There’s been a shift in the real estate industry over the last several years, with an increasing level of investment in technology. This investment is what is driving
Causes for the 2007-08 Financial Crisis
The was like a slow moving car crash. Although many assume that the crisis started in September 2008, it started at least 13 months prior to that. Most insiders in the financial industry were well aware of a major trouble brewing.
The first sign of a severe crisis was in August 2007 when fourfunds collapsed and most good traders woke up to that. In the next 15 months, it was just a slaughter of the pigs (public money) by people who could see the economic data.
There are many books written on this. I will give a brief synopsis of the crisis:
- Financial innovation: in the late 1980s, the financial industry started experimenting with a lot of new ways to doubled edged sword and just like you have created a new thing called “road accidents” with the introduction of automobiles, there are new ways to create disasters. Just like you have regulations for factories dealing with hazardous chemicals, you need strong regulations for companies dealing with complex financial instruments. A lot of new tools were totally complex and opaque that created both the boom and the burst. (package) investments. However, innovation can be a
- Change in character of Wall Street Firms: until the 1970s, operated like service companies. They were held in private and were not capital intensive. Since the arrival of mainframes, then PCs and later algorithmic trading terminals, the industry has grown capital intensive. Since they got capital intensive, they went after public money. This resulted in a classic : the managers didn’t worry as about risk any more, since they were playing not with their own money, but with poor shareholders’ money.
- The business model of rating firms: on the Wall Street, there are 3 main that everyone* trusted – , and . However, these companies were making money only from those who wanted their funds to be rated. Thus, there was an incentive for them to inflate the ratings a bit as the sales guys in these firms wanted to get more bond issuers come to them.
- Regulatory issues: since the 1980s, the R-word was considered as bad as the f-word. There was a mistaken assumption that regulations were anti-business. First, they allowed commercial banks to run their investment arms. The , , and other regulators were mute when banks were betting their house.
- Media feeding herd behavior: technology significantly amplified fads and crappy logic (“real estate prices can never go down”). and 1000s of blogs proudly proclaimed a new era of housing reality:
These factors fed on each other causing a perfect storm. The just called the emperor naked. The disrobing of the emperor was done by the whole society.