Good Layman's guide to the financial crisis

[selil]

Thanks for the link. I can't believe there isn't more uproar against Bernanke who was recently on the record as saying there wasn't any problems with the system. It seems like these days the only place in America that has accountability is in the military....

There was a parameters piece written about 2012....

[Cavguy]

I'm not always a Gingrich fan, but this struck me as spot on.

But because this gigantic power shift to Washington and this avalanche of taxpayer money is being proposed by a Republican administration, the normal conservative voices have been silent or confused.

It’s time to end the silence and clear up the confusion.

Congress has an obligation to protect the taxpayer.

Congress has an obligation to limit the executive branch to the rule of law.

Congress has an obligation to perform oversight.

Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess.

and this:

Question Three: Will the Paulson plan be implemented with transparency and oversight?

Answer: Implementation of the Paulson plan is going to be a mess. It is going to be a great opportunity for lobbyists and lawyers to make a lot of money. Who are the financial magicians Paulson is going to hire? Are they from Wall Street? If they’re from Wall Street, aren't they the very people we are saving? And doesn’t that mean that we’re using the taxpayers’ money to hire people to save their friends with even more taxpayer money? Won't this inevitably lead to crony capitalism? Who is going to do oversight? How much transparency is there going to be? We still haven't seen the report which led to bailing out Fannie Mae and Freddie Mac. It is "secret". Is our $700 billion going to be spent in "secret" too? In practical terms, will a bill be written in public so people can analyze it? Or will it be written in a closed room by the very people who have been collecting money from the institutions they are now going to use our money to bail out?

[Cavguy]

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

I'm on leave this week - and trying to get smart on this financial crisis.

Another good article is here:

Bailout Prevents Great Depression 2.0
September 22, 2008 11:35 AM ET | James Pethokoukis | Permanent Link

What would be the dollar cost of not bailing out Wall Street? Try a number north of $30 trillion. (The awful math is detailed below.) That's why Hank Paulson and Ben Bernanke were so scared last week. And, yes, I think "scared" isn't too strong a word. You don't think they convened an emergency nighttime meeting of congressional leaders and then walked out with something close to a blank check for a trillion bucks because they thought we were headed for an outright recession, even a fairly nasty one?

2) Scenario 2: Great Depression 2.0. The economy shrinks by 25 percent over four years, or $3.2 trillion, plus $1.1 trillion in lost opportunity growth. Economic cost: $4.3 trillion. The market falls two thirds from its peak, losing $7 trillion in value from its current level, plus $3 trillion from not getting a rebound. Stock market cost: $10 trillion. Housing falls an additional $10 trillion from current levels, plus the lost opportunity of $2.5 trillion from a rebound. Housing cost: $12.5 trillion. Total four-year financial and economic cost of doing nothing: $26.8 trillion.

Now this is all a very rough guesstimate and doesn't include the costs of all sorts of other ramifications. Here is a fun one: the dissolution of China. Its economy is built for hypergrowth. A dramatically rising standard of living is both keeping the Communist Party in power and keeping the country together. Neither might survive a global economic meltdown. What is the economic impact of that? I don't know. My guesstimator just blew up.

[selil]

Great Depression 2.0? Talk about fear mongering. Over a 25 percent decline? Dang it... The Great Depression represented an 75% to 85% reduction in the economy not some measly 25%.

[davidbfpo]

These two links were sent across the Atlantic, I've only read this one today and the second is awaiting time:

http://www.ricedelman.com/cs/educati...cial%20Markets

Try the blog Calculated Risk: http://calculatedrisk.blogspot.com/

I have been reading since late 2007. Two bloggers post, calculated risk and Tanta. If need an IQ above 125 tofollow most Tanta posts, but they are worth the effort.

davidbfpo

[Ron Humphrey]

From reading them I kinda get the same feeling I've had since last week.

The country has grown too fast financially in a sense and that was largely artificially pushed, kinda like a machine with cogs where since one cog starts going faster all the others do to whether they should or not. Now that a major cog started going backwards some of the others are breaking teeth because they where still trying to move forward.

The markets being almost as dependent on perception as reality for success have also suffered some artificial pains as well as the real ones which just made some things worse. Finally since we are looking at an overall complexity in the markets which would far outstrip any given private entities capability to deal with (such as what Rockefeller did in history past) the govt seems like the only ones with enough size to effectively stem the tide and get everything moving forward again even if much more slowly than before.

So is the overall goal here to stop the fall, stem the hemmoraging and amputate those parts which cannot be saved?

[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?

[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.

[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.