Financial Catastrophe

[Meddling Mike]

I just received this in my inbox:


>     Dear American:
>
>     I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
>
>     I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
>
>     I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
>
>     This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
>
>     Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
>
>     Yours Faithfully
>
>     Minister of Treasury Paulson

Your country needs you Steve...will you answer the call?

[Matt]

The problem is that right now, we have a more urgent problem to address.  We need to patch up the economy first, then we can start putting heads on the chopping block.

While you and I pretty much agree on assigning the blame for this crisis, I think I will have to disagree here - I don't think fixing the economy is going to be possible without reinstating the regulatory safeguards that previously kept this kind of problem from happening for six decades.

It was entirely their decision, and that is the crux of Phil's argument. No one forced them to take a loan at whatever rate they qualified for

What you are missing is that many borrowers were effectively lied to by the banks, when they were told that yes, they COULD afford the loans. That is banking malpractice, and it's really perverse to focus on the borrowers' relatively slight sins while that much more reprehensible offense was also occuring. The problem was then exacerbated by a system of financial malpractice, re-legalized by the repeal of the Glass-Steagal act by Phil Gramm's Gramm-Leach-Bliley Act of 1999.

While no one's (borrowers', lending banks', financial institutions', the government's) hands are entirely 100% squeaky-clean, the borrowers absolutely had the LEAST share of malfeasance of any acting party.

EDIT FROM ONE YEAR LATER: I'm editing this in order to avoid necroing an old thread, but for posterity:

http://online.wsj.com/article/SB125530360128479161.html
What do you know, it wasn't the fault of poor people after all! The bubble existed across the whole spectrum of the housing market, from poor people's first houses to the rich. The ultimate problem is that lending standards degraded to the point where "ability to repay" was not a disqualification for a loan.

[ELD]

I can't see how anyone could blame someone else when they take out a loan they can't afford.  If I go to a car dealership, and they tell me I can afford a car, why on earth would I listen to them?  As a consumer and a responsible adult, I am the only one who is qualified to make the determination about what I can and cannot afford.  When I look at rental properties, for example, I confirm all the information I am given.  I'm not saying that I'd ever be lied to, but if information turns out to be incorrect, I'm the one who's responsible, and I'm the one who is damaged by the consequences. 

[CopperLeaf]

When the price of a good is based almost entirely on its future expected price, the bubble will inevitably pop and take with it whoever is holding the good when it does.  Just ask the dutch about tulips.

[Godder]

I can't see how anyone could blame someone else when they take out a loan they can't afford.  If I go to a car dealership, and they tell me I can afford a car, why on earth would I listen to them?  As a consumer and a responsible adult, I am the only one who is qualified to make the determination about what I can and cannot afford.

That sounds great as a sound bite, but anyone who has ever been turned down for any sort of finance/credit application knows that they're not the only one qualified to make that determination. If they were, nobody would ever be turned down. Consumers taking out loans that they can't afford is a bad plan, but businesses going bust because of those bad loans should look in the mirror before they blame the consumers who couldn't pay (except for cases of fraudulent applications). Likewise, the fact that swathes of the credit/finance industry are going down in flames has something to do with the consumers who took out the loans, but also a lot to do with staff who approved loans for people who couldn't pay.

[ELD]

I'm not interested in discussing finger-pointing, as I believe it's a problem with the system.  In regards to the consumers, the bottom line is clear.  I'm saying that as an individual, one needs to take responsibility for one's own actions.  Sure, a company can turn you down, but just because they say OK, doesn't mean it's actually the right play, or even a reasonable play to take their loan.  To that end, consumers who find themselves on the raw end of the deal have only themselves to blame.  As far at the people to blame for the whole melt down, that's a whole different story.  The reality is, looking for people to blame isn't the way to solve the problem.  The problem is not one of the people involved, but the systems that are in place. 

example about consumers:
Your car can go 100 MPH, that doesn't mean it's the right play to do it all the time.  I would not lobby car makers to make sure their cars only go 65, and I certainly wouldn't want the Federal Government to try and make that happen either.  As an individual, ultimately I'm the one who needs to make the choice of what works best for me, and live with the consequences. 

[MadManiac21]

I'm not interested in discussing finger-pointing, as I believe it's a problem with the system.  In regards to the consumers, the bottom line is clear.  I'm saying that as an individual, one needs to take responsibility for one's own actions.  Sure, a company can turn you down, but just because they say OK, doesn't mean it's actually the right play, or even a reasonable play to take their loan.  To that end, consumers who find themselves on the raw end of the deal have only themselves to blame.  As far at the people to blame for the whole melt down, that's a whole different story.  The reality is, looking for people to blame isn't the way to solve the problem.  The problem is not one of the people involved, but the systems that are in place. 

example about consumers:
Your car can go 100 MPH, that doesn't mean it's the right play to do it all the time.  I would not lobby car makers to make sure their cars only go 65, and I certainly wouldn't want the Federal Government to try and make that happen either.  As an individual, ultimately I'm the one who needs to make the choice of what works best for me, and live with the consequences. 

Would you say this is the reasoning behind rejecting the bailout too?

Yes, consumer's made poor choices - because the knowledgeable individuals (i.e. lenders/investors) used the general populace's lack of knowledge to sneak up behind them and repeatedly hip thrust from behind.

The problem of accountability and responsibility did arise, but the BIG group to point the finger at is the bankers/lenders, NOT the lemming-like Americans. Yes, you are ultimately the one who needs to make the choice, but if you're making the wrong ones due to blatant asymmetric information problems in the system ... derf.

Everyone got taken advantage of, Wall Street got filthy rich, and now the Walmart republicans are bitching about heavy handed regulation/government oversight in the markets (heaven forbid something like this happen again!) costing taxpayers huge amounts of money in order to bailout wall street. Should we let the shareholders/corporations crash and burn? On a fundamental level, clearly. Does that lead to an undeniably worse economic situation for the U.S.? Without question. Kind of hilarious imo, as the bailout in the long run (since the gov't can hold onto assets until they are properly marked to market instead of obscenely undervalued) really does not "cost" us anything.

[Lexor]

It seems alot of you didnt buy a house between 2000-2005 which is were alot of the problems with subprime loans are having now. In that market people were competeing for houses to get something listed at $200,000 you needed to bid $205k and have an escalation clause to $ 215k it was crazy houses were on the market for 2 maybe 3 weeks max some sold the same day. The expectation was that housing prices were on the rise and people with bad credit could not buy a house without some of these more creative loan products. They didnt have the credit score. Buying a house is emotional for alot of people, they want the house. In alot of cases it was reccommended by mortage officers that they take the exspensive loan they quilified for and refinanced in a year or two once they had a higher score and get their 30yr fixed. My main point its that this is how buisness was done, across the board on all income levels, it got people into houses thay normally they couldnt afford and if they were smart then they would get a better loan later.

Now its nearly impossiable to get a 100% loan, you need 20% of your own money in a transaction. A starter house in the market i deal mainly in is 250,000, which means that you need $50,000 of your own money in the deal. I dont know anyone who has that kind of money to put into their starter house. If you cant sell the starter homes then the ones that own them cant buy the move up homes and the people that own those will have a hard time selling, its a dangerous cycle.

The Pulson plan is crap is not going to permenately fix the problem. Its like casting a tensdrils for 8 when your oppenet is at 20 and has a Darksteel Colllosus in play. Your delaying the inevitable and spending all your resourses to do it. What it wants to do is buy the bad paper from the banks so the banks can make loans again. Which sounds good in theory but whos going to stop them from doing the same thing? Not the government. I rather see these banks fail. They wont really all fail because the ones in strong position will buy up the ones in trouble. Some of the ones in trouble will renegotiate the loans they made so forclousres dont happen, and the market will take a hit. Thats all fine because everything will recover and it will be stronger then it was before.

If the governement really feels like it needs to do something than it should insure those 20% loans for any company willing to loan it at prime + a percent or 2. You make the loan company pay the government for this insurance and make it illegal to pass it on to the consumer. This way home buyers can afford to buy starter homes, and this limits the risk that the banks are making on the last 20%. Since in a forclosurethe bank holding the primary will get their money back from the sale of the home. This plan kick starts the housing sector while getting more people into homes, and cost the tax payer considerably less then 700 Billion dollars. There are other things that need to be done but this helps alot, and dont give any money to ACORN that organization is the biggest fruad in the industry.

[DarkfnTemplar]

I just received this in my inbox:


>     Yours Faithfully
>
>     Minister of Treasury Paulson

Your country needs you Steve...will you answer the call?

Gotta love Nigerians!

[wiley]

I just received this in my inbox:


>     Dear American:
>     Yours Faithfully
>
>     Minister of Treasury Paulson

They are slowly getting better at these; the only word spelled incorrectly was transaction.  I remember getting things like this from ‘negyrian’ royalty until I tweaked my spam filter a while back.

I was talking with some of my friends that are finance/econ majors at ECU and they said that Bush tried to reign in all of the housing lending back in 2001 and was shot down.  Does anyone know where I can go to confirm or debunk this?

[Smmenen]

I know you want to blame "greed," but it's just a silly cop-out that our politicians are clinging to. The profit motive is what drives businesses and individuals to make the best choice given their options. You mean to tell me they were so interested in their well-being that they bankrupted themselves? Nowhere does the list abdicate lenders' responsibility in this; instead, it's arguing that the government providing false market incentives is the primary cause. Everyone who buys into it will be damaged and share the responsibility of what happened. We as taxpayers are who will ultimately foot the bill. Sucks.

It's actually interesting: to maintain the revenue stream that comes from these mortgages, the banks actually have a vested interest in making sure that people were able to stay in their loans.

If people were stupid for getting involved in loans they couldn't afford, at least the banks were dumber for making loans (or, at least, purchasing loans from other banks) that they should have foreseen people wouldn't be able to afford. 

[bluemage55]

It's actually interesting: to maintain the revenue stream that comes from these mortgages, the banks actually have a vested interest in making sure that people were able to stay in their loans.

If people were stupid for getting involved in loans they couldn't afford, at least the banks were dumber for making loans (or, at least, purchasing loans from other banks) that they should have foreseen people wouldn't be able to afford. 

That's due to the brokerage system.  See, the brokers negotiating these loans don't really care if the people can afford it, since they get a hefty bonus everytime they preside over a loan.  If the borrowers default, it hurts the bank, but not the employee, who doesn't suffer any sort of penalty to their bonus.

[dandan]

Why is it that taxpayers have to bail out banks if they get into trouble over bad business practice but if industry has problems it's weeding out the inefficient and leaving leaner, well-run companies to take up more market share?

I think most people would agree that taxpayers bailing out banks is a bad idea but it looks like a choice between bad and worse, in which case the bad idea is better. In any case as well as the short-term fix I would think it is vitally important to determine what went wrong and how the same mistakes can be avoided (and of course heads should roll).

In the longer term, if this results in countries, companies and individuals thinking long and hard before saddling themselves with debt it may well be a good thing.

[Bram]

Financial catastrophe? You wanna know about financial catastrophe? I forget to sell my vintage staples collection when I quit playing two years ago, and yesterday I find out that what I used to think of as my nest egg is now no longer worth the paper it's printed on because the DCI banned or restricted half of it. OMG BR0KE!!1!

In other news: the financial crisis has hit over here, too. Since the Dutch have emulated everything American ever since the arrival of mass consumerism on our shores after WWII, it was inevitable that we followed suit towards financial ruin. Cultural imperialism FTW! In practice, this entails that on the very day that George W. Bush signed the historic $700 billion bailout plan, the Dutch government acquired all shares of banking and insurance firm Fortis (which itself had recently - and in retrospect perhaps unwisely - acquired the major international financial player ABN Amro) for the sum total of $23 billion. The deal replaces an earlier (failed) rescue attempt in which the governments of the Netherlands, Belgium and Luxembourgh together would invest some $10 billion in order to prevent the firm's collapse.

Face it, my American friends, you are no longer unique in having a government that makes taxpayers bleed for greedy financial industry's mismanagement. It always makes me so happy when governments nationalize private firms. 

On the other hand, the four weeks I just spent in California were ridiculously cheap thanks to your weak dollar, so I'm not quite sure where I stand on this yet. Usually, long-term global economic effects versus short-term personal gain is a no-brainer (in favor of the latter, obviously).

[bluemage55]

Why is it that taxpayers have to bail out banks if they get into trouble over bad business practice but if industry has problems it's weeding out the inefficient and leaving leaner, well-run companies to take up more market share?

Because if the banks fall over they knock down most taxpayers along the way.

And also because fiscal deregulation that taxpayers did nothing to stop is partly responsible.

[merfolkOTPT]

To be fair, the smaller banks giving out the loans were not completely stupid, they were effectively selling the loans to bigger companies, after bundling them together for "safety" so they were "as good as money". Admittedly, the bundling up to increase safety of these terrible loans didn't make them safer but the small companies giving out the loans didn't care because they were getting paid by bigger companies to keep taking them. 

The bigger companies in turn had incorrect models of how these loans would perform.  Now admittedly the fault for that lies with them, but until the error comes to fruition how do you fix it.  Similar, though not as dangerous, investments in the past had worked well for people and common sense told them those shouldn't work, so you have to trust the models.

I think there were lots of errors from everyone, but don't act like the banks were being completely dumb.

[Grand Inquisitor]

Cool and somewhat useful

[Bram]

That's a nice little application. I'm gonna make something like that for the Dutch situation.

Another 30 billion dollar injection in the Dutch economy was just announced and utterly fails to counter the downward trend. The Dutch stock exchange has reported unprecedented losses for the 7th straight day. Media reports on massive amounts of people withdrawing their money from banks in Australia and Japan. Russian stock exchanges have shut down.The country (!) of Iceland is on the brink of bankruptcy and the 120,000 Dutch people that had deposited their life savings on the now bankrupt Icelandic bank of ICESAVE can no longer retrieve their money.

I have so much stuff to say about this mass panic from the point of view of my academic discipline, it's not even funny anymore. Every news report I see is a 'walking' case study into dynamics of trust, framing and performativity.  For those interested, I suggest reading this:

http://www.amazon.com/Economists-Make-Markets-Performativity-Economics/dp/0691130167

MacKenzie . . . skillfully describes the history of the financial derivatives market, claiming that the economists caused trader behavior to conform more closely to the model. . . .

[Dr. Sylvan]

At this point the sell-off is a fear response. I am hoping some strong quarterly earnings from major companies come out soon to halt the collective panic. These declines only make sense if investors are predicting an actual depression. It's not too hard to look up that even a hypothetical investor who bought a broad index of stocks at the peak of 1929 would've made his losses back by about 1946, IIRC.

My perception is that most people are deferring large, discretionary purchases like cars, and probably appliances or upgraded consumer electronics, but are continuing to spend on smaller items, just less insanely than before. So I expect GM, Chrysler, and maybe Ford to collapse any time now, but most other businesses will remain intact.

Also: OMG, Bram and dandan in the same thread! The apocalypse has a silver lining after all!

[bluemage55]

At this point the sell-off is a fear response. I am hoping some strong quarterly earnings from major companies come out soon to halt the collective panic. These declines only make sense if investors are predicting an actual depression. It's not too hard to look up that even a hypothetical investor who bought a broad index of stocks at the peak of 1929 would've made his losses back by about 1946, IIRC.

By 1956, the Dow Jones overtook it's previous peak in 1929.  But that doesn't adjust for the 59.1% inflation from 1929-1956.  So you would't actually make back your money until 1960.  Given that the average life expectancy for a 20-year-old white male in 1929 was age 66, you were more likely to die before getting your money back.

My perception is that most people are deferring large, discretionary purchases like cars, and probably appliances or upgraded consumer electronics, but are continuing to spend on smaller items, just less insanely than before. So I expect GM, Chrysler, and maybe Ford to collapse any time now, but most other businesses will remain intact.

People are involuntarily deferring purchases that require loans, such as homes and cars, due to how tight the credit industry is.

Fixed quote tag. --Matt

[Dr. Sylvan]

I found the passage which I was thinking of when composing my previous post:

(from "The Intelligent Investor", pg 113)
The [DJIA] closed at a then record high of 38.17 on September 3, 1929. It did not close above that level until November 23, 1954 [...] when it hit 382.74. [...] However, for patient investors who reinvested their income, stock returns were positive over this otherwise dismal period, simply because dividend yields averaged more than 5.6% per year.

I don't think it's all involuntary. Certainly credit plays a role, both by rejecting buyers who seek approval and by pushing away those who fear they would not be approved. Also, many of those feeling economic pain will do so because of the unavailability of refinancing, or lowered credit card limits. But there is definitely a public awareness of some kind of financial crisis, and they hear the word "recession" a lot on the news or in conversation. That's enough to make a lot of people cut back as a precaution, and the first thing to go when a household feels financial tightness will be a large purchase that is not absolutely necessary.

[dandan]

I find I spend less at Tesco when I leave my wife at home (to be fair, this might not be true if they started selling Magic cards). Perhaps governments could make use of this.

[MadManiac21]

The solution right now is to start buying. Everything. Indiscriminately.

Everything is so under priced, I can't wait to finish making my portfolio and just lose my password to it for the next 3 years, go back and see $$$$.

[Harlequin]

Its like trying to catch the falling knife.  Strike too late, you miss it.  Strike too early you could get seriously cut.

[Juggernaut GO]

The solution right now is to start buying. Everything. Indiscriminately.

Everything is so under priced, I can't wait to finish making my portfolio and just lose my password to it for the next 3 years, go back and see $$$$.

at least, buy everything that isn't GM.