They’re back!

The usual crowd of ne’er-do-wells are seeking to divert attention from their own roles in the crisis, and shift blame elsewhere. These people make up a big chunk of the Its All Fannie’s Fault! crew. By muddying the waters, they hope to avoid retribution for their own roles in what occurred.  As the mid-term election approaches, we should expect to hear more from this crowd.

The reality of crisis causation is far more complex and nuanced. Looking at the many factors that independently contributed to the collapse, and prioritizing them by degree of causation is not easy. A sophisticated approach is required to separate the prime and secondary factors.

Rather, than just repeat my list of factors what were the causal factors, today I want to try a different approach. Let’s do a “Causation Analysis” of the biggest factors to see if we can determine not just the various elements that contributed to the credit collapse, but which factors actually caused it to occur and what merely exacerbated the collapse, making it worse.

Understand that this is a theoretical discussion based on counter-factuals — what is likely to have occurred if various elements leading up to the crisis were different. We are trying to discern the differences between primary and secondary factors, separating the causes from the exacerbators.

Whenever someone asserts as a cause an event or force relative to a particular outcome, you should always ask: “Is this a “BUT FOR cause of that outcome?” In terms of a specific result or outcome, “But for” this factor, how would the outcome have changed? Would the result have been the same or different?

My top 3 list of crisis “BUT FORs” are:

1) Ultra low rates;
2) Unregulated, non bank, subprime lenders;
3) Ratings agencies slapping AAA on junk paper.

Why are these “But Fors?” But for these things occurring, the crisis would not have happened:

-If it wasn’t for ultra low rates, the housing boom would likely have been much more modest; further, bond managers would not have been scrambling for yield, and searching for alternative products to low yielding Treasuries;

-If it wasn’t for the sub-prime lenders, the credit bubble would not have inflated; further, millions of unqualified borrowers would not have been able to purchase homes they could not afford;

-If it wasn’t for the ratings agency fraud, the enormous market for this high yielding junk paper — mislabeled as AAA — would not have existed; further, the primary purchasers were firms that were only permitted to buy investment grade bonds. No A+ or better rating, no sale.

Hence, these factors are huge causative elements — BUT FOR them, there is no boom and bust, no crisis and collapse. Bond managers could not have owned all of these securitized sub-prime mortgages; the credit default swap market would have been much smaller, perhaps 1/10 its size; Sovereign wealth funds around the world could not have purchased all this bad paper; Iceland does not collapse. That is these are the big 3 — why I label them the prime cause of the crisis.

There is a secondary list of things that might or might not be prime causal factors; at the very least, they made the crisis significantly worse:

1) The Commodity Futures Modernization Act of 2000
2) Net Cap Rule Change of 2004 (aka Bear Stearns exemption)
3) Repeal of Glass Steagall (1998)

Lets look at each of these:

1) The Commodity Futures Modernization Act of 2000 (CFMA) exempted derivatives from all oversight and regulation. It allowed derivatives to be traded in the shadows, unreserved for, off exchanges, no disclosures of counter parties, no capital requirements. Did that cause the crisis? I do not think it is the primary cause, but I am not sure.

-It certainly allowed AIG FP to destroy the parent company;
-Did it make things much worse? Definitely!
-Is it a “But For”? Would the collapse have happened without this? I believe its inconclusive, and could easily go either way.

We can easily accept that the collapse of AIG was a major cause of the crisis, but if you were to argue that it didn’t cause it, but only served to make mattes much worse, I’m not sure I really disagree with you.

2) The 2004 Net Cap rule exemption that allowed banks to go from 12 to 1 leverage to 25, 35 even 40 to 1 leverage — again, I am unsure if it is a direct causation of the credit freeze. The basic argument pro is that BSC and LEH might not have been in as dire straits BUT FOR this leverage, and each might have survived, this making the crisis more manageable. No doubt that the increased leverage certainly made the damages much greater.

Is it a BUT FOR? I have a hard time deciding, as it can go either way . . .

3) The repeal of Glass Steagall allowed banks to get much bigger than they would have — which made their losses that much bigger; Another maybe/maybe not on whether it is a BUT FOR.

Citi, Bank of America, and the rest of the TARP recipients would have losses — but for Glass Steagall repeal, they most likely would have been much smaller.


Here’s the kicker — when I do the same BUT FOR analysis on Fannie/Freddie, It get different results.

-Were they an accounting fraud run by weasels? Yes.
-Did they securitze mortgages? Yes, for decades.
-What about securitizing sub-prime mortgages? Primarily after late 2005. By then, the die had been cast.

So are Fannie & Freddie a “BUT FOR” ?

I don’t see how. Wall Street had been securitizing most of the sub-prime mortgages for years without the GSEs — Fannie and Freddie jumped in very late because they were losing market share. Their timing was perfect they started doing nonconforming mortgages just as the market peaked.

And if Fannie & Freddie didn’t exist, mortgage securitization would have happened anyway, the way it did in areas where their were no GSEs — securitized credit card receivables, auto loans, small biz loans, etc. took place without GSEs. I assume there would likely have been a private sector version for conforming loans, the way there was a private sector securitizing response to the demand for non-conforming (sub-prime) loans.

That’s how I end up saying they were not a prime cause of the crisis.

Of course, they certainly made things worse — but so did a lot of other entities. But the key question for the blame Fannie/Freddie crowd is “Would the crisis has happened without them?”  The answer is yes — FRE/FNM were not BUT FORs, because all of this was happening anyway, prior to their participation in subprimes late 2005.

Category: Bailouts, Real Estate, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

57 Responses to “Causation Analysis: What “But Fors” Caused the Crisis ?”

  1. torrie-amos says:

    If not for 40-1 leverage change in Aug. 04 brokerage houses could not have held the supply that they eventually sold too others, thus, they could not factually buy crap, and thus no crap would have been sold, without buyers, prices do not go up. As soon as the sales maching got rolling they wanted more product.

    i find the fannie/freddie crap laugable, the numbers in low income area’s were puney in proportion, in certain ways we’ve lost the ability to discern facts in a yell louder and yell longer world

    If not for insasiable securitization of everything that moved credit expansion off the charts would have ceased for above reasons. If you don’t hold the product you don’t care how crappy it is.

  2. Trainwreck says:

    Keep in mind subprime lending contributed to a huge speculative wave of borrowing by flippers, added by appraisal fraud, and a near global mindset that housing prices “only go up!” I felt like I was going insane talking about the housing bubble to people back in 04-5 only to have people stare at me as if I was insane.

  3. Transor Z says:

    Bottom line: the ascendancy of the financial sector and the decline of manufacturing in the U.S.

    The creation of tangible products whose utility/quality can be more objectively measured were phased out in favor of “financial products,” whose utility/quality is much easier to conceal behind legal/technical jargon and junk economics.

    N.B.: Elizabeth Warren’s consumer protections are for financial products, not manufactured goods. Ralph Nader and others pioneered the product liability field 45 years ago.

  4. solanic says:

    I can feel the frustration in posts like this – like why the hell isn’t transparency & financial reform being taken seriously and on the front page of every MSM paper every day until it’s fixed.

    My theory is this simple: most people aren’t econ-geeks like the ones who visit sites like this.
    More people find economics boring. And, most people *might* believe there really is a problem but either don’t understand it, or somehow believe the people in power won’t let it happen again.

    We all seem to know it will.

    My solution is simple – make the non-econ-geeks raise hell by making the FCIC do their job:

    The Curious Case of Benjamins Missing. Where did the trillions go?

  5. Moss says:

    Fanny and Freddie along with the CRA are easy targets since they are faceless GSE type organizations.
    This is all coming from the usual deniers who will never change that opinion regardless of facts. While Blankfein is out claiming that GS is doing God’s work who would ever claim the same for a GSE.

    People like Rick Santelli and Larry Kudlow among others need to support their deep rooted belief system.

  6. cdog says:

    I disagree with your “but for’s”. The market is governed by fear and greed. What mitigated the fear? I got into a house early in my life because of low rates and subprime lending. However, I am still in my house due to fear of financial failure. Why is this fear not governing other loan applicants, subprime lenders, buyers of complicated securities (if you didn’t understand it, why did you buy it?), etc.?

    I don’t know the details but was it gov guarantees on bad loans? Did the companies trading the securities know they were “too big to fail”?

    If you feel the breeze on your rear end like I do, it is amazing how you make the right decision.

  7. d4winds says:

    Your second list is the correct list of primary causes. A financial panic of some ilk would have occurred precipitated by some event in any case. Bubbles happen; this one happened to be in subprime, etc. The CFMA created the environment for the huge overhang of naked CDSs that magnified the panic. Its bankruptcy provisions giving counter-parties ultra-senior priority directly enabled a “run on the bank” atmosphere. Your observations on Glass-Steagall and leverage without regulatory limit are dead on. Glass-Steagall enshrined two principles that were abandoned: The first is that there should be financial firewalls between institutions to contain the spread of a panic. The second was the that guarantees are limited to sectors with heavy accountability to regulators and with marked financial conservatism in their operations to assure solvency. The violation of the second principle directly leads to a regulatory capture in which anything goes and a corresponding observed “need” to accomodate indiscretions, as with the Greenspan/Bernanke put. It perhaps should be identified as THE primary cause, since it left Wall Street with the well-founded (LTCM, Latin America debt crisis,etc. ) and since-proved belief that prudence and capital were quite unnecessary.

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    “Let’s do a “Causation Analysis” of the biggest factors to see if we can determine not just the various elements that contributed to the credit collapse, but which factors actually caused it to occur and what merely exacerbated the collapse, making it worse.” from above Post..

    Sure, let’s forget all about Nixon’s putting assunder the Bretton Woods Agreement in Aug. 1971. Contained, no longer, the Creature from Jekyll Island was freed to do what it does best–Create torrents of Credit–w/o which, as we should know, Prices have a much harder time of levitating..
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    At first, one might think that our hypothetical king has infinite wealth. But upon reflection, we see that there are actually pragmatic limits on how much new money he will print up each year. It’s true that there are no legal constraints on how many notes he can create, but the more monetary inflation he sows, the greater the price inflation he will reap….” is well done, and, they’ll make these topics more accessible than I..

  10. MEH:

    There has to be proximate cause — “an event sufficiently related in time and space to be held as the cause of the injury”

    Otherwise, you can blame the Big Bang for everything . . .

  11. Cynic_FA says:

    Big Bank bonuses and the purely selfish motivation of bank executives is the cause of the financial crisis.
    You blame unregulated sub-prime lenders but Washington Mutual, Indy Mac, Wachovia, and Merrill all built or boght sub-prime operations.

    Four examples of how selfish greed caused the crisis all so that bankers could get bigger and bigger bonuses:
    1. Wall Street Bankers will sell any kind of crap to clients. They promoted the pipeline for sub-prime mortgages and manipulated the AAA ratings to move ore product.
    2. Finding sub-prime to be extremely profitable they decided to keep more of the profits by buying the factories. Merrill Lynch, Morgan Stanley, and Wachovia bought lenderrs so they could grow faster, manufacture and sell more sub-prime, reap bigger bonuses.
    3. Making more money than most people could ever dream of, Wall Street decided to levererage up and make five timesw as much. Push the leverage out to 30-1 and make more money. What Risk?
    4. Off Balance Sheet vehicles and company sponsorred hedge funds was the ultimate Tri-Fecta for selling crap to clients, manufacturing more, and leveraging up. Bear Sterns, UBS, and CitiGroup all had highly publicized sponsored hedge funds which blew up. The sold toxic mortgages to the very best high net worth clients for the typical hedge fund 2 and 20 profit maximiozation (banker profit that is) strategy.

    A cynic believes that only selfishness motivates human actions. As Gordan Gekko said “Greed is good”. I believe that the bonus structure led Wall Street to line up all the pieces to run the sub-prime factories as fast as they could. Stan O’Neal is the poster child. After presising over all four of the steps above at Merrill Lynch he was paid $200 million to leave. Where is the clawback!

  12. Mannwich says:

    Uh oh. Some things never die. We’re not going to go here again, are we?

  13. Mannwich says:

    Our culture ran out (and has run out) of enough productive things for people to do to make a decent living. Combine that with the near-universal obsession with getting rich (or “getting mine” while I can, no matter how I can and the collateral damage done) quickly and easily and there you have it. This is largely a cultural issue. I’ve been saying it for a while now and see no reason to back off of that assertion.

  14. Cynic_FA says:

    I vote for Leverage from your second list of “But Fors” as the biggest cause. You can make mistakes and survive, Unless you make mistakes with 30-1 leverage in which case it destroys you.

    Unwinding the extreme leverage was a big part of the October/November free fall in the markets. It was only a bear market from the top to 9/30/2008. Two thirds of the decline came after 10/1/2008 as the leverage flew apart.

    I think you should add “Failed Regulatory Oversight” to the second list to make sure that bank regulators, especially the Greenspan Fed, are part of the discussion for failing to enforce the rules that were in place to rein in the banks.

  15. flipspiceland says:



    “Factors” such as those listed above cause NOTHING! It’s the same thing as saying the gun killed the man.

    There are real live people behind every single act that is listed and it is they, not the tools they used, that caused this catastrophe. Right on up from the lowliest Christian Latino with no income who listened to the Rev. Garay to Dick Fuld who pawned his toxic paper on idiots.

    It’s People who caused this no more and noi less.

    “When there are two confliciting versions of the story, the wisest course is to believe the one in which people appear at their worst”. ( H. Allen Smith)

  16. Theodore D. says:

    Could had a nice little pattern of responses that played out as follows:

    But For X,Y,Z no crisis but seems like ppl missed out on it.

    But For Fractional Reserve Banking no inevitable growth in banking
    But For the size and dominance of banks and financial institutions no “financial innovation” such as cmbs, rmbs and other cdos.
    But For Hayek arguing better no TARP.

  17. David Merkel says:

    There is a lot of blame to go around. The GSEs and FHA deserve some of it, and I would not rank them in your top group, but I would place them in your second group. They added a lot of mortgage leverage into the system. Though not as obvious when the bubble started to break, they lent a lot of money to borrowers where the property value was significantly inflated above “equilibrium levels.”

  18. super_trooper says:

    My suggestion would be to frame it where you can have a de facto impact, e. g. in the legislation body. Yes low interest rates were bad, but you won’t win Bernanke over. In a democracy you can influence congress. Congress can’t legislate interest rates. However, congress can introduce law regulating the size of a bank, lending practices and rating agencies. This would be my recommended focus. Debating interest rates is a waste of time. The battle is big, pick the battles you can win, and you may have an impact on. Interest rates aren’t it right now. Fixing financial sector is.

  19. The Curmudgeon says:


    I’ve been saying this from the beginning: “But for” ultra easy money, i.e., low interest rates, none of this would have been possible.

    Once the easy money got the ball rolling in late 2001 in the residential real estate market–after 9/11–it was “Katie bar the door”, and the party continued through 2005, as the Fed effectively reduced the real rate of interest (inflation rate less nominal interest rate) to below zero. All the rest of the exacerbating factors–subprime, securitization, Option ARMs, etc., were directly tied to the flood of resources being forced to the residential real estate/mortgage market by the Fed. Following causation back one level–the flood of money was due to the Fed’s misguided attempt to prevent domestic consumer prices from declining as they should have otherwise been doing, due to currency exchange rates and international wage arbitrage, particularly with the Chinese. The Fed was terrified of “deflation”, so in order to keep Wal-Mart’s prices from dropping through the floor, they pushed residential real estate prices to the sky.

    Financial and technological innovations helped, making it possible to turn a house into an ATM, but again, the innovations were driven by the free money, not the other way around.

  20. Wanna see what passes for education in the US today?
    This future banker/bailout recipient:

    liberty not tyranny

    Community Reinvestment Act, Jessie Jackson and ACORN

    Son, dopiness does not fly around here . . .

  21. Mannwich says:

    And now we’re at the “easy money”, “ZIRP” game again. How are we to expect that yet another bubble isn’t being blown right this very minute?

  22. The Curmudgeon says:

    Manny, but of course there are bubbles being inflated everywhere–in real estate, in commodities, in everything, just as before–we’re pretty close to having returned to 2007–if you doubt it, just take a gander at investment banker bonuses.

    What many people fail to realize is that declining prices might still indicate inflation (e.g., residential real estate). What matters is whether the price declines that would have otherwise obtained because of market conditions were forestalled by manipulations of the accounting by the monetary authorities. As for residential real estate, you throw in direct fiscal manipulations, and there is really no way to tell what the “true” value of a house is, particularly in dollars. Perhaps listings for houses should be priced in gallons of gasoline.

  23. Mannwich says:

    @Curmudgeon: Exactly, but it’s ’07 with unemployment rates at double or more. This can’t be sustainable for very long without the employment and real estate picture improving for real, I would imagine. Can it?

  24. hgordon says:


    I appreciate and applaud your continuing efforts to distill the essence of this meltdown’s cause-and-effect into a digestible message in hopes that those who might actually be able to affect a meaningful course of action are actually listening. But that is the fundamental problem – what impact can anyone have against a system that has been so thoroughly corrupted ? Certainly, you can continue to broadcast this message in hopes that some with that unique combination of influence and personal integrity might begin to comprehend what damage has been done, but it is tiring and painful to continuously bash your head against the stone walls of the vampire squid’s castle.

    Because the sense of crisis has mostly passed, the likelihood of any substantive change seems diminishingly small, e.g. witness the marginalizing of Volcker’s message over the past 2 weeks. Maybe Spitzer and Cuomo and Barofsky will be able to send some folks to jail, but it won’t be the likes of Paulson or Geithner or Summers or Blankfein or Mack, etc.

    For my part, your writings have helped me to reach a better understanding of the world, and if nothing else, perhaps that helps me to more effectively look after those who are important to me. And for that, I am grateful.


  25. Transor Z says:

    @Manny & TC:

    The fake-it-till-you-make-it QE might make sense to serve as a temporary placeholder/deflation salve until the bubble-distorted allocation of capital gets sorted out — BUT ONLY IF the capital has a better place to go and starts moving there. Andy Xie is claiming the idiots are just inflating a RE bubble in China. VC investments are way down. Where is the REAL economic growth supposed to be? Flying cars? Cure for cancer? Cold fusion? Artificial Intelligence? The fabled Green Collar sector?

    Another culprit in the exacerbation camp: revolving credit. There’s no savings to spend our way out from under QE!

  26. Machiavelli999 says:

    I want to second hgordon’s point.

    I admire your Crusade against the people who want to blame it all on CRA, Fannie and Freddie, but sadly, you are losing the battle.

    People listen to what they want to hear in our fractional media world now. And a lot of people want to hear that this entire financial crisis was due to just some financial government regulations. No one wants to hear the real reason, they just want to yell SOCIALISM, COMMUNISM, DEATH PANELS!! etc, etc.

    I am making a long-term bearish bet on America not because of our debt, or leverage, or banks, or our balance sheets, but because of this political climate. That, above all else, will ultimately destroy America.

  27. Fred C Dobbs says:

    Stop it! This whole backward-looking argument is just plain silly and a waste of time, an irreplaceable commodity. It commits the crime of “over-generaliztion,” one of the two most ancient fallacies, and is useless. To reduce the causes into any pre-ordained specific number, other than one, is to put the cart before the horse. The one specific cause is human nature. And, it is not capitalist human nature, or Ayn Rand human nature, or any other subset of human nature. The Collectivist Societies of Europe, the Individualistic Societies of the English-Speaking Nations, the Totalitarian Societies from China to Venezuela, like London Bridge, all fell down. Let’s focus on getting those who gamble with other peoples money, that is, who take a cut of the winnings, but not a cut of the losses other people (such as ‘investors’ and taxpayers) suffer as a result of their failed gamble, out of the banking business, and bankers out of the gambling business. Let’s lend money to people who have the income and assets to repay the loan when due. There will still be the risk that the borrower may lose their source of income or assets through death, illness, job loss, bankruptcy etc. but these are classic risks, and risks that have been successfully managed in the past. Let’s get corrupt, and intellectually dishonest peoples’ hands off of the levers of law. Congressional Democrats pursue their power-mad ways virtually unabated by the freshman senator from Illinois who would be running his first senatorial campaign for re-election had not the grand minority party, the Democrats, a coalition of minorities, not succeeded in profiting from the mess they made, and running him, an unknown, rather than Hilary, a known quantity with lots of baggage. They controlled Congress from 2006 onwards, and only made things worse so they could run on the old slogan “blame Bush,” and offer ‘change.’ The voters need to assert themselves and throw the bums out. In case you forget, the number one cause of the Depression was, according to many historians, the unregulated gambling of Massachusetts Business Trusts, and this precipitated the establishment of the SEC. The Massachusetts Business Trusts were reborn as Mutual Funds in the ’60s.

  28. Mr. Dobbs:

    If you want to fix something, you need to understand how it broke and why . . .

  29. [...] the many causes of the mortgage/financial crisis.  (Big Picture also DJ Market [...]

  30. Marc P says:

    A good list. I would add:

    Leverage, leverage, leverage. For a speculator it’s everything.

    For the individual real estate speculators buying houses on 0% down negative amortization ARMs, the premise was that real estate always goes up so 100% leverage was safe.

    For the “banks” (aka financial product speculators) leverage in excess of 30:1 is simply suicidal unless they are positive that the government will cover their losses.

    Utter foolishness by the individual speculators; brilliance by the financial speculators.

    The government should curtail both because that is what governments are supposed to do, simple as that: create stability, predictability, and a level playing field.

  31. Mannwich says:

    @TZ: There’s also a massive housing bubble in Australia that hasn’t popped yet, but will in time.

  32. ella says:

    Let’s not forget that some in Congress do not have a clue, either because they choose not to or they are simply ignorant.

  33. scharfy says:

    I’m in the ULTRA CHEAP money camp.

    All the rest are natural progressions from there – including the human aspect.

    I certainly think capitalism is designed to have periods of growth, recession. But, not unlike baseball for the last 15 years, our economy was on steroids.

    Another tired analogy – When the driver is drunk, seatbelts, airbags, more cops, antilock brakes, Speed limits are all ignored.

    When the fundamental building block of capitalism (CAPITAL) is altered, the results are too complicated to process without huge quantities of dope.

  34. The Curmudgeon says:

    “This can’t be sustainable for very long without the employment and real estate picture improving for real, I would imagine. Can it?”

    Of course not. It’s less sustainable now as it was in 2007. This is tied to the election cycle, as well. The timing part of the crash in 2008 was, in my view, directly related to the uncertainty presented by the fact of a new administration–the markets knew things could be different one way or the other, after Bush left, no matter who was elected.

    That’s why 2011/12 is shaping up to be so important. If it appears Obama is in danger of losing in 2012, that could be the catalyst for the next crash, if it were felt his replacement was less predictable than him. The banksters markets have already taken their measure of Obama, and they don’t believe (right now) he’ll do anything to upset the apple cart, that for the moment, only has apples for them. What if some populist somebody swoops in like a William Jennings Bryan to save us from crucifixion on a cross of CDO’s? Then the shit would really hit the fan. But, personally, that’s what I’d like to see.

  35. DL says:

    BR has made the argument here, and previously, that Fannie/Freddie were minimal contributors to the overleveraging and fraud in the housing market. I’m not necessarily disputing this particular point, but BR has yet to acknowledge that Fannie & Freddie are going to be sucking up vast sums of taxpayer money. So maybe Fannie/Freddie were not a big part of the initial problem, but in fiscal terms, they are certainly a big part of the problem after the fact.

  36. scharfy says:


    Fannie and Freddie most likely will show a taxpayer profit, in nominal terms, in the next 75 years. It really was a good deal for us.

  37. Darkness says:

    Executive compensation.

    Reward people richly for short term stupidity and they will burn the midnight oil at the office performing the stupid.

  38. rayTheEconomist says:

    think the point would be made clearer if a reader could point at something. An IMF report from the fall of 2008 points out that the causes for the crisis were many, including some analyzed above, and it comes down to over reliance on societal safety nets.

    There are many bad actors, including both mortgage sellers and buyers, and over leveraged banks, and securitization and and and, the point being that we have gotten ourselves into this mess over decades and the crony capitalism that is being practiced now will continue until our society gets its house in order. The public can no longer trust large institutions to do the right thing and we must be vigilant.


    BR: Over reliance on societal safety nets? What safety nets?

    Would you care to explain what safety nets were involved, and who over relied on them?

  39. The Curmudgeon says:

    Fannie and Freddie ‘d have to make a lot of dough to become profitable–we’re into ‘em now for about $200 billion, with the Treasury basically having just given them a blank check for more. Why we’d seek them to be profitable is beyond me. It’s just taking money from one taxpayer and giving it to another. The gse’s are no longer even quasi-private. They are simply government money-funnels. Treasury ought to start lending mortgage money directly, and eliminate the middleman and the incidental costs of having one.

  40. cognos says:


    Savers do not deserve more than 1, 2, 3% on assets. Ultra-low rates are a reality and a natural consequence of wealthy, stable, society. We have deflation not inflation, ergo we need low low rates.

    Subprime lending was massively productive, borrowers all paid, and $Bs in profits were made… starting in 1992. This included no-doc, no-job, no-income loans. All had spreads which were too high for actual losses for OVER A DECADE! Of course, this led to speculative excess as profit caused profit-chasing (human nature is to follow). Classic speculative bubble.

    So the #1 “but-for” fix is — higher downpayment %! Imagine if smart regulators had just said, “this looks frothy, lets require 20% down on all purchases”. Not only would this massively dampen the speculative run-up. It would provide a large cushion for any losses. It ALSO would provide great self-policing against fraud and bad deals as each buyer has “skin in the game”. If frothy-ness continues, start requiring 30% down.

    Downpayment is so clearly #1.

    #2 is probably better consumer protections including: a) clear 1-pg disclosures, 2) no prepayment penalties, 3) Fannie/Freddie being purely public institutions and lending directly.

    Both, so simple.

  41. Its_Science says:

    True. But Fannie and Freddie will be a “BUT FOR” of the future United States public debt crisis, along with Social Security, Medicare, and the W Bush and Obama presidencies.


    BR: That’s a different issue which we can address int he future. For now, the most we can say is that they contributed to the overall mess, they were not a primary cause of it.

  42. mcrcr4 says:

    Barry, good day.

    Proximate causation, being empirically derived, has the benefit of hindsight as its mainstay. I believe you and others correctly pointed out the potentials for mischief of the actual causes as they were perpetrated but no one with any horsepower to make substantive changes was omniscient enough to see what was coming. Or, if they were, they did not care, or were too conflicted to act.

    Best regards,

  43. scharfy says:


    Fair point. Higher down payments would have nipped the housing bubble most likely. However that excess credit, priced below the market would have found its ways into our lives other ways. Housing was the path of least resistance because of lax regulations, and government sponsorship, and its size.

    I believe credit cards, car loans and student loans are other examples of the seepage of excess credit into society, and who can say what might have happened even if a tight lid had been kept on housing.

    Maybe even tulips would have gotten wild, nah that could never happen.

  44. soloduff says:

    Cynic_FA Says: “I think you should add ‘Failed Regulatory Oversight’ to the second list to make sure that bank regulators, especially the Greenspan Fed, are part of the discussion for failing to enforce the rules that were in place to rein in the banks.” –I concur; this factor may even belong on the first list.

  45. Hoberdome says:

    Lots of good suggestions and I agree with most of your institutional picks. I’d add a few other BUT-FOR’s that are more social / cultural:

    1. Treating homes as “investments”. They are not – they are principally shelter and emotional protection. It is true that over various periods of time they have often sold for more than purchase price (even providing an equity return) but that is not their inherent function. Once you “mark your house to market” you start in with the speculation and then, when it goes wrong, you think it’s ok to walk away. Well, Reg T says don’t lend more than 50% of a stock price, so if people want to use homes as investments, mortgages should max at 50% LTV. Maybe we could have banks get a prepayment penalty of 3% if the mortgage is redeemed in 1 year, 2% in the 2nd year, 1% in the third, like mezz debt. It would help banks build up a capital cushion and also deter speculators bidding against “real” owners.
    2. A practice or expectation of Non-recourse. The idea that lenders are financing the asset is crazy. They finance the borrower, and to de-risk that a bit, they have the house as security. It is very expensive to pursue debtors (and not legal in CA), so a lot of the times banks will let it go unless they are sure the borrower has lots of other assets. But mortgagors seem to believe that once they are significantly “underwater” and hence should let the house go. If that logic applied to auto finance, every single car loan would go away since on day 1 your car has already depreciated below the value of the car.
    3. Lack of social shame. Few people live in their communities of birth any more. Your parents, your parents’ friends, your teachers, etc. are not around you. So, you let it go. Maybe make a killing if your bet goes well, and if not, “there’s no shame in that”. Thus borrowers are less creditworthy than formerly. Similarly, the bankers (I used to be one, although not in lending) feel no shame in trying to maximize personal income, since the hedge fund guys do it, the mortgage brokers do it, the doctors do it, A-Rod does it, everyone is just trying to make as much as possible and very few people are willing to subsist at all on the psychological benefits of working for an esteemed and venerable institution. “I’ll be gone!” Talk about Bowling Alone! Unless and until we can develop a healthy fear of shame, a willingness to shame people for their anti-social acts (NOT for physical defects, being gay, whatever), we can’t expect this system to repair itself.

  46. stevenstevo says:

    I agree 100% with your top 3, and thinking about it now, I think these three factors pretty much sum it all up.

    The low interest rates factor is an obvious choice, but thinking about it now after reading this, consider: would we financial and credit crisis ever occurred if interest rates had not been lowered? I think not. That is what drove the housing boom–everyone and their cousins (including my gay cousin Chuck) went out and bought a house.

    And then the subprime lending thing is so amazing to me. You could literally get a $500,000 mortgage with no proof of income required and with no money down. Unbelievable. Not only were they unethical, immoral and the like, subprime lenders were also incredibly stupid–they knew fully well what they were doing, and even then they failed to foresee how devastating the consequences would be.

    And as for the ratings agencies, I still do not understand how or why they have managed to avoid the scrutiny that has befallen the banks. It is still amazing to me how little people blame the ratings agencies for everything. I guess this is probably because of the huge Fed bailout of AIG–journalists and the media leaching off of the public’s economic woes by inciting anger towards a company that took their taxpayer money. You just can’t get the same level of sensationalism from criticizing a ratings agency like Moody’s.

    The result is unfortunate: everyone and their mother all of the sudden became delusional. Now all of the sudden, because of the recession, everyone thinks they have a legitimate understands banking, finance, statistics, economics and the crisis in general, enough to criticize those with PhDs in these subjects for failing to predict the future. I guess it’s easy to blame the big banks and their exorbitant greed, blah, blah, blah. And they blame the economists for failing to predict and the quants for failing to model the randomness correctly, for failing to predict the housing market decline (the first in 60 years) , the Lehman Bankruptcy (the largest in US history) and the subsequent recession (the worst in 80 years).

  47. philipat says:

    Unregulated Sub-Prime lenders and Wall Street leveraged securitisations are opposite sides of the same coin. If Wall Street wasn’t pushing so hard for more of this s**t to be generated so that a never ending supply of CDO’s etc could be created and sold on, the supply would nothave been there. It’s cheicken and egg. Compensation practises remain an integral part of the same problem.

    So I do think that Wall Street securitisation of s**t, aided and abetted by the Ratings Agencies (Who seem to be totally below the radar screen at present) and is deserving of a place in your top ranking.

  48. MEH:

    There has to be proximate cause — “an event sufficiently related in time and space to be held as the cause of the injury”

    Otherwise, you can blame the Big Bang for everything . . .

    I hear you, and, that’s nice, and all..but, when We come up with examples of Fundamental Error/”Cracks in the Foundation”, it isn’t, ever, enough to spackle over the Evidence, or cast about for “the Last Straw”..

    this, from a previous thread: “kevinearick Says:
    February 3rd, 2010 at 1:41 am
    response to Cassandra comment:

    I could care less what happens to those who do not wish to move forward into the future;

    my primary concern is the training of young enterprise architects.

    As difficult as it may be, it’s much easier to teach patience first, and everything else second.

    I am showing the kids the recursive process of evolution and devolution, so their solutions resonate with the laws of physics.

    The point I am trying to make with them, repeatedly at times, because it’s important, is that an economy will devolve back to the point of error, which the current economic example attests to, so they resist their natural impulse to apply energy counter-productively, and, instead, focus their effort on preparing for the opportunity to insert the new code. (the turtle and the hare thing, effectiveness vs efficiency)

    As a secondary consideration, if I can help the bloggers accurately locate the as-is abutment, so the trestle can be accurately located and the stanchion builders can start prefabbing the required parts, so much the better.

    Also, it doesn’t hurt for the general population to have some understanding of how a circuit is developed. If nothing else, maybe those who benefit from the circuit will be a little less prone to throwing trash in the mechanism as they drive over the bridge, and maybe, just maybe, those who are completely protected from evolution will think twice before jumping the safety mechanisms that protect their existance.

    And finally, the bridge has to be built out by a semi-neutral middle class capacitor for capital to be profitably employed. I don’t train build-out architects, because capital is more than happy to pay the middle class well to do that job, but some topographical information tends to be useful in their endeavor.

    My audience is wide, and attention spans on a mature bridge tend to be short, as you have seen in the comments, so I employ analogies and “labels”, both to satisfy that problem and to be less intrusive to the host.

    You don’t see my kids because they don’t comment at the “factory” site. I bring them in, show them what I want them to see, and pull them out as quickly as possible.

    I am thankful to Mr Ritholtz for the opportunity.

    this is what I want my students to see:

    The last time around, Dr. Volcker had the developing Internet to justify NPV calculations as the basis for re-booting the economy. Currently, he has no basis for NPV calculations, and the revenue and cost curves cannot be extrapolated from the old demographic acceleration economy, so he is left with nothing but current negative cash flow to work with, structurally declining tax receipts, accelerating social demand, and infinite monetary expansion to print the checks. What he is asking for is a 12V battery so he at least has a light to work with when the electricity cuts out. He is probably hoping not to get it, and leave the whole mess to the brats who created it, the finance people who pre-sold the Internet along the old nation/state geographic lines, then doubled and tripled down to avoid error disclosure for as long as possible.

    Mr. Dodd is a small to medium size shark that got caught up in the banking mess, for a healthy fee, looking for smaller sharks to eat, because he has consumed everything else in his environment.

    Thank you for your patience.”

    is, actually, what I using as a lens. Through which we can begin to examine Where?, exactly, the Errors are stemming from, the Source-point(s), thereof..toward, the “Root of the Matter”, so to speak..

    or, differently, it doesn’t matter if Straw #476, #482, or #501 is fingered as “the One”, if we are to totally discount the RPG that obliterated the Camel’s L-3,4, and 5..

  49. dsawy says:

    The one aspect of Fannie/Freddie which contributed significantly to this mess was their “implicit US Treasury guarantee” — which several people warned of going back to the recession in 2002-2003. This implicit guarantee caused RMBS interest rates to be lower than they would have been if they had not been seen as “safe as US Treasuries…” As it turns out, that guarantee had to be made explicit – to a great cost to the US taxpayer.

    [BR: The implicit guarantee has existed for (literally) decades — how did it suddenly become the cause in 2003?]

    Another aspect which hasn’t been addressed here is there is securitization and then there is bad securitization. Fannie&Freddie securitizing prime, conforming notes into F&F bonds is OK. There’s a known quantity in the securities, better quality credit, etc. RMBS paper from F&F is a rather liquid market.

    [BR: Garbage in, garbage out securitization addressed here]

    When Wall St. decided that creating illiquid securities was a suave move, they really shot themselves in the foot. The long term trend in markets is to create more regular, easier to trade instruments, not to create boutique securities. When Wall Street decided to create illiquid debt securities, it exacerbated the rapid dislocation of the credit markets, because these instruments could not receive a bid. Why? Because it was difficult to evaluate what was in them – and buyers now saw the liquidity risk inherent in the instrument.

    Now, overlay high levels of leverage on top of illiquidity and we get disaster. Every time. The rule about leverage that should be drummed into the heads of “professionals” is that if you’re going to use high levels of leverage, you’d better be leveraging something liquid, because the day will come (not “might come” but “will come”) when you’re going to have to either meet a margin call or sell do maintain margin ratios. And if you’re holding illiquid stuff when that day comes, you’re likely done for.

    One last observation, which is germane even now: When bankers make 100% (or higher) LTV loans, they’re effectively guaranteeing a high rate of ruthless default when the market turns downwards. When banks make 100% LTV loans, the borrower has no skin in the game. When the valuation of the real estate securing the note goes south, there is no positive incentive for the borrower to continue paying the note. There is only an incentive for the borrower to stop paying on the note, because every dollar spent repaying a loan on a 100%+ LTV loan on a property that is absurdly valued is money just pissed into the wind – so of course, they’re going to default. That’s the rational choice.

    None of these are “but fors,” yet they contributed significantly to the mess. Absent something very drastic happening (eg, the elimination of the Fed, or criminal charges brought against the ratings agencies), there is nothing in the offing that will change the first and/or third of Barry’s “but fors.” The second might well be changed, and while necessary, it is not sufficient to prevent a recurrence. If we accept that Congress is populated with morons, perverts and grifters, we need to look at the second-level issues, because there is some small hope that some of those issues might be changed.

  50. [...] thing that makes this Barry Ritholz post on the causes of the financial crisis valuable is that he spells out what he thinks a cause is, appealing to the idea of “but-for causation,” which I believe is what they teach [...]

  51. Sun Tzu says:

    Have a look at the peabrain comment stream in the trackback above

    Talk about clueless turd blossoms

    No wonder the Democrats get their asses handed to them so often. Geez, what dumbfucks 80% of these people are

  52. [...] What Truly Caused the Economic Crisis by Barry Ritholtz at The Big Picture [...]

  53. [...] week, Barry Ritholtz, on his financial blog The Big Picture, debunked this notion, citing three main causes outside Fannie/Freddie: extremely low mortgage rates; [...]

  54. Amos R says:

    I am a retired Jerusalemite economist. This may allow me a somewhat detached view on the “BUT FOR” issue. It takes but one counterexample to refute a theory.

    If you raise your gaze to view the world around , you will find more than one. Three economies which had similar, if not larger property contemporaneous booms and busts, are the U.K., Ireland, and Spain. The U.K. had consistently higher interest rates. All the three had no subprime lending and their banks did not securitize and offload their property loans.

    So, if these are not “but for”, what could be an alternative?

    Consider this – Availability of flexible expanding credit secured by “safe as property” overpriced assets as adequate collateral, was behind the “Feedback loop” which drove the credit fuelled property bubbles, culminating in the financial crisis.

    Since booming markets make borrowers, who expect double digit returns, less concerned about the cost of credit, the AVAILABILITY of credit, however funded by the lenders, is the crucial element. If regulators don’t limit the ability of appreciating assets to produce, through higher collateral values, ever more credit, banks will find the necessary funding.

    A host of economies thus went through credit fed asset bubbles, inflating and bursting, without one or all the three “but for”. What all of them had in common was the accommodating feedback loop of appreciating assets supporting expanding credit, feeding each other.

    “Discern(ing) the differences between primary and secondary factors, separating the causes from the exacerbators”, definitely puts the unbridled feedback loop as the primary factor for asset price bubbles. Additional factors, like widespread securitization, careless rating, and spurious CDS, exacerbated the collapse of the property bubble into a global financial crisis. BUT FOR the asset – credit feedback loop, neither the bubble nor the ensuing financial crisis.

    A proposal to disrupt the feed back loop by enforcing a simple regulatory collateral valuation rule, limiting the value of a collateral to its cycle average value, rather to its current, ever appreciating value, is attached.

    To be effective, regulators must enforce the proposed regulatory rule throughout the financial system, because greed and shortsightedness are to stay.

  55. Consider the following refutations for the points you raise:

    1) Rates: Understand the significance of low rates to a home buyer — buyer behavior is driven by many things, but all things being equal, rates are the key driver.
    And, rates are always and everywhere relative to recent history — and the UK, Spain and Ireland all had MUCH lower rates early 2000s than decades prior

    In the UK, 1997-98 rates were 7.5% (versus 5.5-6.0% in the US) By 2003, it was cut in half to 3.5-3.75% (US was 2% lower)
    What matters is not the absolute number, ITS THAT RATES CAME WAY DOWN TO LEVELS NOT SEEN IN A GENERATION
    (See this:

    Thus, facts behind your rate argument are incorrect.

    Further, when the central bank for the biggest economy in the world takes rates down to 1% (Fed in 2003) it will impact the cost of capital around the world

    2) Last time I was in the UK, all of the mortgages were variable — there were no 30 year fixed mortgage — so their housing market is even more susceptible to the impact of low rates in England or Ireland (Does Spain have a similar mortgage system? I dont recall)

    3) I said the mass securitization of sub-prime loans was a cause of the credit crisis and freeze — not the housing collapse. That was caused by a boom and bust was based on the low rates and easy credit in the US, and prices that rallied up until rates went up, credit availability tightened, and the economy slowed.

    In nations where mortgages are variable, all it took was rising rates.