Good Layman's guide to the financial crisis

[slapout9]

[QUOTE=Cavguy;57140]Sorry for the run of posts - but I think this has huge security ramifications.
QUOTE]

I think you are right about this. Care to be pontificate(learnt me a nu word) on that a bit?

[J Wolfsberger]

The idea of bailing out a company really p----- me off.

Except:

1. We're in this mess because of the changes, in the 1990s, to force lenders to finance housing to low income borrowers. As anyone with a grain of sense could, and did, predict at the time:

a. housing prices in general would escalate
b. people would wind up in houses they could not, in reality, afford

2. The above required (again, thanks to Congress), a dramatic change in lending. "No-doc" loans, "low doc" loans, games with FICO scores, radical ARM mortgage loans, etc. I probably don't know all the games played. The bottom line is, to comply with the new federal requirements, lenders had to get very creative.

3. The killer, I think, was when the ARMs adjusted. Upward. In a sinking market. At that point, people started to default.

4. As they got close to default, they tried to sell their homes. And prices plummeted.

5. When prices began dropping, eventually financial institutions had to begin taking the losses.

6. To make a long story short, the losses piled up until the Federal Government had to step in to prevent a complete melt down.

No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans.

But then, that might involve, or lead to, the public actually figuring out who created this mess.

Not gonna happen.

[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.

[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.

[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.

[CloseDanger]

The idea of bailing out a company really p----- me off.

Except:

1. We're in this mess because of the changes, in the 1990s, to force lenders to finance housing to low income borrowers. As anyone with a grain of sense could, and did, predict at the time:

a. housing prices in general would escalate
b. people would wind up in houses they could not, in reality, afford

2. The above required (again, thanks to Congress), a dramatic change in lending. "No-doc" loans, "low doc" loans, games with FICO scores, radical ARM mortgage loans, etc. I probably don't know all the games played. The bottom line is, to comply with the new federal requirements, lenders had to get very creative.

3. The killer, I think, was when the ARMs adjusted. Upward. In a sinking market. At that point, people started to default.

4. As they got close to default, they tried to sell their homes. And prices plummeted.

5. When prices began dropping, eventually financial institutions had to begin taking the losses.

6. To make a long story short, the losses piled up until the Federal Government had to step in to prevent a complete melt down.

No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans.

But then, that might involve, or lead to, the public actually figuring out who created this mess.

Not gonna happen.

And you had mortgage companies that found it cheaper to foreclose on a house and would not put it back on the market.

There are alot of good assets out there, they just need revaluation. The Government could even make money in this.
(which we don't want as a general rule) but short term with profit and they get out as soon a possible.

You could repeal Sarbanes Oxley. That may force liquidity in. You could also pass the fair tax, that would flood wall street.

Just saying.

[J Wolfsberger]

And you had mortgage companies that found it cheaper to foreclose on a house and would not put it back on the market.

There are alot of good assets out there, they just need revaluation. The Government could even make money in this.
(which we don't want as a general rule) but short term with profit and they get out as soon a possible.

You could repeal Sarbanes Oxley. That may force liquidity in. You could also pass the fair tax, that would flood wall street.

Just saying.

I had suggested "No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans."

Your points, which would involve having the banks voluntarily forego adjusting the interest upward on ARMs, or converting the mortgages to fixed rate at an affordable payment schedule, are also good.

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

[Ken White]

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

sums it up...

[Rank amateur]

I had suggested "No one has yet stepped up to suggest any of the actions that could allow the private sector (read "Market") to fix the problem. For example, reduce the reserve requirement on commercial banks. Or eliminate capital gains taxes on mortgage securities containing x percent sub-prime loans."

Your points, which would involve having the banks voluntarily forgo adjusting the interest upward on ARMs, or converting the mortgages to fixed rate at an affordable payment schedule, are also good.

And all of these would have required a bit more intelligence than the banking/finance community seems to possess.

Again, faith in market solutions has caused the problem. There are no capital gains, only capital losses. Therefore, tax rates are irrelevant; there's nothing to tax.

Anyone who wants to can ask to have their rate adjusted. (Or as pointed out, stop payments all together and stay in the house.) The problem is the value of their house has dropped so much that the rate is irrelevant. When you owe $300,000 on a house worth $200,000 the market solution is to walk away from the mortgage. When the bubble bursts, millions of people make the same rationale economic discussion and billions of dollars of wealth disappear.

None of that is up for debate. It's happened. The problem is how to keep the problem from spreading. Because when no one is buying furniture anymore it's rationale for furntiure manufacturers to lay off people. And it's rationale for people who think they're going to lose their job to stop spending money, which means sales drop even more, which means companies lay off even more people...... and you have a vicious circle ala the 1930s.

Vicious upward cycles always in vicious downward cycles unless the government breaks the cycle.

[Cavguy]

[QUOTE=slapout9;57154]

Sorry for the run of posts - but I think this has huge security ramifications.
QUOTE]

I think you are right about this. Care to be pontificate(learnt me a nu word) on that a bit?

Slap,

Sorry for the delay. Had a paper to finish. A thrilling essay on how "Japanese Piracy" along the coasts of 16th century China was really not Japanese in origin.

Bottom line in short form-

1) Global economic hits almost always cause political instability. The meltdown in China (who owns a lot of our bad paper) has been worse.
2) Budget deficit. The rising costs of this bailout directly affect our ability to continue to spend $12bil/month in Iraq/Afghanistan, and potentially the willingness of the US public to support a half trillion dollar defense budget. Thus, this crisis may force a less aggressive US foreign policy out of necessity
3) Weakening of US economic leverage. Our economic power the "E" in "DIME" is weakened significantly. Issuing an additional $700 billion in debt will continue to lower the dollar's value as a currency. Many more nations are looking at moving to another currency (Euro?) for stability. This has long term effects in reducing global ties to our economy, which may make us less secure. (this is a long term, not tomorrow, problem)

[slapout9]

[QUOTE=Cavguy;57244]

Slap,

Sorry for the delay. Had a paper to finish. A thrilling essay on how "Japanese Piracy" along the coasts of 16th century China was really not Japanese in origin.

Bottom line in short form-

1) Global economic hits almost always cause political instability. The meltdown in China (who owns a lot of our bad paper) has been worse.
2) Budget deficit. The rising costs of this bailout directly affect our ability to continue to spend $12bil/month in Iraq/Afghanistan, and potentially the willingness of the US public to support a half trillion dollar defense budget. Thus, this crisis may force a less aggressive US foreign policy out of necessity
3) Weakening of US economic leverage. Our economic power the "E" in "DIME" is weakened significantly. Issuing an additional $700 billion in debt will continue to lower the dollar's value as a currency. Many more nations are looking at moving to another currency (Euro?) for stability. This has long term effects in reducing global ties to our economy, which may make us less secure. (this is a long term, not tomorrow, problem)

Cavguy, no problem I am slow today myself. I think your number 2 is the big one. Going to put a lot of pressure as to the level of funding. Japanese Piracy?? are you going to post it here? Sounds really good.