Good Layman's guide to the financial crisis

[J Wolfsberger]

I think you and I are on the same page as to who created this mess.

[tequila]

J Wolfsberger,

Someone is selling you a line. Do you honestly believe that the housing bubble was created because of gov attempts to extend mortgages to poor people? Really? Because, you know, I don't recall Flip That House visiting East St Louis or Brownsville. The housing bubble did not take place in the inner cities or even amongst low-income first time homebuyers in general, and the gov regulations you attest to only applied to thrifts and commercial banks.

The vast majority of subprime defaults were mortgages lent out by independent mortgage brokers, who were not covered by any Federal regulations at all, and certainly not any aimed at increasing home ownership amongst the poor (independent brokers put out at least 50% of such loans, twice the number as banks and thrifts).

Schmedlap, your targets are rather broad and miss out on two key ones: the massive expansion of capital available for investment in the past 20 years, and the extraordinary degree of overleveraging made possible by the growth of the "shadow financial system" that grew up to service that capital outside of the regulatory infrastructure that governs banks and thrifts. SIVs, hedge funds, private equity groups, etc. that became so profitable that the inevitably became enmeshed in and took over large parts of Wall St itself. That massive overleveraging is what has turned a standard housing bubble into financial apocalypse.

And who needs lobbyists or campaign donations when you essentially staff the Treasury Department?

[Ski]

I have a little bit of insight into this whole situation as my dad is a CEO of bank (not investment, trade/finance) and one brother is a broker for Smith Barney.

This all comes back down to Wall St's traditional nemisis, greed. The political parties are part and parcel to this as they are always pro-business, and since the economy is always the number one concern in any political campaign, they support Wall St. almost 95% of the time. Follow the campaign contriution trail, there has been a menage a trois between Wall St, the Dems and Pubs for 30 years. Guess the condom broke yet again...

This type of crap isn't new. There are significant bailouts about every 20-30 years. After 9/11 there were a number of bailouts. The S+L crises is another recent example.

This extends well past the lending houses now. Look at the new list of companies on the "do not short" list.

It's also far more than $1 Trillion - look here for a more comprehensive rundown:
http://www.econbrowser.com/archives/...n_bailout.html

This is going to have huge national security effects for the US. I wrote about this very subject in my SAMS entrance exam. The dollar is going to be worth next to nothing - I honestly think we may lose 30-40% of its worth. Budgets are likely to be slashed. I would not be surprised to see some of the major procurement items cancelled to pay for some other things (and at $200B for FCS, that's probably not all bad).

This is going to be a major league mess with the loss of millions of jobs, the continued weakening of the currency, and effects that we can't begin to comprehend yet because the financial system has become too complex and unwieldy (take note US military...)

[Tom Odom]

The only package I want to hear about is the package of penalties, fines, and jail terms for those who ran the choo choo of the tracks.

In the interest of national financial stability, some bail out is needed but someone deserves more than just a loss of their golden parachute.

Tom

[carl]

The only package I want to hear about is the package of penalties, fines, and jail terms for those who ran the choo choo of the tracks.

In the interest of national financial stability, some bail out is needed but someone deserves more than just a loss of their golden parachute.

Tom

There are thousands and thousands and thousands to blame, starting with the lenders who made foolish loans to those who took them and moving on up the line. All these people forgot about tomorrow and bet that things would always get better, always. It is as if "an institutional bias against rational thought" has become a national character trait. If it has, that is the big security risk.

[J Wolfsberger]

There are thousands and thousands and thousands to blame, starting with the lenders who made foolish loans to those who took them and moving on up the line. All these people forgot about tomorrow and bet that things would always get better, always. It is as if "an institutional bias against rational thought" has become a national character trait. If it has, that is the big security risk.

Heh! Everybody remember the TV ads for second mortgages at 110% of equity?

[jmm99]

Here is my "bible" on the current financial events.

The End of an Era
by Gary North
.....
This investment era began on Monday, August 16, 1982. On Friday the 13th, Mexico had threatened to nationalize all foreign banks and default on its debt. That weekend, the world's central bankers were meeting. They agreed to start pumping in new money. They negotiated new terms with Mexico. On Friday, the 13th, the Dow Jones Industrial Average bottomed at 777.

The week of September 14, 2008, will go into the textbooks as the end of an era. It marked the end of the investing public's confidence in the Powers That Be.
.....
CONCLUSION

Investors last week began to figure it out. A lot more investors are going to figure it out. They are going to have two years to figure it out. This is if things go well. They may have three years to figure it out.

Whoever is elected President in November is going to preside over the worst financial disaster in American history in the postwar era. Some lucky soul is going to lose this election.

You had better batten down the hatches.

http://www.lewrockwell.com/north/north654.html

While Gary North and I differ on religion, we do not differ much on economics. For the last few years, he has been predicting correctly in the economic arena. He also takes a practical, applied approach to things economic, and is no Ivory Tower theorist.

He also is not trying to sell you anything, only his views.

Clicking on the Gary North Archives (bottom of page), takes you here.

http://www.lewrockwell.com/north/north-arch.html

These (going back to 26 May 2000) may be helpful to your own planning.

----------------------------------------------

from cavguy
.... but I think this has huge security ramifications

Yup, in terms of what I call policy (national strategy), we will be seeing this for the next few years: dimE.

[Xenophon67]

......but were afraid to ask.

Absolutely comprehensive economics videos. I believe his analysis to be objective with the purpose being to educate.

Khan Academy: http://www.khanacademy.org/

Also RAND Organization produces some outstanding publications. (Ignore the price/add to cart and go to the pdf download)

[slapout9]

Latest from James Galbraith on President Obama's Plan B for the economy.



http://growth.newamerica.net/publica...ts_on_a_plan_b

[Tom Odom]

There are thousands and thousands and thousands to blame, starting with the lenders who made foolish loans to those who took them and moving on up the line. All these people forgot about tomorrow and bet that things would always get better, always. It is as if "an institutional bias against rational thought" has become a national character trait. If it has, that is the big security risk.

True, Carl, and many at the lower end will pay by losing their homes. It does not however obviate reaponsibilty at the CEO level for pursuing those policies whether we are talking Fannie May, Mac, Lehman Bros, or AIG (and whoever comes next). Oversight has to mean penalty.

Tom

[carl]

True, Carl, and many at the lower end will pay by losing their homes. It does not however obviate reaponsibilty at the CEO level for pursuing those policies whether we are talking Fannie May, Mac, Lehman Bros, or AIG (and whoever comes next). Oversight has to mean penalty.

Tom

The trouble is, most of what the CEO's did was probably legal. Bad judgement isn't against the law. The Congress always had the power to change the law, but they didn't. My opinion is they didn't because they also believed tomorrow would never come, or at least not until after the next election. No percentage in saying "No, you can't."

[120mm]

J Wolfsberger,

Someone is selling you a line. Do you honestly believe that the housing bubble was created because of gov attempts to extend mortgages to poor people? Really? Because, you know, I don't recall Flip That House visiting East St Louis or Brownsville. The housing bubble did not take place in the inner cities or even amongst low-income first time homebuyers in general, and the gov regulations you attest to only applied to thrifts and commercial banks.

The vast majority of subprime defaults were mortgages lent out by independent mortgage brokers, who were not covered by any Federal regulations at all, and certainly not any aimed at increasing home ownership amongst the poor (independent brokers put out at least 50% of such loans, twice the number as banks and thrifts).

Schmedlap, your targets are rather broad and miss out on two key ones: the massive expansion of capital available for investment in the past 20 years, and the extraordinary degree of overleveraging made possible by the growth of the "shadow financial system" that grew up to service that capital outside of the regulatory infrastructure that governs banks and thrifts. SIVs, hedge funds, private equity groups, etc. that became so profitable that the inevitably became enmeshed in and took over large parts of Wall St itself. That massive overleveraging is what has turned a standard housing bubble into financial apocalypse.

And who needs lobbyists or campaign donations when you essentially staff the Treasury Department?

In reality, BOTH happened. The government forced lenders to "find a way" to lend money to poor people who cannot really afford one, AND greedy lenders exploited the relaxation of rules to make all sorts of stupid loans.

And idiot consumers bought too much house because housing always goes up in value, and they'd always get a promotion at work, and they'd always be able to find a way to afford to pay the house payment.

[Schmedlap]

Schmedlap, your targets are rather broad...

That was the intent. There are more guilty than innocent of bad judgment, bad faith, and negligence.

... and miss out on two key ones...

I think that my rather broad target set emcompasses those whom you more specifically cited.

And who needs lobbyists or campaign donations when you essentially staff the Treasury Department?

Good question. I can't discern the rationale used by Freddie and Fannie. I can only look at their actions and surmise that they had reason to judge that doling out campaign contributions and setting up a network of lobbyists was essential to further their goals. Then again, I guess their judgment is also pretty suspect, in retrospect.

[Rank amateur]

That was the intent. There are more guilty than innocent of bad judgment, bad faith, and negligence.

I can't agree. Mjustassive economic bubbles always pop and cause ruinous depressions. It is the government's job to "take away the punch before the party gets out of control." Blind faith in free markets caused the problem. We need common sense regulations.

Nothing personal, but I continued to be amazed by how many people think that as long as they vote for a "tax cut" they'll never need to pay for anything the government buys.

Re the security ramifications: I was just thinking that Bin Laden set out to destroy the US economy and we have caused far more damage to it than he ever could.

[Schmedlap]

I can't agree. Mjustassive economic bubbles always pop and cause ruinous depressions. It is the government's job to "take away the punch before the party gets out of control." Blind faith in free markets caused the problem.

What economic bubbles in the past 50 years caused ruinous depressions in the US?

I have no idea what you mean by the phrase "blind faith in free markets." That is so vague and invokes such an often tossed about term as to be almost meaningless.

I'm just guessing here, but I suspect that...

"It is the government's job to..." = if they don't do it, then the gov't is negligent.

"Blind faith in free markets" = bad judgment

If I got that much right, then I'm not sure what you were not agreeing with.

[Rank amateur]

What economic bubbles in the past 50 years caused ruinous depressions in the US?

"Depression" = depression of asset prices. Dot com stocks is the most recent example. When the value of everyone's stocks slide, it's bad for the economy, so even people who don't own stocks get hurt. Same thing happened to stocks in the 20s and tulip bulb prices in Holland. I believe the same thing happened to gold in the 70s.

The only reason these things haven't caused another "great depression" is because economists have learned a lot since the 30s. The government needs to cool things off when they're hot - higher interest rates, lower money supply - and warm them up when they're cold through government intervention in the economy: social security, unemployment insurance, lower rates.

Basically, anytime people are buying things just because the price is going up - in this case mortgages they can't afford, because the house "will be worth more before the rates adjusts" - inevitably creates a situation where everyone sells as soon as the price drops and prices plummet.

Real estate developers were placing strict limits to keep speculators out of their development. When real estate developers show more awareness of basic economics than the administration, there's only one place to put the blame.

[Ken White]

Real estate developers were placing strict limits to keep speculators out of their development. When real estate developers show more awareness of basic economics than the administration, there's only one place to put the blame.

Which administration? This one? The one before? two or three before?

I think you're confusing 'the administation' (whichever one) with Congress whose pursuit of 'affordable housing for all' (and the concomitant campaign contributions from the lender including Fannie and Freddie) is far more responsible for this debacle than any one administration has been.

I suggest that government intervention thus far has done far more harm than good -- and the prognosis for the future is not good...

[bourbon]

Cue Howard Beale:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's work, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat, and we sit watching our TV's while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be. We know things are bad - worse than bad. They're crazy.

It's like everything everywhere is going crazy, so we don't go out anymore. We sit in the house, and slowly the world we are living in is getting smaller, and all we say is, 'Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won't say anything. Just leave us alone.'

Well, I'm not gonna leave you alone. I want you to get mad!

I don't want you to protest. I don't want you to riot - I don't want you to write to your congressman because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you've got to get mad.

You've got to say, 'I'm a HUMAN BEING, Goddamnit! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!'
- Network (1976)

The "shadow financial system" being a big key, as tequila notes, seems curiously missing from the current national discourse. This area also being home to massive cases of fraud and naked short selling.

Schmedlap, your targets are rather broad and miss out on two key ones: the massive expansion of capital available for investment in the past 20 years, and the extraordinary degree of overleveraging made possible by the growth of the "shadow financial system" that grew up to service that capital outside of the regulatory infrastructure that governs banks and thrifts. SIVs, hedge funds, private equity groups, etc. that became so profitable that the inevitably became enmeshed in and took over large parts of Wall St itself. That massive overleveraging is what has turned a standard housing bubble into financial apocalypse.

My sister works for Lehman, she's been kept on for the next couple weeks, I guess to sift ashes.