Good Layman's guide to the financial crisis

[bourbon]

If you think the U.S. is in an economic mess try Iceland. Michael Lewis is one of the funniest and sharpest writers out there, and he doesn't disappoint with this one.

Wall Street on the Tundra, by Michael Lewis. Vanity Fair, April 2009.
Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.

What he might say to them about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.

Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.

Enter investment banking.

The people of Iceland are not soft to begin with, they will make do. In this sense they may be better off than much of the West in coping with financial calamity.

[slapout9]

This is a short video that seems to support the Merril Lynch paper.


http://therealnews.com/t/index.php?o...4&jumival=3345

[Surferbeetle]

If you could buy now with everything bottoming out, what do you buy?

ODB,

I don't think that the bottom is anywhere close to being in.

Cash in the bank(keep in mind FDIC insurance levels), and index funds like tsp g or their equivalent (low maintenance costs, low turnover, and run by a reputable firm) are a good place to wait out the storm. USAA has some low cost Vanguard managed offerings, and of course Vanguard has some low cost offerings (3000 or higher to start depending upon the fund) for your IRA.

If you have a work-based retirement vehicle, an IRA, an emergency fund, and are willing to throw out some additional money that you may/probably will not ever see again there are some interesting individual stocks out there to consider. Diversification risk goes way up when you purchase individual stocks . GE is a very good company that is taking it on the chin due to their GE Capital division. There is some speculation that things will continue to get worse for GE in the short term.

Investing-wise Warren Buffett is whom we all aspire to be and we all fall short. Schmedlap's method of purchasing Berkshire Hathaway is seriously worth considering. This strategy reduces your diversification risk and allows one to capitalize on Mr. Buffett's brainpower and skills .

I will repeat however that you must be willing to throw out some money that you may/probably will not ever see again. One of my accounts reminds me of this fact daily

Best,

Steve

[slapout9]

Question for anyone. Where can I find information on WHO!!!! got all the money that has been giving out so far? Thanks in advance.

[bourbon]

Question for anyone. Where can I find information on WHO!!!! got all the money that has been giving out so far? Thanks in advance.

The Treasury Department isn't releasing that information. Bloomberg and Fox News have FOIA suits pending. Judge ruled with Fox on one case already, I don't Treasury has responded to it yet.

The quest is not only WHO, but also WHAT assets they were bailed out on.

[selil]

The quest is not only WHO, but also WHAT assets they were bailed out on.

Bernanke got pounced on today. When looking at credit lines for banks he proudly declared that all distributions were done only to "Triple A" credit institutions/assets. Senator asked him if that rating was done by the same credit rating agencies that evaluated all the previous toxic debt as "Triple A" and got them into this mess. Bernanke said yes. And looked kind of sheepish.

[jmm99]

still a falling knife.

Compare the slope on the S&P 10-year going down pre-9/11 to 2003 - and the present slope.

Looking at the S&P from 1950, the support level looks to be in the 200 (worst case) to 500 (better case) range.

It is possible to find companies that are counter the trend - as an example, Family Dollar Stores (FDO), which targets lower income buyers and frugal folks. Still risky business.

See attached.

[Surferbeetle]

Jmm99,

What are you using to make those?

I download stock price data from google and plug it into Microsoft Excel...

Best,

Steve

[Ski]

A lot of the money in Iceland came from Austria, who are now up the same creek as the Icelandics.

The British economy is going to get so bad the government has warned of social unrest this summer.

All the indicators point to a much sharper drop - another 25-35%. I honestly think- and never would have thought this would occur again, much less in my lifetime - we are headed for another Great Depression. I see no way out of this. We are trying to spend our way out of the hole by borrowing more money, which was the problem in the first place - bad debt. What happens when the Arabs and Chinese stop buying T-bills and debt?

Greedheads on Wall St. Twice in a century - they will NEVER regain the trust of the average American.

[Ken White]

Greedheads on Wall St. Twice in a century - they will NEVER regain the trust of the average American.

Have a great deal of US government help?

From Gale Cincotta and Jimmy Carter and the Community Reinvestment Act to Rubin and and Summers changing the rules to aid their investment banking friends to Barney Frank and Chris Dodd stopping any restructure of Fanny Mae and Freddy Mac -- which are the two Government organs that really brought the whole structure down -- and the Fed. There's a lot of blame to go around. It wasn't all Wall Street; more DC and plain old human greed on the part of a lot of folks who created the housing bubble buying houses they couldn't afford.

As for trusting 'em, if a few bad apples in the chain had been my determining criteria I would not have stayed in the Service for 30 years. This is the fourth time in my life my stock is worth about three quarters to a half what it was a year earlier. I rarely sell, just keep buying; third stock, third cash, third other. The market goes down, the market goes up. No one really knows why...

[Ski]

Ken

You're wrong here.

There is widespread evidence that the current financial crisis - while given much leeway by government - was caused by almost all the major credit providers and investment banks shoveling cheap credit out to door to people who could not and should not had access to it.

Wall St. is dead and the trust in government is also eroding even further. It is no surprise that there is a revolving door between Wall St. and high level governmental positons with the Treasury Dept., Mint, etc...similar to the revolving door between high ranking military officials and defense contractors.

There are very solid reasons why the market goes up and down. While human psychology has a very definitie role to play in the market, it's not nearly as nebulous as it seems. What is nebulous and for the most part horse#### is economic theory...mainly because most ignore the irrational nature of humans.

[Sergeant T]

Greedheads on Wall St. Twice in a century - they will NEVER regain the trust of the average American.

Sure they will, once everyone currently older than puberty is dead or feeble. Everyone's familiar with the Glass-Stegall Act. Passed in 1933, it was repealed in 1999. There were sound and solid reasons for the law. Reasons they were able to talk themselves out of with the passage of enough time. Laws aren't impediments to people with power; just details to be renegotiated. The longer I look the more I'm convinced we need a constitutional convention to address this issue. I just haven't nailed down what the focus of the convention should be.

[Ken White]

Ken...You're wrong here....
There is widespread evidence that the current financial crisis - while given much leeway by government - was caused by almost all the major credit providers and investment banks shoveling cheap credit out to door to people who could not and should not had access to it.

I totally agree.

That's why I pointed out the three big problems of governmental action that allowed and even encouraged them to do that.

Wall St. is dead and the trust in government is also eroding even further. It is no surprise that there is a revolving door between Wall St. and high level governmental positons with the Treasury Dept., Mint, etc...similar to the revolving door between high ranking military officials and defense contractors.

I agree with all that -- and I also know that people forget and forgive. I've been around long enough to see Wall Street get far more venom than it is getting now or is likely to in the future. I've also seen it bounce back and sell even more stock to even more people. I have no doubt that will again occur.

I've also seen government thoroughly distrusted and trashed before. Several times. Far worse than today; this government has carefully (and very wrongly in most respects) built itself up as a provider of funds and services to people who do not need those funds and services (that's called vote buying; if they targeted those in need, it would be good government, they don't -- so it isn't) thus it no longer gets nearly the vilification it once got when people knew it had screwed up -- as they do know this time.

That's one big reason Wall Street will not die.

There are very solid reasons why the market goes up and down. While human psychology has a very definitie role to play in the market, it's not nearly as nebulous as it seems. What is nebulous and for the most part horse#### is economic theory...mainly because most ignore the irrational nature of humans.

I don't think I said it was nebulous -- I said no one really knew why it gyrated the way it does. Your suggestion about humans is the closest to being correct but that's impossible to predict ergo, the market gyrates and no one really knows why.

Economic theory does indeed have problems. Old Adam Smith got it pretty close to right 232 years ago and none of his nominal successors have done much to refine or disprove what he wrote.

This too will pass, as they say...

[Ken White]

Sure they will, once everyone currently older than puberty is dead or feeble.

Five to eight years, max.

Everyone's familiar with the Glass-Stegall Act. Passed in 1933, it was repealed in 1999. There were sound and solid reasons for the law.

True. Uh, Who was SecTreas when that was repealed. Who signed the bill into law...

[George L. Singleton]

...Shoveling credit out the door to poor people who shouldn't or didn't qualify for it...

This is an incomplete statement.

We also found our credit society at large giving credit to failed middle and upper income folks who didn't know, ever, how to manage their much larger incomes and estates.

So, some big income folks had equally lousy credit scores and profiles. As a real estate broker how many times have I been asked (and I refused every time) to "find a mortgage fix for Dr. so and so or lawyer so and so, whose income or cash flow is huge...but whose credit history is even bigger in terms of being BAD.

[Ken White]

I've seen an amazing number of people with decent incomes who do not need to have much if any credit card debt but in fact have thousands of dollars worth of it. I have a neighbor -- in a pure middle class neighborhood -- who has an E550 and and a G-Wagen and his wife has a new Bimmer, the big one they made ugly last year.

Not bad for a P.A. whose wife does not work...

There's enough blame on this economic pratfall for a lot of folks -- and that worldwide, not just the old evil US.

Added: A correction -- My Wife, who of course does not gossip, informs me that the E-model has allegedly been returned to the dealer. In any event, it has not been seen lately.

[selil]

There is widespread evidence that the current financial crisis - while given much leeway by government - was caused by almost all the major credit providers and investment banks shoveling cheap credit out to door to people who could not and should not had access to it.

I have to disagree with the idea that this financial crisis was caused simply by the wrong/poor people getting bad loans. That story just doesn't float. Yes people got credit that shouldn't have gotten credit. It was bankers and financial institutions who leveraged known bad debt 30 to 50 times original value and much more. When you knowingly leverage bad debt and then sell it as a "AAA" fund that is fraud.

I think this little conspiracy theorist essay may have more to do with how we got to where we are http://wallstreetwatch.org/soldoutreport.htm .

[Schmedlap]

I think this financial crisis is a good thing.

Maybe after this mess more boards of directors, activist shareholders, and banks will pay more attention to the actual skills, knowledge, judgment, and experience of whom they hire to run their companies and handle their money, rather than just looking at where they graduated from or who they know.

I also think that this is a good reality check for many Americans who have been living beyond their means. I'm in law school with a bunch of spoiled brats who don't work, never have worked, but have their tuition and expenses paid by their parents and by the taxpayers, get spending money from mom and dad, and they still have credit card debt up to their eyeballs. So long as they're still finding lawful ways to go out drinking every single night and dropping $30 to $40 every evening on dinner, we're not at the bottom. When the credit card company cuts them off and then mom and dad cut them off, that will be my "buy" indicator for the market.

I want to see this country prosper, but my definition of prosper varies significantly from the measures reported on the news. If we're fat, rich, and happy, but the country is nothing but a monument to depravity and excess, then I don't see that as an accomplishment. Hopefully people take advantage of this economic downturn to re-evaluate their priorities, habits, and values.

[Ken White]

Can't add to that.

[bourbon]

I have to disagree with the idea that this financial crisis was caused simply by the wrong/poor people getting bad loans. That story just doesn't float. Yes people got credit that shouldn't have gotten credit. It was bankers and financial institutions who leveraged known bad debt 30 to 50 times original value and much more. When you knowingly leverage bad debt and then sell it as a "AAA" fund that is fraud.

I Agree, I also think what was done is much worse then just stamping bad debt AAA, though that is a key part of it. I fear that 'Bob O'Brien's Take On The Subprime Meltdown is on the mark. The implications if true are huge.