Good Layman's guide to the financial crisis

[jmm99]

If future value of dollar assets and income become FUBAR (inflation), stocks will be one defense - assuming you are buying corps that consist of things that will appreciate. Perhaps GE or Ford would be something of a straddle into both the manufacturing and credit sectors. Now into both a very little bit; but with a reverse S&P fund for a hedge.

Despite the current bounce, I'd like to see a better slope before even thinking near bottom. Pretty much locked in for the next few months. Legal business in the small business planning area has been nearly non-existent for the last year - also commercial real estate, where almost everything is for sale with very few buyers. Situation (here to me locally) looks like the 1970s in more ways than one.

[SethB]

Pursuit of capitalism (and it is a moving target) requires some regulation.

Microeconomics will introduce you to a number of assumptions upon which free market theories are based. Things like perfect competitiveness and perfect knowledge. To my mind, these attributes are not always natural to the system, but must be instilled by an active public and governmental regulation.

Pure capitalism would be anarchy, which is a system that naturally resolves itself, and not in a pretty way.

Amory Lovins:

Economies are supposed to serve human ends.. not the other way round. We forget at our peril that markets make a good servant, a bad master and a worse religion.

[Surferbeetle]

From the Blog Macro Man

Elsewhere, the debate about the dollar's reserve currency status rages on. A UN panel has suggested a move to a multilateral framework, though why the UN is opining on the matter is open for debate. Most likely because it's the only organization that will give a platform to some of the "experts" quoted in the story, who have made a career out of not udnerstanding the functioning of currency markets.

Still, you can't deny that many of the largest holders of FX reserves, including some of the worst of the serial piss-takers, are getting restless. China appears to be a Huey Lewis fan, as they've recently started playing "I Want A New Drug"* to fuel their FX reserve-buying habit. Now, Macro Man would argue that the current arrangement is useful, insofar as when the limits of economic rationality are pushed to extremes (like having $2 trillion of FX reserves), it provides a built-in disincentive to continue mercantilist behaviour.

Another consideration is that if a new FX reserve currency is going to be managed/arranged through the IMF, there should be some sort of quid pro quo. You know, like oversight of misaligned exchange rates. Such as when a country runs, oh, the largest trade surplus in the world, and offsets more than 100% of it with FX reserve accumulation, as China did in 2008.

When faced with an oversight condition, something tells Macro Man that PBOC will be serendaing the dollar with another Huey Lewis tune....."Stuck With You."

[Schmedlap]

Nice resource for a history of the Fannie Mae abortion, in reverse chronological order: http://online.wsj.com/article/SB121599777668249845.html

[selil]

If you want a good hedge against risk buy ammo. I'm only sort of kidding.

[jmm99]

millions of people agree with you - as to firearms and ammo. These two the first that Googled up.

Of course, I would not be indulging in purchases of that kind. As all know, I am a firm (nay, a fanatic) believer in total and absolute Gun Control - as illustrated in the attached .jpg.

[slapout9]

Good interview with Tom Ferguson of Boston University. No conspiracy just bought and paid for and now it's time to produce. Only problem is the American people are going to end up with the green weenie.


http://therealnews.com/t/index.php?o...4&jumival=3486

[jmm99]

JMM post 289
A few more trillion to go before the economy is "saved" by the "war on the credit crisis" ?

pretty much affirmative according to Prof. Ferguson; especially if what he calls the private-public partnership model does not work.

Japanese model (what he says the Obama administration is using) vs. the FDR model of the Great Depression (which he says should be used).

[Schmedlap]

Some people criticized the Bush administration for not asking Americans to contribute or sacrifice in support of the war (GWOT, Long War, OCO - whatever we wish to call it). I think this administration is already failing that test in regard to the economy. A journalist asked the President about this in his press conference a few days ago and his response was that Americans are already sacrificing, in that they've been impacted by the economy. Sorry, but that's not a sacrifice.

"Oh crap, my home's value has dropped by 20%" is not a sacrifice. It's a circumstance.

Rather than sacrificing, we're indulging. By "we" I mean Americans, as we exert our actions through our elected representatives. Spending trillions of dollars on the same pork-barrel BS that we've always thrown away money on is not sacrifice. It is exploiting the circumstance. One would think that a party and a President who sweep into power with so much political capital and outright power (majority in both houses) could do a little better and act a little more responsibly than grasping for the same projects for their home districts that they've always pissed away our money on, but now doing so under the guise of "stimulus." We can't tighten our belts at all? We need $1 trillion deficits every year for the next decade? What a load of crap.

There is no call for people to sacrifice and, lacking any leadership to influence them do so, the vast majority of people will not. They're still in "what's in it for me" mode and "getting whatever I can get" mode. They've simply adapted to the circumstance by plundering and pillaging more energetically and with less shame than normal. What we are witnessing is akin to New Orleans after the flood. A mishap is bringing out the worst in too many people.

I still contend that this "crisis," in the long run, will be a good thing. In the long run, the great depression was a good thing. It gave way to the greatest generation. Eventually, people will be forced, as a result of this financial nutroll, to either correct their behavior or suffer. I am somewhat troubled that it will take longer than I originally thought. The governmental response, thus far, has only been a catalyst for the unethical, self-centered, greedy and incompetent mindsets that threw our economy into this tailspin. I fear that this will continue for quite a while before it gets so bad that it forces people to change.

[slapout9]

1-Everybody Flips out at the word Trillion dollars now a days, but they forget how much our country and our Economy has grown between the FDR period and now. The Population of the country has just about doubled.

2-As for sacrificing for the Economic crisis. The Economic crisis was an intentional man made event ...it was not some type of natural disaster it was caused by somebody or somebodies personal greed nothing else and as soon as they give back all the Bar-B-Que they stole and as soon as they are in jail...then we can talk about sacrifice.

[Schmedlap]

1-Everybody Flips out at the word Trillion dollars now a days, but they forget how much our country and our Economy has grown between the FDR period and now. The Population of the country has just about doubled.

Good point. To put the deficit in perspective, see here.

2-As for sacrificing for the Economic crisis. The Economic crisis was an intentional man made event ...it was not some type of natural disaster it was caused by somebody or somebodies personal greed nothing else and as soon as they give back all the Bar-B-Que they stole and as soon as they are in jail...then we can talk about sacrifice.

Why? We can't fix the problem until we've doled out the punishment? You think the destroyed wealth was actually transferred somewhere and someone can just give it back? I agree that this was caused by greed and much of it was deliberate. But as for putting those people in jail, I think that there would be more people in jail than out of jail - assuming that the court system could even absorb the case load.

[slapout9]

Schmedlap, there were about 700 people that were put in jail after the S&L fiasco of the 1980's and that had a very sobering effect at least for a while.

As for your second point their is some merit to it. Money is "part of a relative pricing system and an accounting store of value" much of what was lost in the market was not real wealth, it was the price component of money, something people are usually not aware of. There were a lot of people that new what was going on and made a lot of money off of illegal activities. They should give it back and go to jail.

If the FDIC had taken over the bad banks as they should have andhad a legal right to and had full access to all records it would become very apparent who made how much and when. However I would not hold my breath on this happening.

[slapout9]

Schmedlap,The Economy and the national debt can be paid off tomorrow morning, IF the President and Congress had the guts to follow the Constitution. China just proposed this type of honesty money but most people missed the part where they said the new reserve currency should be one that is NOT debt based.

Here is a video that explains it. Don't believe anything in the video... research it yourself.... what the man says is absolutely true.


http://www.youtube.com/watch?v=WXbxE...om=PL&index=20

[Schmedlap]

There were a lot of people that new what was going on and made a lot of money off of illegal activities. They should give it back and go to jail.

I agree. But I also believe there are too many to prosecute. 700 for S&L is nothing; I'd say we're looking at thousands, if not tens of thousands, who were engaging in a similarly culpable manner and tens of thousands more who lied and falsified paperwork. As for giving the money back, I doubt that many of them have it. Folks who took out NINJA loans have nothing to give back. People who made lots of money on MBS's saw those gains evaporate. Most of this wealth, as you point out, was just inflated market value.

Regardless, this financial "crisis" is the product of a depraved society. This is what happens when 300 million people think that they deserve everything that their heart desires right now and don't want to earn it. All of the talk about who is blame and what regulatory changes need to occur, etc, are bluster. This is what happens when society gets morally depantsed. An immoral people cannot be governed by laws - they just get inconvenienced by the laws. Making sure that this doesn't happen again requires a lot more than just prosecuting some of the innocent and changing some regs. It requires social change. Fair play and morality need to have their legitimacy restored. I don't see it happening until things get much worse.

[slapout9]

Regardless, this financial "crisis" is the product of a depraved society. This is what happens when 300 million people think that they deserve everything that their heart desires right now and don't want to earn it. All of the talk about who is blame and what regulatory changes need to occur, etc, are bluster. This is what happens when society gets morally depantsed. An immoral people cannot be governed by laws - they just get inconvenienced by the laws. Making sure that this doesn't happen again requires a lot more than just prosecuting some of the innocent and changing some regs. It requires social change. Fair play and morality need to have their legitimacy restored. I don't see it happening until things get much worse.

Schmed, that is some Strategic stuff there....and agree 100%

[bourbon]

I agree. But I also believe there are too many to prosecute. 700 for S&L is nothing; I'd say we're looking at thousands, if not tens of thousands, who were engaging in a similarly culpable manner and tens of thousands more who lied and falsified paperwork. As for giving the money back, I doubt that many of them have it. Folks who took out NINJA loans have nothing to give back. People who made lots of money on MBS's saw those gains evaporate. Most of this wealth, as you point out, was just inflated market value.

The people who lied or falsified paperwork, received ninja loans, or traded MBS are small game. Pawns, tools, etc. Sure they did things that were ethically wrong and/or illegal, but there is bigger game that needs to be bagged. These people may have seen their wealth evaporate; but others made money on it, a lot of money on it. If somebody legally does that (and it’s possible), fine. But it was intentionally inflated to collapse, like a bust out scheme. They make money on the way up, and even more money on the way down. Assets can then been purchased for pennies on the dollar, and wealth and power is further consolidated. This is massive fraud employing many acts and maneuvers that are illegal (ex. naked short selling, CDS and futures manipulation, disinformation campaigns, etc). This is not the first time this has happened in our country.

The networks that do these things, and the people that comprise them are identifiable and in many cases known. The small gamers are a lightning rod for public outrage, the fall guys. Does that make them excusable? No, but our efforts and outrage can be targeted better then at small fish, and society no matter how depraved it is or is not.



This is a memo to the Secretary of the SEC from Roel Campos, a former SEC Commissioner. Has a nice collection of price v. failure to delivers in Q4 2008 for a number of financials.

II. Naked short selling will threaten TARP, taxpayers, and national goals to rescue the banking system.

Bank and insurance companies that are essential to the economy, including those receiving funds from Troubled Asset Relief Program (TARP), are at risk from naked short selling tactics, similar to those used against Bear Stearns and Lehman Brothers. 3 Past data suggests that TARP entities were also subjected to naked short selling and manipulative conduct, resulting in shareholder wealth destruction 4 In fact, the Commission moved to protect these entities by prohibiting short sales of these companies through an Emergency Order.5 As noted earlier, naked short selling has the potential to have a vast disproportionate impact to help drive down the share price of even the largest banks, destroying government efforts to invest taxpayer money into those companies. The damage to the TARP and the economic recovery are certainly additional urgent reasons why the Commission needs to amend Regulation SHO in the manner described below.

[Schmedlap]

The networks that do these things, and the people that comprise them are identifiable and in many cases known.

If true, then I fully support outing them. And while I contend that there are too many to prosecute, I do think trying is worthwhile and prioritizing the most egregious offenders (and those who can testify against them) makes the most sense. I just don't think that this should be our main effort in going forward. That is backward looking.

The small gamers are a lightning rod for public outrage, the fall guys. Does that make them excusable? No, but our efforts and outrage can be targeted better then at small fish, and society no matter how depraved it is or is not.

I'm not really concerned about how we target our outrage. I'll leave it to those of you who are outraged to ponder that. I'm more concerned with the moral health of the country because none of this would have been possible in a country of people who care about right and wrong. If you've got a nation that is moral, for the most part, then a few well-placed and well-funded crooks such as those you've pointed out would not have been nearly as successful. In fact, I think that they would have had the whistle blown on them or perhaps known better to attempt anything in the first place. Instead, the small gamers realized that a big swindle was going down and pitched in to get a small piece of it. It's depravity on a society-wide scale. A moral nation would not be doling out NINJA loans, packaging garbage and selling it, rating garbage as AAA rated debt in spite of concerns that it is garbage, falsifying paperwork, lying, and so on.

I'm all for the guilty being punished. But I am far more concerned about the morality of the nation. That has a significantly greater impact upon the health of our nation than whether some crooks go to Club Fed after millions of dollars and several years of legal battles.

[selil]

An in depth article.

The End of Excess: Is This Crisis Good for America?

In the early 1980s, around the time Ronald Reagan became President and Wall Street's great modern bull market began, we started gambling (and winning!) and thinking magically. From 1980 to 2007, the median price of a new American home quadrupled. The Dow Jones industrial average climbed from 803 in the summer of 1982 to 14,165 in the fall of 2007. From the beginning of the '80s through 2007, the share of disposable income that each household spent servicing its mortgage and consumer debt increased 35%. Back in 1982, the average household saved 11% of its disposable income. By 2007 that number was less than 1%

I found the article to be a lot more balanced and explanatory of how we got to where we are than the pundit filled rantings of the left or right. The article is not short giving a substantive look at the cultural factors as well as some of the regulatory/political factors that led to the collapse.

[SethB]

The original suburban home from the post-war era costs only $80,000, adjusted for inflation.

Not only have home values been going up, but houses have been getting better and more extravagant for some time, as well.

And that is a direct result of cheap credit. Sometimes too cheap.

[slapout9]

The original suburban home from the post-war era costs only $80,000, adjusted for inflation.

Not only have home values been going up, but houses have been getting better and more extravagant for some time, as well.

And that is a direct result of cheap credit. Sometimes too cheap.

SethB, I understand what you are saying but changes in building regulations had a lot to do with it to. Minimum square footage regulations were changed in many places to where people could not buy or build what they could afford but what they could get.

Also houses wear out just like everything else but in real estate the price does not go down as it does for every other product relative to wear and tear. These two structural problems had far more to do with it than cheap credit.

There is no such thing as cheap credit take a look at any compound interest amortization table and you will find there is nothing cheap about it