genejockey 

Actually, both were an instance of excess money pouring into a market looking for safety and returns, leading to a rise in asset values triggering FOMO, pullng even more money into it. Indeed, it can be argued that the dotcom bubble led to the housing bubble. At this point in history, most of what we call 'investing' is really just gambling, but without the flashing lights, the cigarette smoke, and the scantily clad hostesses bringing fresh drinks.

Koyote

Don't forget the repeal of the Glass-Steagall Act, inadequate regulation of mortgage lending practices, and Alan Greenspan's incredibly naive view of financial markets.

genejockey 

Like a perfect storm of naivete.

Helldorado

I get it. I just disagree with your premise.

If he can pay off the loan every month like he's supposed to, then the bike will be affordable to him - because of the loan. Now, maybe if he was trying to get finance a Ferrari , he would not be able to afford the monthly loan re-payments - so yeah, that Ferrari would not be "affordable." But a much cheaper bike? Totally doable and affordable...because of the loan.

livedarklions

I may have to borrow money for your retainer.

phughes

UnderDawgAl

Rather, it was because of Barney Frank and Ted Kennedy, among others in Congress, who sponsored legislation requiring a certain percentage of loans being given to non-credit worthy recipients in order to overcome perceived disparities in the housing market. The whole subprime mortgage crisis was a direct result of their legislation. Recall that the lenders got vilified and politically crucified, but no one admonished the legislators that forced the crisis into existence. Freddie Mac and Fannie Mae execs got off scott-free. That legislation helped drive up prices, drive up demand, and drive up the number of subprime mortgages that were doomed to failure from the start.

u235

Have an example of the bleeding edge polymer material science and exotic materials and new resins specific to the Emonda?

Koyote

Though opinions vary, the majority opinion (among economists who have studied this) appears to be that Fannie Mae, Freddie Mac, the CRA, and the Housing and Community Redevelopment Act did contribute to the crisis but were not primary factors. Those were the main agencies and programs through which the federal gov't pursued the long-standing (and bipartisan) goal of extending homeownership to lower income earners -- in the case of Fannie and Freddie, by requiring them to purchase and back more mortgages from such households. Note that this did not require lenders to sell subprime mortgages.

Also, note some of these policies that led Fannie and Freddie to purchase lower quality mortgages left much latitude to presidential administrations -- and while Clinton did raise those requirements, G.W. Bush raised them still further. No one is blameless....But most of the blame goes to poor regulation of lenders and their practices, an out-of-control (and virtually unregulated) derivatives market, CDOs, and a downturn in real estate values.

u235

Option 1. Buy house at some price before or during bubble, take out money on the ever increasing value to make ends meet or maintain a lifestyle above your present income allows (note 1)(because you spent to much on the house). Value tanks, walk away with nothing but a potentially bad credit report for a few years.

Option 2. Buy a house you could afford at some point during the bubble. Value tanks later. You are now holding the mortgage on a house that is worth half its value. Live in it as long as you can and not pay. Walk away or be forced out and buy almost the same house across the street for 1/2 the amount you owed on your original house.
In both options, you walk away with nothing but an administrative ding on your credit report. Sure, you get a higher interest rate on credit for a few years but $200k-500K more than you saved by walking away? Hell no.
It made 100% financial sense to walk away from those situations for just about anyone that value tanked and they were upside down even if they still could have paid them. Morally was it wrong if you could still afford it the original mortgage? That's an opinion. When you are talking a few hundred thousand dollars difference that moral compass gets askew. Would you right now want to have a 750K balance on a house worth 450k and still be paying at the 750K rate for another 20+ years?
Take it a step further and deal with a short sell or work something out with a relative or spouse to buy it at the now reduced cost and you still live in it and pay them or eventually buy it back from them. Hell, walk away from your existing house that the value tanked, rent it out to someone while your spouse buys another house at 1/2 the going price and you are collecting rent on a house you are slowly defaulting on. Add some renters that may or may not go to the police or complain for various reasons and you could rent rooms in it to a bunch of different people with the understanding they are getting a deal, you are doing them a favor, but they may get booted on short notice. That rent you are getting is paying for your new house. When the final days are imminent, go in and take all of the copper and the AC unit for scrap and take and sell the appliances that were supposed to stay with the house for a bonus. This is all hypothetical, none of that happened I'm sure, lol

Note 1. Just because you got approved for X does not mean you could actually afford or pay back X lving a given lifestyle, a lot of people never thought about that or did not care. I'm approved, it must just work out. The loans were readily available for higher than "normal" or traditional values but that doesn't mean you had to take them. Finding affordable housing in many popular areas of the country made that a hard decision to not take I guess but renting was still an option. The people MADE those individual decisions and even if the home values would have plateaued instead of plummeted, a lot of people were still in trouble..

This isn't the Foo forum, thread will be closed soon.

genejockey 

I am perpetually amazed how Barney Frank and Ted Kennedy were able to wield so much power while both were in the MINORITY, and had been for over a decade by the time of the collapse. Truly, their power was immense. It's almost as if that argument is complete nonsense.

Maelochs

Dotcom and housing were both 'get-rich-quick" schemes. Dotcom was based on magical thinking---"I am sure whatever some 24-year-old nerd is telling me will be the next Apple will be!" and of course it was all vaporware and salesmanship, with few actual products and usually no actual profits.

Housing had nothing to do with real estate, sort of. it was more about cynical investors realizing the could create fictional investment instruments and sell them to suckers The Dotcom whiz kids really believed (I think, and sometimes at least) that they had some phenomenal new virtual product. The housing bubble crooks flat knew they were cheating everybody and gaming the system. Even the regulators and ratings firms got in on it---shows why we needed the regulations we got rid of because .... oh, yeah All regulations are evil and hurt business.

The "housing bubble" was really the "collateralized debt obligations" bubble .... and as with all bubbles, CDOs were great investments until people saw the emperor was naked.

And have we forgotten the Junk-Bond/Savings-and-Loan debacle? or are you all too young/?

Some folks might point out that none of this has anything to do with buying toys and games on credit. Some folks might point out that when some folks feel the need to win an internet debate, they will voluntarily make all kinds of totally wrong statements ( having been there myself too often, and seem some other posters there .... we All know it, but usually too late in any given thread.)

Anyway ... I take my comedy wherever I find it.

Maelochs

An addendum: One reason home ownership rose so sharply wasn't because two minority senators decided to make everyo9ne in the whole world write bogus mortgages. Mortgage brokers realized that they could sell mortgages, because they suddenly had a market for mortgages which were sure to fasil, and for insurance on those mortgages ... Previously nobody wanted to offer loans to people who couldn't pay for them ... but suddenly the more mortgages the better, as they could be bundled, giving ridiculous credit ratings, and passed through ten sets of hands before the homeowners defaulted.

The whole affair was a criminal scam, where there was so much fast money to be made, almost everyone who could sold their morality.

Regulations repealed, ratings firms deliberately lying, salespeople deliberately lying, mortgage brokers filing bogus mortgage applications, regulators who chose not to get involved .... everybody was quite happy to participate in a vast criminal enterprise so long as the profits kept growing.

I mention the S&L - junk bond bubble for the simplest of reasons--it was the first time that financiers experimented with inventing entirely new financial instruments with indeterminate value which could be sold to suckers as "get-rich-quick" bond bundles. Savings and Loans, a subset of banks, were deregulated, which allowed them to do things Glass-Steagal prevented banks from doing .... and after everybody realized that the bundled junk bonds they were buying and selling were mostly worthless, the bubble popped and a lot of people got burned.

livedarklions

Superficially, we are disagreeing, but it's a matter of perspective. My job as a bankruptcy lawyer was working with the victims of the housing bubble--people conned into buying too much house with terrible mortgages. From those people's perspective, the reason they bought into it was mainly because they believed conventional wisdom that the value of real estate always goes up, so they'd be able to sell the property before any balloon payment or whatever booby trap clicked in, or better yet, refinance it at that point. Very rapidly, these became mortgage payments they couldn't afford with a property that couldn't be sold or refinanced because it was over-mortgaged.

People who were buying stupid dotcom stocks were doing so because they thought people had discovered technology and ideas that made basic economic principles irrelevant.

Since the thread is supposedly about how we decide to buy bikes, I've looked at these bubbles from the "consumer's" perspective, not that of the perpetrators or bankers.

UnderDawgAl

Nobody was forced to buy a house. They did it willingly. My wife and I moved to a high cost area during the frenzy. We opted to rent, despite what every person we knew was telling us about "losing out" and "25% value increase per year". I remember trying to explain to an otherwise smart guy that the law of exponents ensures that the prices won't keep going up and that this madness would end badly for many people. In late 2005, a friend (who also rented) and I were guessing when the bubble would burst and when the best time to buy would be; he guessed 2008, while I guessed 2009-2010. I'm not a prognosticator at all; this was an obvious bubble with a foregone conclusion.

I remember all the sob stories in the news, and some people were indeed duped, while many others willingly jumped in with both feet. The lenders in general were no more complicit than all the buyers--folks buying way more than they knew they could afford, folks buying two and three "investment opportunities", folks taking out huge home equity loans to finance lifestyles beyond their incomes. I met and worked with people in all those categories. They thought I was a fool to sit on the sidelines.

Even minority legislators can wield enormous influence on legislation, as Frank and others did. Sorry, but it's true that lenders had no choice to make a certain number of subprime loans which, by very definition, are at high risk of default even when there is no bubble. I remember all the frothy news articles and the Congressional pontificating about the "evil" predatory lenders--who were only one-third of the problem. The buyers and the legislators comprised the other two-thirds.

Anyway, I'm sorry to jump in with politics. I just wanted to point out that inadequate regulation wasn't the problem. No regulations can prevent greed.

Back to bikes!

u235

Not arguing or specifically pointing these comments to you!!! Just venting that the concept this logic does not make any sense. From the consumer end, the bad flags were there. Take the house out of it. Buy something for an amount you know you can't afford, example $3k/month. To somehow think that $3K/month will go away or go down and you'd be able to suddenly afford it later does not make sense. The price you paid and your monthly payment would NEVER go down (unless you perpetually extended payments to some eventual outcome). These were conscience decisions. These decisions were not made in a sterile bubble void of information and resources pointing out potential pitfalls.
Sell and then what? Live in a tent as the plan? Sell that house and try to buy another house that is even more expensive now for a net gain of nothing? You still had to live somewhere. Maybe they thought their house would go up in value but no others would? They could sell theirs at a premium and buy one that did not go up for some reason? That plan fails basic logic.
And then pay even more? If you can't afford the mortgage before, how would you afford to finance even more later. If you could not afford it on day 1 regardless of any bubble or value later that day would never come and that is obvious.
Opening up the availability of loans and money and telling someone they can afford it is not a con. People made the decision to buy more than they could afford. In my opinion, no law, government, loan officer, salesman, neighbor, can predict or tell me that. This is personal responsibility issue. This was not some inherent scam, bait and switch, someone did not do a sneaky swap on you behind the scenes, something hidden like a faulty airbag or a defective product or sell you a house not up to code or on swamp land. People LOVE to blame someone else for their problems and decisions. I see that even with cars, someone was approved for $550/month. They make no effort to think if they can actually afford that or afford to replace the tires eventually or even pay the insurance. You can't blame the car dealer, regulators or the lender. Far too often the person that falls into that trap will blame someone else. Someone else should have protected me from myself!!! I bet there were a lot of people telling these people something they did not want to hear at the time..

Koyote

That's actually not true, but I don't think you will accept that.

They made those loans because (1) they got paid to write mortgages, and (2) the derivatives market gave them a way to slice up and sell off those mortgages and hence slough off the risk they had created. Moody's and Standard and Poor's overrated the bonds' quality because, well, that's what got them paid, too.

Out of ten members of the Financial Crisis Inquiry Commission, only one agreed with you -- the one from the notoriously conservative (i.e., government-hating) American Enterprise Institute. The other nine disagreed with you.

UnderDawgAl

I don't want to burst your bubble (ha!). The commission split along partisan lines, with the six-member majority getting to write the opinion. Those six members had one ideological view, in line with the decades-in-the-making statutory and regulatory framework advanced by the Community Reinvestment Act.

Of the four in the minority, three dissented from the majority. The final member, as you noted, wrote his own response. Of course, the truth is found from parts of all the responses -- government policies pushing for favored outcomes had a hand in it (i.e., the subprime lending requirements over the previous 2-3 decades), as did lax self-policing, as did individual consumer greed and panic, as did the CDOs, as did the search for higher investment returns from institutional and individual investors. It's a shame the majority focused only on the "evil" banking sector. It's always the fault of those evil capitalist corporations!

Anyway, why are road bikes so expensive? For a recreational rider like me with one moderate income and small kids at home, I think the smart money is on used bikes or a higher priced bike bought and ridden for a long time. This ensures financial security for the rest of my family without my hobbies putting us in any financial jeopardy. Family first!
​​​​​

Koyote

The "final member," Wallison, was the ONLY one who concluded that government policies (the policies you are emphasizing) caused the crisis. In this conclusion, he disagreed with even the other three Republican-appointed members of the Commission. The other nine members disagreed with you and Wallison.

UnderDawgAl

Hahahaha! Evil capitalist corporations, probably in cahoots with the notoriously conservative American Enterprise Institute!

The reality is the government had a hand in it by requiring lenders to make mortgages available to high-risk applicants. There were many contributors to the crisis, and the degree to which each party contributed cannot be known. I just wanted to point out that Government isn't infallible and that statutory and regulatory requirements can have unintended consequences. Surely you agree with that. Even the notoriously liberal Heritage Foundation might admit that!

​​​​​​No more comments from me on this. I apologize for allowing myself to get sucked into this.

Man, road bikes sure are expensive!

genejockey 

Weak sauce, dude. The majority party had a decade to change any rules, and as we see now, absolutely no compunction about doing so.

genejockey 

Also, if the CRA was responsible, why did CRA-covered banks have half the default rate of non-CRA covered banks, and most of the defaults come from mortgage banks totally unaffected by the CRA? The CRA is a fairy tale made up to reassure Free Market absolutists that the market DIDN'T fail, when clearly it did, and repeatedly does, going back to Tulip Mania. That's why you regulate markets - they're no more intelligent than any other herd.

livedarklions

Thanks, Captain Hindsight! A lot of these were smart people being worked on by predatory lenders whose incentives were to get the deal to close whether it made sense or not, and they would convince the buyers of pie in the sky scenarios. People without any finance background were being told by "experts" that they could expect for things to work out. it was deliberate deception by people who got a commission at closing whether or not the mortgage ever got paid. Perhaps the consumers should have known better, but there were literally millions of them. What you're missing is that the logic works out to be profitable if the value keeps increasing infinitely, the bubble part becomes obvious only when that inflation stops. Maybe you're not old enough to remember this, but the notion of profitable flipping was being hyped by trained professionals throughout the popular media as well.

You do realize that several banks collapsed based on this logic, right? Are you arguing that all of the blame for that should go on the consumers? No one was forcing the banks to make the stupidest loans possible.

livedarklions

Rails?! We don't need no stinkin' rails!!!

genejockey 

That's the basic problem - the whole thing came about because EVERYONE, at every level, assumed somebody was "in charge". "They wouldn't let you do it if it was dangerous". That goes from the homebuyers all the way up to the Fed Chairman, but let's be clear here - the farther up the chain you go, the more that person brings in a big salary based on the expectation that they WON'T do something stupid.

Until the early 2000s, homebuyers could reasonably expect that the bank writing their mortgage wouldn't let them buy 'too much house', because up till that time, banks wouldn't do that. Why? Because either the bank held the mortgage and couldn't afford to loan too much, OR they couldn't sell a mortgage that risky.

So, why did banks start writing 100% mortgages to people who couldn't afford the payments when the teaser rate ran out? Because somebody else was buying all the mortgages they could write, no questions asked.

So why did somebody buy mortgages no questions asked? Because investors were buying all the MBS's they could bundle.

So why were investors doing that? Because they had way too much money, they'd gotten burned in the dotcom bubble, and wanted something safe. That's how it started. Their money flowed into the market, causing housing prices to rise and the value of their MBS's with it, so more money followed - rising market and FOMO (Fear Of Missing Out).

And everyone assuming it was safe, because somebody MUST be making sure it wasn't all just a bubble, right?

Oops.