Good Layman's guide to the financial crisis

[Cavguy]

Found this in my Google Reader this morning. An excellent summary of the credit crisis for laymen.

I'm nervous about this bailout. I understand the impacts of a loss of credit to the market - but I too want some payback for the $5k-6k in taxes I'm going to pay to bail out US AND INTERNATIONAL firms who are handing out golden parachutes left and right.

Part of me swings liberatarian on this, but the stakes are too high to not act I suppose. I also know that large, sweeping legislation passed hasitly (Patriot Act, anyone?) often has huge unintended consequences.

[Entropy]

Agree completely with your sentiments, Cavguy. Thanks for the link!

[tequila]

I used to work for Lehman Brothers in the FX trading field before going on deployment.

Not in favor of the Paulsen plan --- no oversight and it is essentially a giveaway. We will overpay for the bad assets, and this is part of the plan.Socialism for the wealthy, capitalism for the little guy. No thanks. This post runs down the major reasons why this $700 bn blank check is a HORRIBLE idea.

Haven't we learned that giving this Administration a blank check to do anything is something to avoid? If Congress gets buffaloed again, I might just vote for Ron Paul after all.

[selil]

I will refrain from commentary on the bail out plans or even the concept of a bail out as I may be led to curse and use language I would rather not have associated with me.

Failure is always an option.

[bismark17]

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....

[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?

[Schmedlap]

I understand the impacts of a loss of credit to the market - but I too want some payback for the $5k-6k in taxes I'm going to pay to bail out US AND INTERNATIONAL firms who are handing out golden parachutes left and right.

When you do your taxes and suddenly find that you're getting tagged with that $5-6k in additional taxes, please let us know. I won't hold my breath. Like the other $10 trillion in debt, that money will be paid for by someone else at some distant point in the future.

A few random thoughts...

- Our loan to AIG was at 8% above LIBOR and their assets are collateral. If anybody here would like to borrow money from me at 8% above LIBOR and to put up their house as collateral, then please let me know. I would be happy to provide such a bailout to anyone who is likely to repay. My savings account is only paying 3% and my portfolio is down for the year. 8%+ would be pretty sweet.

- Anyone making more money than someone else is a popular target for blame on this issue, but that is oversimplified. Here is a short list of culprits for this global financial abortion: those who borrowed more than they could afford, those who lent money without regard to the ability of the borrower to repay, regulators who failed to enforce regulations, legislators and officials who did away with sensible regulation, and investment bankers who assumed too much risk. Did I leave anyone out?

- And if this $700 billion to $1 trillion bailout bothers you, don't forget the dual fiascos known as Fannie Mae and Freddie Mac. Check this out from Politico...

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

Fannie and Freddie’s aggressive political maneuvering has helped stave off increased regulation and preserve special benefits such as exemption from state and local income taxes and the ability to borrow at low rates.

And according to the AP, the highest lifetime contributions from those PACs? Why none other than the Speaker of the House, House Minority Leader, House Minority Whip, Senate Majority Leader, Chairman of Senate Banking, Housing and Urban Affairs Committee, and the Chairman of the House Financial Services Committee. This is the best government that money can buy.

[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.

[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?