Why did the US banks loan the money in the first place?

Question

We are now in a bad place globally on a financial level so why did the banks give loans to people with little or no credit? surely it was clear they couldnt pay the money back?

Answer 1

The War had to be financed somehow and the economy was actually in a recession.
Money is funny because it is actually created by a book keepers trick. Debt creates money. If you go to a bank and qualify for a loan you give them an agreement to pay the loan back. They accept that as a check. Then they give you an account and credit the money you promissed to pay into the account as cash. Nice eh. Notice that there is only an agreement that you owe them money so far. If you had that money you would just go buy the house instead of making a promiss to pay the bank money that does not even exist yet.

Now they are looking at the money in your account and your promise of payment both as real money. Here is where it gets interesting. They can loan ten times their cash reserves and secured credit like a house loan counts as cash reserves.
A 1 million dollar loan equals 10 million in money supply all generated through nothing but credit based on real estate.
It is a bubble and it is inflationary. But as long as the money keeps going around like a bad check that everybody agrees to honour who cares. Now you can through taxes use this new money to support your dollar based on the increased value of your real estate which was inflated by making easy money loans available.
Of course if they decide to contract the economy the banks get the real estate, people end up broke and the whole cycle can start over again. Almost every dollar in circultation is debt created money. The debt is mostly over real estate but all debt is really the same.
Nobody ever wants you to know how money is actually created in a Banking economy. This all dates back to the creation of the Bank of England.

Answer 2

Two reasons.
Greed for profit.
Assumption that property values would continue to escalate.

The country experienced this in the 70's-80's in some areas. Houston, TX. , Atlanta, GA., for example.

Office buildings suffered. A sign in Atlanta at that time,
"FOR SALE. BUY ONE, GET ONE FREE".
Even John Connely, former US VP, had to bankrupt a new building, in Houston.
Values were escalating at a rapid pace. When the downturn occurred, values dropped below the mortgage balances.
Appraisals were performed in fraudulent ways, falsely exaggerated so that loans would be approved, also, many loans were approved WITHOUT APPRAISALS or even seeing the property.

Bank officers were loaning money to each other, transferring ownership of properties in the same day, at inflated prices.
Done at my bank, went down for this reason in 1970's.

Banks went under when fraud was discovered by bank examiners.

Whitewater was the same scheme. I lived in Arkansaw when that occurred. Even some Canadian junk property was involved. Investors there lost. I visited the area. This was never revealed in US.

Answer 3

If it is like the UK, because the regulatory authorities are too lax and the banks too powerful. In the UK banks have been "selling" debt to the public like there is no tomorrow, it won't have to be repaid and any assets against which they are secured will keep on rising forever. They say the consumer has an appetite for debt, when the truth is they have been handed it on a plate and of course many have gratefully accepted it.

Answer 4

Just like bookies they layoff their loans(bets) to others. So it's not so much the banks that are in trouble, it's debts have been split up repackaged and bought and sold around the world. Sooner or later, it all come tumbling down, but not after some huge amounts of money have been "made".

Answer 5

Bankers get bonuses for the amount of loans they secure. The penalties come years later. Another factor is the belief that a certain amount of bad credit is needed for profit maximization. Then economic times change and the little bad credit gets out of control and it becomes a lot of bad credit.

Answer 6

Greed, they were thinking of how much money they would reap when the interest rates went up without thinking about the fact that many of these people wouldn't be able to keep up the payments. They never took into consideration that the runaway inflation from Bush's sorry economy would make it harder for people to make their payments.

Answer 7

Because that's how they make their money, by preying on the poor and charging ridiculous amounts of interest

Answer 8

goe's without saying, bad times follow the good. time to buckle up and spend responsively

Answer 9

It's academic now. Problem is, the whole world suffers when the States have a problem. You louse up and we pay.