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Robert J

What, no thread on the banks?

158 posts in this topic

The problem is unfettered, unregulated free-market ideology. To the extent that Clinton and other Democrats bought into it, they are culpable as well. Still, I have a lot more faith in the D's to take a more aggressive stance on reining in the private sector, if they're in full power. McCain's spiel so far is the samo samo GOP prescription for everything.

More news: WaMu now seeking merger

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1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it?

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To the extent that Clinton and other Democrats bought into it, they are culpable as well.

You can say exactly the same thing in this country about the continuance by Blair and Brown's New Labour of the free-market policies introduced by their Conservative predecessors, Thatcher and Major.

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I think you people are being silly by treating this as a Repub/Dem partisan issue.

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view.

1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

Your understanding is incorrect and borderline racist. The root cause of the problem is not subprime loans. If it we're we'd see Countrywide go out of business, but would not be staring major financial catastrophe in the face.

The problem is that the free market was allowed to securitize these loans, repackage them, and trade them, making it impossible for those trading in them to have any understanding as to their actual worth while they a) gamed the ratings agencies to pat them on the head and tell them they weren't risky and b) bought and sold them at crazy margins . No government forced Merrill Lynch to trade in these opaque CDOs against their will; they made this an integral part of their investment strategy.

Edited by Big Wheel

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I think you people are being silly by treating this as a Repub/Dem partisan issue.

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view.

1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

Your understanding is incorrect and borderline racist. The root cause of the problem is not subprime loans. If it we're we'd see Countrywide go out of business, but would not be staring major financial catastrophe in the face.

The problem is that the free market was allowed to securitize these loans, repackage them, and trade them, making it impossible for those trading in them to have any understanding as to their actual worth while they a) gamed the ratings agencies to pat them on the head and tell them they weren't risky and b) bought and sold them at crazy margins . No government forced Merrill Lynch to trade in these opaque CDOs against their will; they made this an integral part of their investment strategy.

Yes. I'm no financial wizard but that sounds reasonable.

Frankly, the fact that they were able to securitize loans, "repackage them and trade them" just boggled my mind. Didn't that decouple the loans from any sense of the underlying RISK involved?

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I smell Late Capitalism!!! :excited: :excited: :excited:

Comrade Jsngry, we simply shut down the markets for our late, mid-late early-mid-afternoon Stolichnaya. :rhappy:

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Meanwhile, apparently the USA has just lost its AAA credit rating :blink:

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The TSX took a hit yesterday, but will rebound as it was mostly energy stock devaluation.

Stand by for a long-term shift to lower valuations worldwide. I suspect it won't significantly recover for a fair old while and nowhere will be immune IMO.

The imploding of 100% mortgages on houses (not to mention 40 year repayment periods, never mind 25) were a time-bomb just waiting to happen. I expect we'll be back to something like the old prudent system of 3 to 3.5 times employer certified income on max. mortgages for the longer term. No more 'liar loans' And not before time either !

I'd like to think that. Unfortunately, last night while listening to the news, y'wanna guess what the first commercial I heard right after the announcement of all of these financial woes was? That's right: "NO CREDIT? NO PROBLEM! INTEREST RATES ARE AT THEIR LOWEST EVER! WE'LL GET YOU INTO THE HOME YOU DESERVE!"

There, in a nutshell, is the cause of this whole mess: an inherent attitude of "the world owes me a living" and not learning the lessons even in the middle of being taught such lessons!!!!!

This goes WAAAAAY beyond partisan politics, although a lot of that is involved as well.

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Meanwhile, apparently the USA has just lost its AAA credit rating :blink:

Yikes. I don't see it popping up on the news reports yet, but that can't be good.

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Meanwhile, apparently the USA has just lost its AAA credit rating :blink:

Yikes. I don't see it popping up on the news reports yet, but that can't be good.

Take it easy. There has been discussion of the credit rating, but no changes.

Read Here

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1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it?

Bruce, I'm always happy to blame the Fed for inflation and whatever else can be pinned on it, but I don't think that low interest rates are the cause of this problem. I think that low interest rates are good.

Let's consider the sub-prime mortgages. Let's say that a low-income family is convinced that it would like to buy a home, and the govt is pressuring the banks to make loans to such a family.

Let's say that the family is paying $1,000 in rent, and believes that it can afford a $1,200 mortgage payment. The bank is not as particular about whom it lends its money to as it used to be, so it agrees to make the loan.

The family is concerned about the $1,200 a month payment. It isn't concerned about the price of the house. With interest rates at 5%, the price of the house is going to be higher than it would be at 10%, because the family is only going to agree to pay $1,200 regardless of what the interest rates are.

The real estate developers and those wishing to sell their homes like to see a higher price for obvious reasons, but the low-income buyer doesn't care. He cares only about the monthly payment.

So then the husband loses his job, and they cannot meet the $1,200 payment on only the wife's salary. So they default on the mortgage loan. They return to a $1,000. apartment.

It seems to me that that is the nature of subprime loans. They are risky and shouldn't have been made in the first place. I don't see that to be the fault of Alan Greenspan's low interest rates.

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As I understand it, the problem is not whether the banks in a given country are strict about home loans, but about whether they invest in the financial products whose value is uncertain because they contain "subprime" home loan credit originating in the States. Those subprime mortgages were sliced up and packaged, resliced and repackaged with other stuff, and so on, and sold and resold all over the world--all the while being given good credit ratings...

Yes, Tom, that is the point I was making in post #23. People were assigning values to their assets which were not backed up by the facts.

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Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view.

1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

I'm not sure how far that goes with bipartisanship, since, in spite of what the Berigans of the world beleive, Clinton was probably our most conservative president of the last twenty years. The problem is that the entire conservative (and libertarian) approach is wrong.

2) The Libertarians oppose such government pressure regarding telling the banks how to do business.

3) The Libertarians oppose all govt/taxpayer bailouts of private corporations.

No disagreement here.

4) Think in terms of a business cycle. The Libertarians believe that if the market is allowed to do what it thinks is best, of course mistakes ("malinvestments") will be made. But without govt intervention, they will be soon corrected, and the cycle will be mild. Each time the govt intervenes, the correction is postponed and the malinvestments will continue, which will make the cycle more exaggerated, and the eventual resolution more painful.

If that is the case, then Libertairans must be completely ignorant of history. Economic cycles were far more violent, and hurt far more people, before the government began intervening in the process.

5) In this case of the past sixteen years, there has been a great deal of corruption by both the bankers and the Congress. I don't believe that any theory will work well if all the parties involved are crooked.

Perhaps. But then such corruption could hardly be unexpected when the hands off approach libertarians and conservatives support practically encourages it.

6) One final point about the Libertarians. They are in favor of the free market theory, not capitalism per se. What we have here is the so-called "socialism for the rich, capitalism for the poor", where the poor have to pay for their mistakes, but the rich get tax-funded bailouts. Clearly the Libertarians are opposed to this.

The problem with the free market theory is that it is sorely outdated. It has joined the ranks of communism in the "nice on paper" category. When industry in this country meant individuals or family manufacturing, the free market was great. But with the emergence of corporations, government interference as a counterbalance is essential in protecting the freedom of individuals from these corporations.

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Well that's the problem isn't it. There wasn't enough government "interference" to make a difference. Now that the whole system is collapsing like a house of cards, the government that was formerly uninterested in overseeing the financial sector steps in to save the day. Why it's OK to privatize profits and socialize losses is beyond me, especially when it's you and I who are paying the freight in the form of taxes and/or interest payments to the Chinese. I guess that makes me a Libertarian.

The really scary part of all this is that when the various and sundry financial institutions are forced to place a real value on their debt, this whole thing could blow up in ways even the government will not be able to do anything about. Why do you think two weeks ago Lehman Brothers said they had 20 billion in assets and a week later it was only two?

Up over and out.

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Anybody know if there's a connection between the weirdness on the Russian stock exchanges & our own financial teeteriness?

Yes. The basic connection is that right now there is an extreme fear of risky assets (what people call a "flight to quality"), hence a massive outflow of capital from Russia's stockmarket. Furthermore, if Russia's banking system is similar to that of others around the globe, its banks have "exposure" to Lehman/whoever or someone who does. It's like a giant ball of yarn, once you pull on one end you may end up unraveling the whole thing.

Guy

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I think you people are being silly by treating this as a Repub/Dem partisan issue.

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view.

1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

The primary reason why subprime mortgage lending by banks and other institutions grew so rapidly during the past 5-6 years was that it was immensely, immensely profitable. While the argument you made surely does account for some of the expansion, I would assume this was a tiny fraction of the whole.

Guy

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1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it?

Greenspan is also culpable from a regulatory standpoint.

That said... this crisis has many, many fathers and I would hesitate to put Greenspan in the top 5.

Guy

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Frankly, the fact that they were able to securitize loans, "repackage them and trade them" just boggled my mind. Didn't that decouple the loans from any sense of the underlying RISK involved?

It doesn't decouple the loans... but it does decouple the lender. This isn't necessarily a problem in and of itself if the lending process is well-supervised/regulated or if the person who purchases them is intelligent enough to remember the incentives faced by the lender. But neither of these things happened, apparently.

For what it's worth, securitization of loans existed for a long time before this crisis, and it will come back. It just got extremely out of hand this time around.

Guy

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Meanwhile, apparently the USA has just lost its AAA credit rating :blink:

As far as I know that has not happened... yet. I am sad to say, but the US government is going to have to step in and bail out the guys who are responsible for much of this mess - the banks. It's going to be ridiculously expensive, foreigners are going to own massive amounts of US assets, but that's a small price to pay to avoid an implosion of the US (and maybe global) financial system.

Guy

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Anybody know if there's a connection between the weirdness on the Russian stock exchanges & our own financial teeteriness?

Yes. The basic connection is that right now there is an extreme fear of risky assets (what people call a "flight to quality"), hence a massive outflow of capital from Russia's stockmarket. Furthermore, if Russia's banking system is similar to that of others around the globe, its banks have "exposure" to Lehman/whoever or someone who does. It's like a giant ball of yarn, once you pull on one end you may end up unraveling the whole thing.

Guy

Ironicly, I can remember a time in the recent past (2000 - 01) when the "fligth to quality" was the explanation for the run up in AIG shares.

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I think this meltdown is as good a reason as any to vote third party across the board this November.

Okay, let's see who you got!

Let the liberals vote for the Green Party

My original plan, until I found out that Cynthia "let's get a congressional hearing together to find out who killed Tupac" McKinney was their presidential choice. What a way to tell the world, "hey, we don't have a snowball's chance in hell of winning in November!"

and the conservatives vote for the Constitution and Libertarian Parties.

And, for the libertarians, we get someone who voted for some of the most UN-Libertarian laws ever to be on the books: The Patriot Act, DOMA, and he also wasted how many tax dollars trying to impeach Clinton?

What a change in Congress we would see then!

Yeah. The phrase "the inmates running the asylum" comes to mind.

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1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it?

Let's consider the sub-prime mortgages. Let's say that a low-income family is convinced that it would like to buy a home, and the govt is pressuring the banks to make loans to such a family.

Let's say that the family is paying $1,000 in rent, and believes that it can afford a $1,200 mortgage payment. The bank is not as particular about whom it lends its money to as it used to be, so it agrees to make the loan.

The family is concerned about the $1,200 a month payment. It isn't concerned about the price of the house. With interest rates at 5%, the price of the house is going to be higher than it would be at 10%, because the family is only going to agree to pay $1,200 regardless of what the interest rates are.

The real estate developers and those wishing to sell their homes like to see a higher price for obvious reasons, but the low-income buyer doesn't care. He cares only about the monthly payment.

So then the husband loses his job, and they cannot meet the $1,200 payment on only the wife's salary. So they default on the mortgage loan. They return to a $1,000. apartment.

It seems to me that that is the nature of subprime loans. They are risky and shouldn't have been made in the first place. I don't see that to be the fault of Alan Greenspan's low interest rates.

OK , let me get this straight. This is quite simplistic, but it helps me understand. The problem is that people are just walking away from homes with these sub-prime mortgages on them. They were just paying interest on them, so they have no equity. And now as far as the banks and other institutions go these mortgages are being shown on the books as having no value. Is that correct? But, in fact, they are worth something. New housing starts are way down, so these homes will be bought and lived in at some point. If the mortgage on the house is $200,000 (which the bank "borrowed" from someone else - namely its depositers and must repay to them), and someone eventually buys the house for $100,000, the financial instituion won't have a total loss. I guess the problem is that no one knows when someone will step in and buy these homes and for how much, so they're just written down to zero now. It's obviously too late for tthe banks, but someone is going to make a HUGE amount of money buying these abandoned properties cheaply and selling them at a nice profit down the line. Capitalism at its finest!

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1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it?

Let's consider the sub-prime mortgages. Let's say that a low-income family is convinced that it would like to buy a home, and the govt is pressuring the banks to make loans to such a family.

Let's say that the family is paying $1,000 in rent, and believes that it can afford a $1,200 mortgage payment. The bank is not as particular about whom it lends its money to as it used to be, so it agrees to make the loan.

The family is concerned about the $1,200 a month payment. It isn't concerned about the price of the house. With interest rates at 5%, the price of the house is going to be higher than it would be at 10%, because the family is only going to agree to pay $1,200 regardless of what the interest rates are.

The real estate developers and those wishing to sell their homes like to see a higher price for obvious reasons, but the low-income buyer doesn't care. He cares only about the monthly payment.

So then the husband loses his job, and they cannot meet the $1,200 payment on only the wife's salary. So they default on the mortgage loan. They return to a $1,000. apartment.

It seems to me that that is the nature of subprime loans. They are risky and shouldn't have been made in the first place. I don't see that to be the fault of Alan Greenspan's low interest rates.

OK , let me get this straight. This is quite simplistic, but it helps me understand. The problem is that people are just walking away from homes with these sub-prime mortgages on them. They were just paying interest on them, so they have no equity. And now as far as the banks and other institutions go these mortgages are being shown on the books as having no value. Is that correct? But, in fact, they are worth something. New housing starts are way down, so these homes will be bought and lived in at some point. If the mortgage on the house is $200,000 (which the bank "borrowed" from someone else - namely its depositers and must repay to them), and someone eventually buys the house for $100,000, the financial instituion won't have a total loss. I guess the problem is that no one knows when someone will step in and buy these homes and for how much, so they're just written down to zero now. It's obviously too late for tthe banks, but someone is going to make a HUGE amount of money buying these abandoned properties cheaply and selling them at a nice profit down the line. Capitalism at its finest!

Uh....maybe. This assumes that the homes are in places where people are going to continue to want to live. See "Flint, Michigan, History of." Do you really want to live in some exurban shithole like Stockton, CA? I don't.

It also assumes that the population is growing fast enough to occupy all the excess construction lying around.

Edited by Big Wheel

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Here's a speech Ron Paul gave on the floor of the US Congress July 16, 2002, six years ago, warning about the housing bubble, taxpayers bailing out investors and government interference in the marketplace.

http://www.house.gov/paul/congrec/congrec2002/cr071602.htm

Congressman Ron Paul

U.S. House of Representatives

July 16, 2002

Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.

One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing postponing the necessary market, but this cannot hold off the inevitable drop in the housing market forever. In fact, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.

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