Ali Velshi gave a good, succint history of the housing affordability crisis Sat. morning (11/10) during the second hour.

[eppur_se_muova]

Last edited Sun Nov 16, 2025, 11:55 PM - Edit history (2)

Brought on by S&L deregulation, S&L bankruptcies, and the Resolution Trust Corporation -- all back in the Eighties, and their consequences.

I'm sure it will make it you YouTube eventually; look for it.



***ETA***: Rhiannon12866 (who else ? )has posted the video here: https://www.democraticunderground.com/132160662
2nd part here: https://www.democraticunderground.com/132160663

[snot]

1. A few points re- how things are now vs. the S&L crisis in the 80's

Sorry it takes so many words to explain the following (I didn't think this would be so long; hope it's helpful.)

1. The S&L crisis was made possible mainly by deregulation.

2. The S&L crisis had painful effects on the larger economy, but we were able to recover relatively quickly as compared to our experience following the 2008 Great Financial Crash for several reasons:

(a) Credit Derivatives. Derivatives of the kinds we have now were not yet in use, so the potential losses due to the bad mortgage loans were at least limited by the extent to which the loans were "underwater" – that is, the loans were secured by real properties, even if those properties were worth far less than the inflated values fraudulently stated on their loan applications. So, roughly speaking, if a house was really worth only $100,000, but the S&L had knowingly or negligently loaned $300,000 based on a fraudulently inflated appraisal, the loss suffered when the loan was liquidated was limited to roughly $200,000.

So all the homes securing bad loans could be liquidated and their proceeds could be applied to the outstanding loan balances, and there were losses, but they were limited in amount; AND they were borne by the owners of the S&Ls and their creditors, not by the S&L depositors or by taxpayers via bail-outs.

In addition, MANY S&L executives and others who facilitated the fraud were prosecuted, and in some cases, their ill-gotten gains were recovered to help pay for the losses.

In contrast, in the GFC of 2008, there were not only the losses due to the fact that the loans were much greater than the actual values of the homes, but the losses were vastly multiplied because credit derivatives had come into common use.

The best way to explain what these derivatives were may be to compare them to a homeowner's policy against loss of a home due to fire, flood, etc. The homeowner is usually required to maintain insurance on the home, and in any case, the homeowner has a direct, personal interest in not having the home burn down or if it does, in receiving sufficient funds to replace it. The homeowner's lender has a similar interest, since if the home burns down and there's no insurance on it, all of a sudden there's no collateral for the loan, and the lender may face a total loss on the loan.

But Joe Blow down the block has little or no direct, personal interest in whether or not the home burns down. And if he were allowed to buy insurance on a home he doesn't own and hasn't lent any money for, he'd actually be better off if the home DID burn down, because he'd be able to collect a big pay-off for the small price of an insurance policy. Indeed, allowing Joe Blow to buy insurance on someone else's home is illegal in most jurisdictions because it actually gives him an incentive to commit arson. Moreover, allowing many third parties to buy such policies on a single house would greatly multiply the losses, and the more such policies sold, the greater the likelihood that the sellers of such policies would not have retained sufficient reserves to cover all the policy pay-outs.

A credit derivative sold to a third party is like an insurance policy sold to Joe Blow. And ca. 2008, there was no meaningful limitation on sales of such derivatives to third parties.

So for every bad loan in the pooled mortgages being sold by Goldman Sachs et al., the potential losses included not only the amounts by which the loans were underwater but also all the pay-offs due to countless other purchasers of credit derivatives betting that those mortgage loans would in fact go south; i.e., not only did insurers have to pay the bad loan owners for the amounts by which the loans were underwater, but credit derivative sellers were also on the hook to pay all the other third parties that had piggy-backed derivative "insurance policies" on those loans, including Goldman Sachs, Deutschebank, Royal Bank of Scotland, etc. etc. (i.e., US taxpapers didn't just bail out US institutions that had purchased credit derivatives but also foreign ones!)

(Note also that Goldman Sachs and perhaps others were profitting at both ends of these deals – on the one hand, they were selling the pooled bad mortgages to pension funds et al., while on the other hand, they were also using credit derivatives so as to bet that the same mortgages would fail... and somehow we're supposed to swallow the idea that they didn't know what they were doing.)

AIG was one of the biggest sellers of such credit derivatives, but like most other such sellers, it had not retained sufficient reserves to make good on all the pay-outs that became due when the bad loans collapsed – it either had not charged enough premiums for all the “policies” it had sold to all those third parties, or it had already distributed too much of those premiums out in pay to its executives and/or dividends to its shareholders – so when we bailed out AIG and other derivatives issuers, we were essentially making it possible for AIG & the like to make good on all those "policies" they’d sold.

(b) Bail-Outs. If instead we had approached things the way we did in the S&L crisis, the mortgagees or other owners of the loans would have had to bear their losses to the extent that the loans were underwater, and if the losses rendered those owners insolvent, they would have been liquidated rather than bailed out, with the losses borne by their creditors and their shareholders other than their depositors, whose potential losses should have been covered at least in part by the FDIC.

In addition, sellers of the credit derivatives that had not retained sufficient reserves to make sure they could cover all the "policies" they'd sold to third party derivatives purchasers such as Goldman, Deutschebank, et al. would also have been liquidated rather than bailed out, with the losses borne by their creditors including derivatives purchasers such as Goldman et al. and by the derivatives sellers’ shareholders.

In short, apart from some administrative expense that the government would have had to incur in order to help resolve the mess plus the hit to the FDIC insurance fund, US taxpayers would not have had to bail out anyone, on Wall St. or otherwise. Some losses would nonetheless have percolated through the economy to some extent, and because they were bigger than during the S&L crisis, the drag on the economy would have been greater; but the heaviest losses would have been borne by those who either helped cause them or who had been in a position to recognize the risks and avoid them, and the financial slate would have been cleared in the healthiest way possible.

Instead, those who were both least at fault and least able to bear the burden – taxpayers – bore most of the losses, and those with the most responsibility for the losses gave themselves some of biggest bonuses in Wall St. history.

Estimates of the total losses realized in the 2008 GFC range from $16 to $32 trillion.

(c) Minimal Prosecution & Resulting Moral Hazard. If that all weren’t bad enough, even though the magnitude of the 2008 GFC dwarfed the S&L crisis of the ’80s, there were far fewer prosecutions of the executives that caused it; on this point, see Bill Moyers’ interview of William Black at https://billmoyers.com/2013/09/17/hundreds-of-wall-street-execs-went-to-prison-during-the-last-fraud-fueled-bank-crisis/ .

Wall St. had established that they could play with other people's money, lose it, and then reward themselves for their fraud or negligence.

(d) The Repeal of Glass-Steagall. One more factor worth mention: The Glass-Steagall Act used to say that if a financial institution wants to hold ordinary depositors' savings, it could not also invest in the stock market or other financial speculation such as buying or selling credit derivatives; this restriction effectively prevented depositary institutions from gambling with grandma's retirement funds. Banks had to pick: you're either a depositary bank just holding deposits and making plain old loans, or you're an investment institution engaging in more speculative activity,such as speculating in stocks & other instruments, facilitating IPO's, etc.

Then Glass-Steagall was repealed under Pres. Clinton, with his support. In 2008, the merger of depositary and speculative banking that this repeal had made possible meant that if a bank or similar institution had big losses due to having bought into bad mortgage pools or to having purchased a lot of credit derivatives from an institution that lacked reserves sufficient to cover all the claims made on it, the failure of that bank might also have jeopardized grandma's savings. This was part of the claimed justification for "too big to fail”: we have to bail grandma's bank out because otherwise she’s broke. This argument makes superficial sense but ignores the fact that we shouldn’t have let her bank gamble her money away to begin with, & b.t.w., maybe we should make the bank’s execs and owners bear the losses before we tap grandma, since they’re the ones who should have known better and whose fraud or negligence caused the losses.

Fwiw, the decision not to regulate credit derivatives was also made by Pres. Clinton, against the advice of his own Chair of the Commodity Futures Trading Commission at the time. (Actions ultimately DO speak louder than words, and I'm afraid that such actions or omissions by establishment Dems have directly or indirectly fueled the growing disenchantment with the party and the rise of candidates such as Bernie Sanders and Trump, who were different in important ways but whose campaigns focussed at least in large part on the economic woes of the 90%.)

3. As one of the many bankers who exploited the S&L deregulation put it, "The best way to rob a bank is to own it."

4. Bail-INs. It gets worse, and this may be the most outrageous thing of all, making our situation far scarier than even in 2008, let alone the 1980s: laws enacted in the wake of the GFC made possible what are called bail-INs, which are a whole order of magnitude worse than bail-outs.

To explain, we need to back up a minute and talk about what used to happen when a bank or other corporation became insolvent. (Insolvency means that the bank owes more money than its assets are worth and that it can't pay its debts as they become due, including any attempted withdrawals by depositors or their creditors.) So first, as I understand, the insolvent bank’s assets were sold off, and the proceeds were applied in something like the following order:

The bank’s depositors would be paid the entire amount of their deposit balances. (If there weren’t enough $ left to do that, the FDIC would make depositors whole up to $250,000 per depositor.)

If there were any funds left after the depositors had been made whole, payment out of the proceeds from any particular asset would go to any “secured” creditor that had a properly recorded lien on that particular asset (e.g., the holder of a second lien mortgage on a house that had been foreclosed on would have priority over the other, general creditors of the bank).

If there were any funds left after paying off all the depositors and secured creditors, then all the remaining creditors would get in line to be paid cents on the dollar out of whatever were left. E.g., if the total remaining debts of the bank were $200,000 and the remaining funds were $100,000, each of the remaining creditors would receive 1/2 of what it was owed by the insolvent bank.

The shareholders or other owners of the bank would be last in line.

There would be no taxpayer bail-out beyond the $250,000 FDIC insurance for depositors.

(I’m rusty on this stuff, and the foregoing is at best broad-brush; but hopefully it’s close enough to give a general idea.)

A bail-out means, taxpayers step in to make sure that not only depositors but other creditors of the insolvent institution are made whole. This is very bad.

A bail-IN means that, instead of depositors being first in line to be made whole, they’re LAST – even though they had the least knowledge, power, responsibility, or culpability for the insolvency.

Similar bail-in laws have already been used in several other countries to protect bank executives, shareholders, investors et al. while stealing the savings of depositors.

I know this sounds too awful to be true, but google it for yourself, and if you can parse all the mumbo-jumbo designed to make it sound somehow reasonable, you’ll see.

THIS is what we face in the next crash.

Meanwhile, there are now even more credit derivatives out there than there were in 2008, and the US government debt is also far bigger, because instead of resolving the 2008 crisis in the healthy way, it basically tried to paper over our problems, first by bailing out Wall St. and then by injecting even more dollars into Wall St. and other unproductive investments via Quantitative Easing & other devices, which both pumped up the stock market and ultimately also jacked up prices for IRL assets such as homes, fuel, food, etc., resulting in painful levels of inflation in the real economy.

These points do take a lot of words to explain, but the concepts seem fairly simple once you grasp them – a lot simpler than Wall St. would have you believe. And imho, it's imperative that as many voters as possible come to understand these things better, because we're very unlikely to get the legal reforms we need in order to rebuild a just and robust enconomy unless and until we do.