medium, or too risky!

if you had a chance to invest your money into an electricity plant for example, steady and demand-able, any rating could consider this as AAA (the most safest investment ever) ... while if you were going to invest into a stolen rolex for example, that could be very risky because you could get caught doing it that's would be CCC ... so between AAA - CCC there are varieties, AA A+ B BB B+ and so and every rating is updated according to what happened of events every hour of the day. so when banks started to bond all mortgages they buy from lenders, into a one bond and start to sell them, they were given AAA ... that was the starting point, But when there were no more (Good people matching the criteria to buy a house, they start fraud the scores, and bundle them into a bond, so a bond AAA should have at least 65% of AAA (Solid payment loands)
banks started to decreased them to only 5% and the Rating agencies still mark them as AAA. As they should be rated to BBB at least! ... that's call fraud, and what make me laugh really, that, when the EXEC of those Rating agencies was in congress they waved of the first amendment of constitution and they say that all they were saying that these were "Just opinions" we give our opinions and people could buy them or not!!! ... What the hell is that?!! ...

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1. This film almost pretty much spelt out WHY the crisis happened. The crash happened, because people in masses couldnt NOT service their loans. This meant an abundant of houses on the market which devalued prices further. Who owns those houses who no one lives in or paying mortgages for?.... the banks and investors. Which meant people lost money, big amounts of money.

2. The crash happened, because of people who shouldn't be buying houses bought MULTIPLE houses, due to the EASY loans. The loans were easy to get because the lenders interest lies on bigger banks buying the loans off their hands to feed into the MBS/CDOs.


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Exactly the same thing is happening in Australia at the moment, record high house prices, record low interest rates. Bankers and real estate salesmen running about telling people their house will always go up, borrow more, spend more. Our personal debt is at a terrifyingly high rate and I'm sitting back and waiting for this bubble to burst as well, it will, it's only a matter of when.

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so what you saying is, it was the fault of the normal poeple because they are not that intellegent or what? You have 'cash' written in you imdb name, really? i hope yo die poor :)

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No, but people need to understand basic economics in order to avoid getting into trouble. If you borrow to the hilt when interest rates are low you are naturally going to struggle with repayments as interest rates inevitably rise. It's simple math.

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It's simple math, but most people carry a credit card balance, amazingly, also.

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