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Some say "housing crash" but I suspect the existing global banking system imploded. Am I off-base, or ...?

In my experience, CME S&P futures, for example, require a performance bond of something less than 10% of the market value of the underlying asset(s) to open a position, i.e. healthy leverage is baked into the product. As I calculated back then, TARP and TARPII literally provided enough capital to purchase the entire US stock market via futures contracts.

Today, a decade later, the run on global banking seems to continue. "Buy gold bcs you can't trust governments or banks" commercials come on TV about every 15 minutes. Also, inflation continues to outpace return on bank deposits, i.e. negative real interest rates. Punishment for holding cash; and we see several Nations outlawing large denominations of cash. Gold has been repatriated out of NYNY in masse.

Did the global banking system collapse in 2008, or was it simply a housing/mortgage issue? Lastly, if it did, my understanding is that like 99% of $100 bills notes are held outside of the USA. Why didn't the Fed simply declare bankruptcy, void all those notes (and all those complex derivative contracts), and start over with new money? Why the fake? The sun's going to come up tomorrow regardless...?

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  • $\begingroup$ 'Today, a decade later, the run on global banking seems to continue. "Buy gold bcs you can't trust governments or banks" commercials come on TV about every 15 minutes.' Note that the folks running those commercials are selling gold, not buying it. They apparently don't care to follow their own advice, so why should you? $\endgroup$
    – Charles E. Grant
    Mar 28, 2017 at 1:35
  • $\begingroup$ @CharlesE.Grant respectfully, they have to buy it to sell it. So they are doing both. Whether they hedge out upon purchase I have no idea, but the gold market has primary dealers (bullion banks) that sell to distributors that sell to coin shops, as I understand it. E.g., Prince (the entertainer) died with 67 10oz bars; Ron Paul, ...lots of smart people hold physical gold. However, smart people don't advertise their position. $\endgroup$
    – Ronnie Royston
    Mar 28, 2017 at 1:41
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    $\begingroup$ 'respectfully, they have to buy it to sell it.'. That's simply not true. No rational economic actor will trade something of higher value for some of lesser value. Where it get's complicated is that we all disagree about the relative values of things. I assure you though, if someone wants to sell you an ounce of gold for for US$1255, they'd rather have 1255 US dollars than that ounce of gold. $\endgroup$
    – Charles E. Grant
    Mar 28, 2017 at 1:58
  • $\begingroup$ Understood. I mean the coin shop must have purchased the coin. I don't think they sell on consignment. That's all I meant. The flip side of your statement is that someone must want that gold more than their cash or else there would be no sales of gold, right? $\endgroup$
    – Ronnie Royston
    Mar 28, 2017 at 2:02
  • $\begingroup$ 'The flip side of your statement is that someone must want that gold more than their cash or else there would be no sales of gold, right?' Absolutely. The price of gold is a valuable indicator of economic sentiments. TV commercials hawking gold are not, but those are what you cited as evidence for your concerns. Commercials are simply sales pitches, will at be self serving at best, and frankly dishonest at worst. Watch what they do, not what they say. If they really thought that banks and govs. were about to collapse they be buying gold and hanging on to it, not trading it for more dollars. $\endgroup$
    – Charles E. Grant
    Mar 28, 2017 at 3:25

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To sum up the 2008 crisis in a few bullets:

  • Loose lending policies by government and private institution caused regular (and poor) folk to become real estate speculators.
  • Housing prices declined rapidly, causing foreclosures. This caused banks and investors to lose money and put the housing/construction industry on hold, causing unemployment.
  • Many mortgage-backed securities were based on the value of real estate and their risks had not been taken into account by investors, who were unprepared for losses.
  • Financial institutions were highly levered and tightly connected with each other by contracts and derivatives that lacked transparency, causing a crisis of faith in these institutions.
  • Government bailouts were reasonably successful in keeping the problem contained but at great cost and setting a questionable precedent.
  • Since then the financial system has recovered and done very well.

The low real interest rates you mention isn't a problem with the banking system, it's a simple problem with too many parties (globally) wanting to save and not enough wanting or being able to borrow. The latter effect is partly because of government and bank reluctance repeat the same mistakes with loose lending and partly because we don't have a lot of good real investments available to us.

Some say "housing crash" but I suspect the existing global banking system imploded. Am I off-base, or ...?

Yes, you are off base. The banking system, and financial system in general, temporarily lost a lot of value and suffered from a credit crunch but have since recovered and are doing very well.

As I calculated back then, TARP and TARPII literally provided enough capital to purchase the entire US stock market via futures contracts.

Posting margin to take a large position in futures contracts is very different from "purchasing" the stock market. I don't understand how this is related to your question, though. Using bailout funds to speculate on the market seems like an odd idea. Note that TARP funds were loans, which have been repaid and made the government a tidy profit.

Did the global banking system collapse in 2008, or was it simply a housing/mortgage issue?

Again, it didn't collapse, but it did suffer. The housing situation was the precipitating event but there were a number of problems that came to fruition at the same time.

Lastly, if it did, my understanding is that like 99% of $100 bills notes are held outside of the USA. Why didn't the Fed simply declare bankruptcy, void all those notes (and all those complex derivative contracts), and start over with new money? Why the fake? The sun's going to come up tomorrow regardless...?

Why would the fed want to declare bankruptcy? If it tried to void our currency there would be negative global economic and political repercussions the likes of which we have never seen. I cannot imagine this happening nor why you would think it would be a good thing.

Is there a reason you think voiding derivative contracts would be a good thing? Those are contracts parties voluntarily engaged in, many of which are necessary to provide stability to both or at least one participant. During the crisis the fact that big banks were involved in so many derivatives undermined their credit-worthiness because people couldn't be certain how much risk they had. But that is a very, very far cry from saying that it would be a good idea to void derivatives, or even certain classes of derivatives.

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    $\begingroup$ appreciate the well thought out answer and polite response. Man, as I recall "Let them go bankrupt" was the mantra of those labeled as fringe operators (Jim Rogers, Faber, etc). So, I'm not saying contracts should have been voided; the basis of the contracts (USD) was perverted to prop up otherwise dead counterparties. Resulting in zombie banks. I don't see how the banking system is currently healthy at all... Negative interest rates is unicornery. I'm no economics expert, but very interested. $\endgroup$
    – Ronnie Royston
    Mar 30, 2017 at 0:42
  • $\begingroup$ I'd say that the global banking system was imploding. The things preventing a massive bank death were the bailouts and other interventions (e.g. extra liquidity provided by the central banks during the credit crunch). $\endgroup$
    – Klas Lindbäck
    Mar 30, 2017 at 8:01
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The main factor was bad loans. Moreover, bad loans were made to look like high grade loans by lying and by gaming the system.

Housing loans were bundled. The big rating firms allowed a small percentage of bad loans even in the highest grade bundles. So bad housing loans were bundled with good loans. The bundle (highest grade) was then put into a new bundle with more bad loans and the new bundle would also get the highest grade. The process was then repeated a number of times until there was a large amount of bad loans in a bundle with the highest grade. The bundle was then sold at a premium, because some of the bad loans had really good interest rates. When it was discovered that these highest grade bundle actually contained a large portion of bad loans their value dropped. Some financial institutions were hit so hard that they went insolvent. The US government decided not to bail out of the fairly large players. The result was that all debt of that player became worthless, sending ripples through the banking sector that threatened to bankrupt more banks throughout the world. Without intervention from the governments, there would have been a banking collapse.

Meanwhile, some countries in Europe had been lying about their national debt and their budget deficits. When the financial meltdown happened the big banks started to look at other loans that could be lower grade than indicated, and their sights set on the cheating countries. Again, the governments (and the EU) had to intervene.

As for voiding national debt: FIAT currencies are only as good as the trust people put in it. If the US would default on its national debt (paper money is debt), what would happen to the trust in the new US dollar? Who would dare accept US dollars or lend money to the US in the future if there is a risk that the money will become worthless?

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  • $\begingroup$ For sure. See Countrywide Combo Loan but as I recall it was the financial derivatives (exotic insurance contracts) that actually imploded the system. Business Insider's The The Real Cause Of The Crisis Was OTC Derivatives $\endgroup$
    – Ronnie Royston
    Mar 29, 2017 at 16:47
  • $\begingroup$ @RonRoyston Excellent article! One example of the bundles I am talking about are CDS (Credit Default Swaps). The article agrees that it was mispriced risk that set off the crisis. I would say that both factors are needed: First you need a big load of bad loans. Then you need them to be mispriced. The housing bubble helped with the loans, the rating companies and unscrupulous finance firms created the mispricing. $\endgroup$
    – Klas Lindbäck
    Mar 30, 2017 at 7:52
  • $\begingroup$ Agreed. I just have a hunch that what happened is irreversible and shrouded and obfuscated and under-understood. I'm not against banking. $\endgroup$
    – Ronnie Royston
    Mar 30, 2017 at 13:17
  • $\begingroup$ Gaddafi gold-for-oil, dollar-doom plans behind Libya 'mission'? $\endgroup$
    – Ronnie Royston
    Mar 30, 2017 at 20:08
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A factor that appears to be often overlooked is what was happening to the price of energy since 2004. The WTI oil price broke through $40 in 2004 and just kept rising. Combined with aggressive housing credit offering, the gradual squeeze on energy prices eventually tipped the system.

enter image description here

data source: http://www.eia.gov/dnav/pet/hist_xls/RCLC1d.xls

additional info: https://en.wikipedia.org/wiki/Price_of_oil

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