Talk:Crash of 2008

Some comments on the current version

Hi, here are some comments from reading through the current revision. I think the overall structure is pretty good, with two caveats: i) I concur with the one above, about needing more content about 'what' happened, and not just 'why', and ii) I think the intro section could be a little longer (although perhaps if you all agree with my second point, dealing with that would handle this). Anyway, specific comments:

• "spread rapidly" - I'm not so sure about the "rapid". The subprime blowup was well under way a year ago (that Senate report on the SP mess which Nick linked to is from October '07), and if you look at Talk:Subprime mortgages crisis#Confession and invitation (the title of that article might be a misnomer, now that I think about it, because the problem has spread from subprimes into other forms, and the total dollar amount in mortgage-related losses in the US outside sub-primes sounds like in the end it might well be larger than inside - but I digress - more later) you will see people getting antsy about the (much-debated) FNMA/FHLMC back in the spring. Also, the article mentions Paribas back in August '07. Is stuff that happened over the course of a year or so 'rapid'? I don't feel that's quite the appropriate word. The velocity of the crisis did seem to accelerate at the end of summmer of '08, though, as the (excellent, by the way) timeline clearly indicates - an acceleration which seems to have started with the failure of FNMA/FHLMC (how amusing, given the heated debate a few days ago).

I don't feel strongly about this, so I have deleted rapidly. Nick Gardner 08:26, 29 October 2008 (UTC)

• The opening para makes it sound like the US housing bubble, and the losses it inevitably caused in all kinds of mortgages, is the only place there are problems in the global system, and the problems elsewhere are all basically because of losses in US mortgage-related securities held by institutions in those countries - but is this accurate? First, I seem to recall that there were housing bubbles in the UK and one other EC country (Spain?); and the problems in Iceland seem to be as much too much foreign debt for the economy as a whole, not just losses in mortgage-related securities by their banks. I don't have time to go country-by-country and research local contributory factors, alas. Note: I am not trying to absolve US responsibility, because US mortgage-related securities surely are a huge factor. I just want to make sure the article is accurate. Second, even in the US (and I suspect elsewhere as well), there are other factors, such as the overuse of leverage in an attempt to jack up rates of return; the lack of transparency and regulation in things like CDS's, etc. How important these were, compared to the housing bubble, I'm not sure is fully understood at this point.

I agree, and I have redrafted the opening so that it points to the part played by the weakness of the worlfd financial system (which in my openinion made a more important contribution). In my opinion, the Krugman quote also gives the misleading impression that the subprime crisis was the inevitable and only cause of the crash - and I should like to remove it. Nick Gardner 08:26, 29 October 2008 (UTC)

Well, the quote isn't a bad one - the housing bubble did have the effects he indicated. The question I guess is 'does it give an inaccurate impression'. I would deal with that by putting a few more sentences in before the quotation, explaining that there were a number of factors, and the bursting of the housing bubble was the thing that brought them all to light (or, caused the crisis in synergy with them). Alternatively, I would not mind if you removed (or at least moved) the quotation - maybe it could be moved to an article on the US housing bubble? J. Noel Chiappa 13:16, 29 October 2008 (UTC)

Yes! If no-one objects, I will move it there. I agree that it is not a bad quote - I think it very good. Nick Gardner 07:03, 30 October 2008 (UTC)

• "world recession" -> "world-wide recession" - the latter sounds more natural to me, but the former is OK I guess if people really like it.

• "fallout from the United States subprime mortgage crisis" - repeat previous point about how the mortgage problems have spread from sub-prime mortgages to others. The October '07 Senate report was predicting losses of $100B in the sub-prime area - but the total losses in mortgages are now predicted to be much larger than that, I seem to recall? (A number here would be good, but I don't have one on hand.) I think it's more accurate to describe it as a bubble in housing valuations - that is really the root cause of the problem. I don't think sub-primes in and of themselves could have caused the magnitude of what we are seeing now. The deflation of that bubble started in sub-primes, but has since spread. (In general, I think we are saying "subprime mortgage crisis" when what we really mean is "US housing bubble".) The rest of the text in this section looks fine, though.

I agree that the term "subprime mortgage crisis" is inaccurate for the reasons you give, but it has become so colloquial that we can hardly avoid it. Nick Gardner 08:33, 29 October 2008 (UTC)

You have a good point there. At the same time, I don't think we should be propagating inaccuracies. We could use the term "housing bubble" or "mortgage crisis", if you think people would recognize that as well as they recognize "subprime mortgage crisis". J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• "securities became so unreliable" - I think a better way to put it is 'became impossible to put an accurate and dependable value on these securities'.

You've got a point, but I was trying not to depart unnecessarily from the words used by President Bush. Nick Gardner 08:38, 29 October 2008 (UTC)

Hardly the most articulate of people, though, eh? :-) J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• "Contributory factors" - may this should be "Other contributory factors", because the previusly-discussed housing bubble is a big one? Oh, I see, the mortage mess is listed at the end. The "Contributory" made it sound like 'Additional'. Is there are better word?

As you have observed, the material under that heading covers all of the contributory factord including the subprime crisis. I can't think of a better word (does it matter?)Nick Gardner 08:47, 29 October 2008 (UTC)

Hmmm (ponders). How about "causal"? I think the pair together (i.e. "causal factors") captures what you meant, and more pithily than some other alternatives (e.g. "originating factors"). J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• Also, IMO we should list as a discrete factor the increased use of leverage, in an attempt to boost rates of return - I gather the low capital ratios at places like Lehman, FNMA/FHLMC were a big factor in their failures. "Attitudes to risk" is of course related, but the leverage/rate-of-return issue isn't mentioned there. I have no opinion on whether we should expand that section, or create a separate one for leveraqe. Oh, I see, leverage is mentioned "Financial innovation", but I would have thought that should mostly cover the rise in complex derivatives, off-balance-sheet accounting devices, etc. Oh, the poor job of credit-rating agencies should also be mentioned as a separate bullet, no? They are mentioned in "The subprime mortgage crisis", but do they deserve a bullet of their own?

I'll come back to this. Nick Gardner 09:00, 29 October 2008 (UTC)

This is difficult. I agree that the leverage/risk issue is important, but it seems too complex for this article. I may deal with it in the banking article and put in a link to that article. Nick Gardner 10:59, 29 October 2008 (UTC)

The thing is that excessive leverage is such an important factor in the crisis that I think we have no choice but to say something about it here, even if it's only at a relatively elementary level. In some sense, over-use of leverage was perhaps the most wide-spread single factor in the crisis - e.g. the people who took on mortgages where the principal was too large for their ability to service it were also over-leveraged. It was a disorder present from top to bottom of the system... J. Noel Chiappa 13:16, 29 October 2008 (UTC)

I also accept that the role of the credit-rating agencies was significant (although not crucial). The trouble is that I don't know why they got - or the banks - got it wrong, so I wouldn't know what to say in a separate bullet on the subject. (The fact that they were paid by the banks puts suspicions in my minnd that I don't think I should put in the article!) Do we want to burden the reader with speculation on this? Nick Gardner 10:59, 29 October 2008 (UTC)

Let me see what I can dig up on the credit-rating stuff. I think there's no question but that it played a role - a lot of institutions wouldn't have bought those securities unless they were rated well - and clearly, a lot of them were rated inaccurately (see, for example, the non-subprime securities in this story). J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• In general, I feel that this entire section could use a substantial editing pass to make sure each sub-section covers one specific point.

I'd be happy to do a draft version of this for people to look at if you would like. J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• "Regulation" - This section should probably mention the lack of transparency and regulation in the CDS market. (I'm still boggled that what was basically an insurance business was utterly unregulated, unlike housing, life, etc insurance which are generally regulated to make sure there are adequate assets to cover most any levels of losses.)

• "Attitudes to risk" - the back part of this section is a bit jargony, and could use a rewrite to simplify/clarify the language.

What jargon? I accept there is some in the quote, but some authority for the statement seems necessary and I don't know of another. My use of the word securitisation is justified by the explanation of the term in the previous paragraph. Nick Gardner 10:41, 29 October 2008 (UTC)

Let me take a crack at a rewording, which I'll stick here for you to examine; hopefully that will make what I'm trying to get at a bit clearer. J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• "Consequences" - I wonder if there is more to be said here? Certainly the credit crunch and a recession are the 'big two' outcomes, but are there more? Or is it still to early to see them clearly?

• "coprehensive" -> "comprehensive"

• "power to remove "toxic assets" from the financial system,." - I would expand this a bit, to say in plain words that the plan was to buy up those mortgage-backed securities and other complex derivative instruments for which, because they were/are hard to value and assign risk to, there were/are no functioning markets to either i) value, or ii) dispose of (for those who needed to sell assets) them. It should also be made explicit that this 'indirect' support (buying these assets) plan didn't satisfy the market, because it was seen as likely taking too long to implement, hence the change in direction to follow the UK lead, and provide capital directly to banks (in the form of purchase of preferred shares, I seem to recall is what the US is doing).

I have put in a reference for those who wish to pursue the matter, but the subject is so complex that it some would find further explanation confusing - and it is not, I think, a matter of overwhelming importance. I'll maybe expand the brief article on the Paulson plan to cover your points. Nick Gardner 09:06, 29 October 2008 (UTC)

Hmm, let me ponder that. I guess I find the "remove" grating - they aren't getting rid of them, just holding them for a while. Could we at least say something like 'power to buy "toxic assets" from financial institutions which were carrying them, unable to sell them, and hold them until their value becomes clear', or somesuch? J. Noel Chiappa 13:16, 29 October 2008 (UTC)

• "The crippling of the world financial system by a minority of defaults in a small corner of the United States economy has been seen as an reminder of that system's inherent instability." Same comment as at the top, about other factors in places outside the US. Also, the world economic system was already under stress, because of the runup in prices for raw materials, etc - a correction was happening anyway because of those.

I had change this by inserting "triggerd by". The other factors you mentioned were causing economic - but not, I think, financial stress. Nick Gardner 09:00, 29 October 2008 (UTC)

Anyway, hope this is useful. J. Noel Chiappa 16:23, 28 October 2008 (UTC)

Message received with thanks, Noel. It is getting on for close of play here, but I plan to go through your points tomorrow. Nick Gardner 17:16, 28 October 2008 (UTC)

No rush - take your time. (No reason for anyone to get stressed out over CZ - if you need some extra days, take some extra days! It's not like we have to have the article done by day X.) J. Noel Chiappa 17:54, 28 October 2008 (UTC)

OK. I just didn't want you to think I was putting it on the back burner. Nick Gardner 21:24, 28 October 2008 (UTC)