Economic Crisis Origins

[Big Sarge]

I found this video quite informative about the root cause of the economic crisis. Take a look at it & see what you think about it.

http://boortz.com/more/video/burning...the_house.html

[BigV]

Hey, Big Sarge.

Did you know that the Community Reinvestment Act covered Commercial Banks? Did you know that the banks that have imploded Indy Mac, Bear Stearns, Merrill Lynch, etc are Investment Banks, not Commercial Banks? Did you notice that Commercial Banks, like Bank of America seem to have plenty of liquidity to buy even other banks, like Merrill Lynch!

I'm not buying this whole blaming tone communicated in the tone of the author of the video. This is a crisis of confidence in the other fellow's ability to repay a loan. But it's the bank to bank fear that prompted the gazillion dollar mother of all pork boondoggles. But I'm not bitter. Really.

The first firm to "securitize" mortgages was Bear Stearns. They introduced another obfuscating layer between borrower and lender. They created a new thing, a MBS, that I could buy. At that point, I have a note that has an anticipated return, which is "higher" because the risk is lower since, come on, they're backed by real property. How can you go wrong? But I don't really own a mortgage, but a fraction of a many mortgages, spreading the risk--good idea, right? It is. But now I can't say say which mortgage I own easily or which will be more likely to default.

This opacity is what causes uncertainty and therefore nervousness and unwillingness to buy/sell/loan/borrow. How can I know as an investor what to expect as a rate of return?

And, now that you've gotten me started, an even more fundamental problem here is our cultural propensity to live for short term returns and to live on credit. Living beyond our means, as individuals and as a national economy is a strategy that has exactly this kind of peril.

I'm not bankrupt. I'm not in foreclosure. Because I'm not overextended. My credit union has a big sign in the lobby "We have money to lend!" Go google up the bank of floyd. Seriously. Sound practices have sound results.

How does this relate to the CRA? Well, I think redlining *should* be illegal. And I think predatory lending, usury also should be illegal. But I have limited sympathy for institutions who are panicking because some percentage of their loans are going bad, some higher than anticipated percentage. That they're not getting the return they feel they're entitled to. Tough shit. You took the risk, you would keep the return, why are you moaning about the pain of the loss?

And for the stupid borrowers?? I've said before they and the lenders should come back to the table. As equals. Why would a lender kill their golden egg laying goose? What about some silver eggs in the interim? Or will it be roast goose? If the borrower can't make the 10% rate, why not ramp it back to a level they *can pay*?

I guess I'm not done being bitter. This whole thing is stupid.

[xoxoxoBruce]

Some nuggets from the bill's guts:
McCain had no part in constructing this bill, it was created by Chuck Hagel, Elizabeth Dole and John Sununu. McCain tacked his name on at the last minute as a co-sponsor.

This bill would have actually replaced the existing Dept. of Housing and Urban Development with the "Federal Housing Enterprize Regulatory Agency", which would be appointed directly by President Bush, which would actually remove any semblance of independent, nonpoliticized action that the HUD had left, and created a "Mortgage Czar". This guy would have a 6 year term, cancellable of course at the pleasure of the President.

This bill would not have solved the issue of "bundling", all it would have done is make it more difficult for someone to get a mortgage. Subprime or not, the Mortgage Czar would have unlimited authority to define "unacceptable risk".
Several statutes are also "worse than the disease".

Contrary to what McCain is saying, it was not voted down "by the Democrats", it never made it out of its senate committee, the "Committee on Banking, Housing, and Urban Affairs" ordered the bill to be reported with an amendment, but were generally favorable to the bill. These amendments (to the "worse than the disease" aspects) were never amended and the bill died.

Oh and before you ask, in 2005 (when this bill was put before the committee) not only was the Senate a Republican majority but so was the Committee on Banking, Housing, and Urban Affairs, and it was chaired by Richard Shelby (R-AL).

One thing I forgot to mention as well.
This bill would have also actually deregulated reporting on the SECURITIES, which is what caused the housing market to actually implode (the sale of bundled securities to market bonds).

This, if anything would have actually made the subprime mortgage crisis worse.

LINK

[Trilby]

Oh, sure. Everything looks bad if you remember it!

[Griff]

Originally Posted by Brianna

Oh, sure. Everything looks bad if you remember it!

*priceless*

[TheMercenary]

WASHINGTON — Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank's relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie.

Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical.

"It’s absolutely a conflict," said Dan Gainor, vice president of the Business & Media Institute. "He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane?

"If this had been his ex-wife and he was Republican, I would bet every penny I have - or at least what’s not in the stock market - that this would be considered germane," added Gainor, a T. Boone Pickens Fellow.

http://www.foxnews.com/story/0,2933,432501,00.html

[dar512]

This American Life had a very good explanation of the current economic situation on their show this week.

[dar512]

Originally Posted by dar512

This American Life had a very good explanation of the current economic situation on their show this week.

The free mp3 is up now.

[Stormieweather]

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand? My daughter asked me this question as I was driving her to school this morning...

She doesn't have a good understanding of what an investment is, barely knows what a mortgage is, and has no idea what 'unemployment rate' means.

I had 3 minutes to lay it out...and what I said was, it's a domino effect that basically began with mortgages. Some banks/mortgage co's began giving mortgages to people who couldn't really afford it. The people (who couldn't really afford it to start with) began to default (ie: not pay) and so the banks and/or servicing co's began to lose money. Stock markets don't like when banks start losing money/going under, so their prices fell. This meant some people's companies became worthless, so they closed up. When they closed up, they began to lay people off (so they lost their jobs). These people no longer had money to spend, so other businesses began to lose money. The banks aren't giving any more loans to people who need it. So the companies have to lay people off. These people can't pay their mortgages without a job, and more banks go under and more stock prices fall and more prices get raised to make up for the people who no longer have money to spend.

Hell, I'm not really sure I understand the origins. Anyone got a better (ie: more accurate), simpler explanation I can offer her this afternoon?

Stormie

[classicman]

Just tell her its Bush's fault - pretty much everyone else is.

[dar512]

Originally Posted by Stormieweather

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand?

Listen to the "This American Life" mp3 and you'll understand it enough to explain it.

Here's the short version as I understand it.

Certain mortgage lenders took greater risk on some mortgages than they should have. Loaning more than they should have to many buyers and taking mortgages from iffy buyers.

They did this because they didn't worry about the repercussions. They knew the mortgages were going to be bundled and sold. The debts would be problems for someone else.

The institutions that bought the bundles didn't worry because they were buying credit default swaps on the bundle. CDSs were intended to be a kind of insurance. The bank etc. would arrange a credit default swap on the bundle to insure things if they went bad. One of the problems, though, is that CDS were unregulated so the debts were not transparent. Institutions were making these deals without knowing exactly what the situation was.

CDSs were being created to cover all kinds of debts including these mortgage bundles. Since there was no regulation on CDSs two things happened. Institutions that were guaranteeing the CDS were not required to have cash reserves to cover the CDS. Second, institutions that did not hold the debt were allowed to create CDSs on a given debt. What was intended to be a kind of insurance became a kind of gambling.

Institutions that gave bad CDSs and didn't have the cash to cover them, ended up taking a nose dive -- which caused other CDSs to be called and so on.

I may be wrong on particulars, but I think that's the gist of it.

Also, listen to that last 10 minutes or so of that program to hear how financial lobbyists affected the bailout plan.

[Trilby]

Originally Posted by classicman

Just tell her its Bush's fault - pretty much everyone else is.

If the hat fits...

[tw]

Originally Posted by Stormieweather

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand?

People at the highest levels of the business and government played money games so that real estate, companies, investment paper (ie bonds), etc were all declared as worth more. These vampires then took massive rewards while using those mythical values to justify their incomes and to create a ponzi scheme. A ponzi scheme can be explained to a kid by example.

The ponzi scheme has collapsed. Now America needs money to keep going and pay outstanding bills (including those for "Mission Accomplished"). No money today means jobs are lost up to four years later. America must sell things to foreigners for money – desperate to pay off personal and government credit cards. But the world no longer trusts these American businessmen who claimed everything was great. Foreigners need to see houes and companies decrease in value maybe up to 50% before they will buy. Government must buy up homes, companies, and investment paper. Then sell it to the world in a desperate attempt to find money. If government will not sell them, then foreigners will not trust who is selling them. America is now so short of actual money. We must sell things cheap.

Yes, it does get more complex. A ponzi scheme (using Enron accounting standards and CA energy crisis myths), that openly encouraged this past eight year party, has collapsed. Suddenly there is a shortage of money everywhere - and, worse, a shortage of trust in American businessmen. So government is also printing money. They will not admit it. Otherwise you might realize that massive inflation or stagflation is looming. Years later, prices for everything increase and adults lose jobs.

Today the Fed said it has unlimited funds. For adults, the Fed and Treasury will pump money into the economy that is does not really have and as if more money will create productive economic activity. Well yes. Jobs will be saved today. Then four years later, economic forces again take revenge for all that 'free' money. Americans will see a lower standard of living imposed either by 1) increased inflation (even though George Jr says there is not inflation), or 2) selling off American real estate and companies (meaning foreigners reap the profits), or 3) massive more government debt like we have not yet seen (meaning American will be paying higher interest payments to the world), or a dropping dollar (means less products for sale in America, higher gasoline prices, and increases in things such as grocery prices).

Bottom line - the American standards of living will be punished for a party we gave to the rich. Did you enjoy the party as your income dropped two percent during that period? Those who profited kept telling us how much better we were and how much lower our taxes were. Those were the best times.

A child must first learn how a ponzi scheme works. Only then can a child appreciate why so many adults these past years have been lying to themselves saying, "The fundamentals of this economy are sound". An economy always looks sound during a ponzi scheme. Debts of those fundamentals will now be paid mostly by those who are not so rich. Good thing your Federal income taxes were 20% lower these past six years. Oh? Your taxes did not go down? How could this be. The same people that said the economy is sound also said your taxes were lower. They would lie? What else were they saying while running a Ponzi scheme? They must have been telling the truth. After all, we reelected them?

[classicman]

At least you didn't blame it all on one party for they are both to blame immensely.

[TheMercenary]

Originally Posted by classicman

Just tell her its Bush's fault - pretty much everyone else is.

"Bush Did It!" People! and then he put explosives in the World Trade Center and guided those remote control planes into the towers... well that, after he hid all the people who were on the planes and gave them one way tickets to the South Pacific and told them not to tell anyone.