Who's to blame for the financial crisis? Why ...
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Ed Gadziemski wrote:
So you're saying the credit problem is because ....
Not at all. What I tried to communicate is that the concept of credit worthiness went by the way side. In my somewhat sheltered life I have bought 4 homes, completely paid the mortgage for 2 and sold the other 2. On each occasion I had to pony up a 10% to 20% down payment and my credit was heavily scrutinized. Each of the homes I reference in the preceding was purchased before the loosening of credit requirements and at no time did I purchase any that would consume more than 20% of my income. I have watched advertisements for loans that were 125% of the assessed value and have seen people take out loans with low entry rates with 5 year balloon payments and I've scratched my head saying, "you're nuts". And sure enough, they were. Very few of those with mortgage problems understood the old adage, "if it sounds too good to be true ...". Our current crisis is I believe a function of the above, multiplied by the fact that these goofy mortgages were subsequently bundled into derivative securities and it would have been (I think) impossible to know the weakness that existed in the underlying product - the mortgage. So ... we have willful ignorance on the part of the mortgagees and stupidity on the part of the investor. I don't think either you or I have any way of understanding the depth of the problem and I'm not sure what I think of any bail out. On the one hand if credit markets don't work our economy goes agrarian. I fairly well agree with the Democratic position that the guys at the top shouldn't get any compensation (ie., pay checks and bonuses), but at the same time I think anyone in default or foreclosure proceedings should not get relief either. I would have replied last night, but there's a charity thing I do on Monday evenings.
Mike - typical white guy. The USA does have universal healthcare, but you have to pay for it. D'oh. Thomas Mann - "Tolerance becomes a crime when applied to evil." The NYT - my leftist brochure. Calling an illegal alien an “undocumented immigrant” is like calling a drug dealer an “unlicensed pharmacist”. God doesn't believe in atheists, therefore they don't exist.
I agree that the concept of credit worthiness went by the wayside. However, laying it off on poor people and minorities as some are trying to do is incorrect. The first wave of defaults has already crested and is receding. That is the wave of poor people and minorities that purchased since 2003 or 2004 and have already been foreclosed out of the market. What most people don't realize is that the second wave consisting of white people and people of middle and upper-middle incomes is just starting, and it will make the subprime defaults look like a day at the beach. Also, as you note, the derivative securities are actually the root of the Wall Street problem. Subprime mortgage defaults only comprise about $120 billion and a bailout of that amount or less could have cleared every penny of every mortgage in foreclosure. But Wall Street took a relatively minor problem and created a $49 trillion (yes, $49 trillion) of derivatives, which is 7 times the amount of every single mortgage, the good bad and ugly, in the United States (!!!!) by buying and selling worthless paper amongst themselves and in world markets. Personally, I've never paid a large downpayment. I've always used VA loans with $0 down and have always paid off my houses. I've had to jump through hoops to qualify, especially being self-employed, but I've always bought houses that I could afford to live in. As far as the Democratic position, I agree with the compensation limits, but given what I said above, that real, live actual mortgagees are only responsible for $120 billion of exposure while Wall Street created $49 trillion of funny money, I wouldn't have any heartburn if every bad mortgage was paid off and Wall Street was told to piss up a rope.
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Ed, it's nice to talk about over-valuation and speculation, but then I'm going to ask you what's the fair market price of all these assets? How do you propose to value them? Furthermore, studies on speculation (and I mean, really, what is excessive speculation while we're at it?) usually are inconclusive which leaves you with one of several choices: 1. Speculation isn't excessive 2. Speculation has marginal effects at best 3. Our definition of excessive speculation is wrong The thing you are forgetting is that speculators are needed in order to maintain proper operation of the futures and stock markets. Indeed, the futures market requires them in order to function.
...that mortally intolerable truth; that all deep, earnest thinking is but the intrepid effort of the soul to keep the open independence of her sea; while the wildest winds of heaven and earth conspire to cast her on the treacherous, slavish shore.
73Zeppelin wrote:
what's the fair market price of all these assets
A good place to start with real estate would be the current tax assessor value. Have a national re-evaluation of properties and use the modified assessed value. Studies on speculation are typically done by those who benefit directly or indirectly from speculation so I discount their value. What I do know is that when Congress closed the Enron Loophole recently, the price of oil dropped 33% within a matter of days. Now that stocks are looking iffy, capital has flooded back toward oil and other commodities. We've gone from one speculative bubble to another in the past 30 years, whether it be real estate, gold, silver, tech stocks, real estate (again), oil, corn, you name it. While some speculation is required for futures markets, it is possible to have too much of a good thing and we have certainly done so.
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Good for John McCain - and yes, I do know he's a republican!
Visit http://www.notreadytogiveup.com/[^] and do something special today.
Good for John McCain IF he had meant it. The bill everybody is so ecstatic about as proof of McCain's clarity on this matter was actually written by another senator. McCain was one of three others that jumped on the bandwagon primarily because the other political party was benefitting from the current system. It was a strictly parochial and political move on McCain's part, and the bill died without ever gaining any support beyond the original author and the three co-sponsors.
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Oakman wrote:
Agreed, but if that mortgage broker knows or even strong suspects that your abi;lity to pay down the loan is non-existent and he sells the mortage to someone else - who is to blame then? And when that third party - who is just as aware of the chicanery as the original broker - in turn sells that loan and many more like it. . .well you get the idea. Ultimately a whole bunch of crooks were allowed to pull their scams, because the cops (Treasury, Federal Reserve, Congress) were being paid off.
When did risk become a commodity to be profited from? There are many people in many positions that have contributed to this situation. What I would like to know is how these debts, when repackaged as various derivative products were able to be classified as investment grade rather than speculative securities. To my mind that is where the regulators have let the market down.
Josh Gray wrote:
how these debts, when repackaged as various derivative products were able to be classified as investment grade rather than speculative securities
Two primary reasons: First, they were sold as insurance products rather than asset backed securities. While housing prices were rising there was little risk, so companies would underwrite a billion dollars of loans with a setaside of one or two million and generate an income stream from the premiums. This income stream became the basis of the value of the securities, and they were traded back and forth in classic Ponzi-scheme style. Second, traders rightfully believed that the government would bail them out if there was a serious problem. After all, government had bailed out the players in the 1980s real estate bubble and almost nobody suffered serious repercussions except the taxpaying saps who re-elect 98% of the same politicians each election cycle.
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John W. McBush, that's who. In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the savings and loan industry. The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry--including John McCain's warm-up speaker at the Republican National Convention, Fred Thompson. Seven years later, the S&L industry was collapsing. What was the cause? Garn-St. Germain had handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it hadn't handed them the bank's regulations. Left to operate in an anarchistic gray area, S&Ls had chased profits, indulged in amazing extravagances and cranked out enough cheap mortgages to fuel a real estate boom. They had also experimented with lots of complex, creative--and risky--investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?[^]
The real reason has little to do with the actual mortgage problem. It has a lot more to do with something called "credit default swaps" (CDS). For a look at how they are dragging the ENTIRE financial system into oblivion, please go to http://www.moneymorning.com/[^] and search on CDS. There are two articles so far and a third due out tomorrow. Just to highlight one item, it took a Cray super-computer over an hour just to trace ONE CDS and determine it's "cost". Just realize there are TRILLIONS of dollars out there in CDSs and no way to pay them off. I think many of you will be totally shocked at what is really going to happen
John P.
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73Zeppelin wrote:
what's the fair market price of all these assets
A good place to start with real estate would be the current tax assessor value. Have a national re-evaluation of properties and use the modified assessed value. Studies on speculation are typically done by those who benefit directly or indirectly from speculation so I discount their value. What I do know is that when Congress closed the Enron Loophole recently, the price of oil dropped 33% within a matter of days. Now that stocks are looking iffy, capital has flooded back toward oil and other commodities. We've gone from one speculative bubble to another in the past 30 years, whether it be real estate, gold, silver, tech stocks, real estate (again), oil, corn, you name it. While some speculation is required for futures markets, it is possible to have too much of a good thing and we have certainly done so.
Ed Gadziemski wrote:
A good place to start with real estate would be the current tax assessor value. Have a national re-evaluation of properties and use the modified assessed value.
Ah, well. The fair value of the real-estate itself is one question. The fair value of a derivative asset on real estate is quite another. I had the impression you were referring to the latter.
Ed Gadziemski wrote:
Studies on speculation are typically done by those who benefit directly or indirectly from speculation so I discount their value. What I do know is that when Congress closed the Enron Loophole recently, the price of oil dropped 33% within a matter of days. Now that stocks are looking iffy, capital has flooded back toward oil and other commodities.
Not always - for example there was a report to Congress in 2006 regarding speculation in the oil and gas futures markets. While the study was flawed to some extent, there was really no concrete evidence presented. As another example, I have just put the finishing touches on a study of precious metals markets speculation and my findings show that any effect on price inflation is quite weak, at best. The problem is that the data from the CFTC is highly aggregated (you would really need almost tick-by tick and exact position data) so extracting anything from the position data is hard. Still, the effect, while measurable, is incredibly feeble.
Ed Gadziemski wrote:
We've gone from one speculative bubble to another in the past 30 years, whether it be real estate, gold, silver, tech stocks, real estate (again), oil, corn, you name it. While some speculation is required for futures markets, it is possible to have too much of a good thing and we have certainly done so.
As for gold an silver, the CFTC classifies long positions as speculative positions (although some contracts traded on the OTC market make the distinction rather unclear and complicate things). If we assume that a long futures corresponds to speculative activity in the precious metals markets, you'll be surprised that there is very little correlation between the inflation in precious metals prices and the number of open long contracts. In effect, it's not the market positions that count. This is further confirmed by the fact that the price of gold is a funny thing with two fixings (one a.m. one p.m.) where a group of trade
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Oakman wrote:
Agreed, but if that mortgage broker knows or even strong suspects that your abi;lity to pay down the loan is non-existent and he sells the mortage to someone else - who is to blame then? And when that third party - who is just as aware of the chicanery as the original broker - in turn sells that loan and many more like it. . .well you get the idea. Ultimately a whole bunch of crooks were allowed to pull their scams, because the cops (Treasury, Federal Reserve, Congress) were being paid off.
When did risk become a commodity to be profited from? There are many people in many positions that have contributed to this situation. What I would like to know is how these debts, when repackaged as various derivative products were able to be classified as investment grade rather than speculative securities. To my mind that is where the regulators have let the market down.
Josh Gray wrote:
There are many people in many positions that have contributed to this situation. What I would like to know is how these debts, when repackaged as various derivative products were able to be classified as investment grade rather than speculative securities.
This is what Zep pointed to awhile back: http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1 He said, that it was true, even if packaged as a cartoon. It'll take a minute to load.
Jon Smith & Wesson: The original point and click interface
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BoneSoft wrote:
I think it's the core of most of our problems. And we have several generations raised in that mindset. And to make things worse, our entire economy is built on the concept, consume consume consume. I don't see a way to turn that around either, short of an extraordinary catastrophe. As much as I'd hate to see it, maybe we need another depression.
I am of the belief that prior to catastrophes there are warning signs that can be observed (conditional on knowing what signs to look for). I think we've seen a few recently that suggest the current system doesn't work too well. The correction has come fast, but I'm not sure everything is resolved yet. I wonder if the majority of people today are of the opinion that nothing catastrophic can happen in the 21st century - the West has been pretty stable in the aftermath of WWII, but Spanish flu, depressions, etc... aren't all that improbable. I wonder if it's partly due to a mindset of "that was then, this is now" so we don't have to worry. I think when a society becomes excessively complacent, it's time to worry.
...that mortally intolerable truth; that all deep, earnest thinking is but the intrepid effort of the soul to keep the open independence of her sea; while the wildest winds of heaven and earth conspire to cast her on the treacherous, slavish shore.
73Zeppelin wrote:
I wonder if it's partly due to a mindset of "that was then, this is now" so we don't have to worry. I think when a society becomes excessively complacent, it's time to worry.
I can remember very clearly pointing out to some friends about 2001 that all of the regulations put in place after the Great Depression were being systemically gutted starting in the seventies. They assured me that they knew it couldn't happen again, because 'that was then and this is now.'
Jon Smith & Wesson: The original point and click interface
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Ed Gadziemski wrote:
A good place to start with real estate would be the current tax assessor value. Have a national re-evaluation of properties and use the modified assessed value.
Ah, well. The fair value of the real-estate itself is one question. The fair value of a derivative asset on real estate is quite another. I had the impression you were referring to the latter.
Ed Gadziemski wrote:
Studies on speculation are typically done by those who benefit directly or indirectly from speculation so I discount their value. What I do know is that when Congress closed the Enron Loophole recently, the price of oil dropped 33% within a matter of days. Now that stocks are looking iffy, capital has flooded back toward oil and other commodities.
Not always - for example there was a report to Congress in 2006 regarding speculation in the oil and gas futures markets. While the study was flawed to some extent, there was really no concrete evidence presented. As another example, I have just put the finishing touches on a study of precious metals markets speculation and my findings show that any effect on price inflation is quite weak, at best. The problem is that the data from the CFTC is highly aggregated (you would really need almost tick-by tick and exact position data) so extracting anything from the position data is hard. Still, the effect, while measurable, is incredibly feeble.
Ed Gadziemski wrote:
We've gone from one speculative bubble to another in the past 30 years, whether it be real estate, gold, silver, tech stocks, real estate (again), oil, corn, you name it. While some speculation is required for futures markets, it is possible to have too much of a good thing and we have certainly done so.
As for gold an silver, the CFTC classifies long positions as speculative positions (although some contracts traded on the OTC market make the distinction rather unclear and complicate things). If we assume that a long futures corresponds to speculative activity in the precious metals markets, you'll be surprised that there is very little correlation between the inflation in precious metals prices and the number of open long contracts. In effect, it's not the market positions that count. This is further confirmed by the fact that the price of gold is a funny thing with two fixings (one a.m. one p.m.) where a group of trade
73Zeppelin wrote:
Now, the buying up of physical gold could be speculation by "gold bugs", but that's not speculation in the market sense
That's where our conversation is diverging I think. I'm not referring to speculation in the market sense. The type of speculation I'm referring to should more appropriately be called manipulation such as this classic example by the Hunt brothers[^]. Here in Arizona, where land speculation has run rampant the past three or four years, it's been property developers and investment consortiums that have over-inflated the property bubble.
73Zeppelin wrote:
The fair value of a derivative asset on real estate is quite another.
I'd say the fair value of the vast majority of the derivatives is $0. The derivates are valued on paper at $49 trillion. All U.S. mortgages combined are only $7 trillion.
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The real reason has little to do with the actual mortgage problem. It has a lot more to do with something called "credit default swaps" (CDS). For a look at how they are dragging the ENTIRE financial system into oblivion, please go to http://www.moneymorning.com/[^] and search on CDS. There are two articles so far and a third due out tomorrow. Just to highlight one item, it took a Cray super-computer over an hour just to trace ONE CDS and determine it's "cost". Just realize there are TRILLIONS of dollars out there in CDSs and no way to pay them off. I think many of you will be totally shocked at what is really going to happen
John P.
Good article. Thanks. Hopefully at least a few people on this forum will bother to read it and actually try to understand what is going wrong.
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Good article. Thanks. Hopefully at least a few people on this forum will bother to read it and actually try to understand what is going wrong.
Until I read these articles, I had no inkling as to how deep this crisis really goes. I doubt not 1 in 1000 Americans really know what the true cause of this mess is. I was astounded that a Cray supercomputer had a hard time figuring out what is going on! Just imagine what the auditors are going to have to go through and figure out and/or solve each and every one of these --- mind-boggling!
John P.
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73Zeppelin wrote:
Now, the buying up of physical gold could be speculation by "gold bugs", but that's not speculation in the market sense
That's where our conversation is diverging I think. I'm not referring to speculation in the market sense. The type of speculation I'm referring to should more appropriately be called manipulation such as this classic example by the Hunt brothers[^]. Here in Arizona, where land speculation has run rampant the past three or four years, it's been property developers and investment consortiums that have over-inflated the property bubble.
73Zeppelin wrote:
The fair value of a derivative asset on real estate is quite another.
I'd say the fair value of the vast majority of the derivatives is $0. The derivates are valued on paper at $49 trillion. All U.S. mortgages combined are only $7 trillion.
Ed Gadziemski wrote:
That's where our conversation is diverging I think. I'm not referring to speculation in the market sense. The type of speculation I'm referring to should more appropriately be called manipulation such as this classic example by the Hunt brothers[^]. Here in Arizona, where land speculation has run rampant the past three or four years, it's been property developers and investment consortiums that have over-inflated the property bubble.
I follow you - difficult to corner the gold market though - most bullion is held and leased at the GOFO rate by central banks.
Ed Gadziemski wrote:
I'd say the fair value of the vast majority of the derivatives is $0. The derivates are valued on paper at $49 trillion. All U.S. mortgages combined are only $7 trillion.
Now their value is zero - but they were obviously traded at some value. I'm not one for credit derivatives. I think they're dangerous and extremely difficult to value accurately. They're contingent on the source of the credit being secure and credit is never secure.
...that mortally intolerable truth; that all deep, earnest thinking is but the intrepid effort of the soul to keep the open independence of her sea; while the wildest winds of heaven and earth conspire to cast her on the treacherous, slavish shore.
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Ilíon wrote:
Government is *rarely* the answer and is almost always the problem.
For once, I agree with you. :)
Cheers, Vıkram.
"You idiot British surprise me that your generators which grew up after Mid 50s had no brain at all." - Adnan Siddiqi.
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His middle name is Dale (like Roy Rogers's wife.) Maybe you should search for it that way.
Jon Smith & Wesson: The original point and click interface
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His middle name is Dale (like Roy Rogers's wife.) Maybe you should search for it that way.
Jon Smith & Wesson: The original point and click interface
Nope, nothing there either. *sigh* Is there anywhere we can find intelligence in him?