Credit CrisisFollow

Sounds like Math.

Math is teh enemy.

there will be a bailout followed by increased regulation, perhaps limiting the credit to, say, 50% of the purchase price of the home.


No.

This story is, for all intents and purposes, a press release for some jackass's book,and the first of many press releases designed to manufacture consent for the government's impending massive welfare program for the exceptionally wealthy. Here's how you can tell:

I'll quote the parts of the article that have a function, the rest is just meaningless filler.

It really started in 1998,

Translation: It's Clinton's fault. All Republicans will take from the article,

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”

Book ad, complete with jackass sky is falling quote.


Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt

Oh, economists on the left argue that we should give billions to corporations who's sole purpose for existing is to rob the middle class, who were well well aware that their campaign contributions bought this sort of unwritten "insurance" in case their usury business hit a downturn. People who lost their homes? **** them.

You'll see story after story about there being "no choice" but to give failed corporations more money with which to fail again, while leaving poor people poor. The bailout itself should make it's way through Congress right after the election and be signed into law by whomever wins the White House.

What Smash said:

My simplistic interpretation.

Credit rating agencies give ninjas (No Income, No Job, No Assets) a high rating so they can take out a $50,000 mortgage they can never pay back. (Said agencies aren't liable tee hee)

Banks lend the po'crackers money and get into trouble. Some of them sell these loans to merchant banks who only later realise they have a crappy asset:debt ratio and are deep in the doo-doo.

Bank account holders worry the bank will go bust and withdraw their savings. Voila! Self fulfilling prophecy.

End result - £20 knocked off the value of my house.

Gotta love capitalism.

Mmm. Paint Chips!

Not to buy a home, but for an entity (bank) to buy the loan from another bank they would require some amount of cash on hand. At the moment, they need basically none, ergo when homes become worthless they literally don't have the money to cover it.

You don't get it, do you.

Assets and borrowing ability are no longer the bedfellows they used to be.

Maybe it is. What you didn't say is if you actually think the explanation of the origin of the "crisis" is wrong.

Whether or not we should bail out the industry requires some kind of understanding of what the industry has actually done: in short, why a relatively small number of defaults on home loans can cause the value of a stock (this "Bear-Sterns" company, or however they call it) to plummet to near worthlessness.

Maybe it is. What you didn't say is if you actually think the explanation of the origin of the "crisis" is wrong.

It's wrong. The 'crisis" has to do with exceptionally complex investment vehicles and hedging strategies that people aren't going to be able to understand from reading a newspaper article. Accept that you're not going to understand it. Accept that the world is not a simple place that could be run by a good person who tries hard. Realizing that you're not capable of understanding this without a good deal of effort we both know you're not going to make, let me assure you of this incidental fact:

The absolute only reason this crisis is occurring is that a government bailout was factored into the risk assessment portfolio of these structures 10 years ago. The market was pushed to this point because there is no downside, and if you have a 1 in 1000 chance of making an extra dollar and a 999 in 1000 chance of losing everything, it's worth the risk if you know there's no way to fail.

Investment banks can't fail in the US, no matter how many times they do.

Absolutely. Despite Smash's attempts to make this more complicated then it really is, your assessment (ok, the article's) is essentially correct. Ultimately, the problem lies in the ratio of money owed to money actually "invested" into the debt.

I think that 50% is too high though. The banks aren't magically going to cough that up themselves, so lenders have to deal with smaller percentages. The traditional 20% works just fine, and people who took out loans on that percentage aren't having any problems (like myself). Ultimately, the money has to come from the person borrowing it. The bank just acts as a middleman in this case.

Lower starting percentages (second mortgages) have been in use for some time. The classic 5/15/80 loan for example. Even those aren't terribly in trouble. The problem loans were lenders who figured that they could get more money if they put people into loans that they knew those people couldn't pay in the long run. Negative amortization loans. Balloon loans (basically the same thing). The lenders figured that even if they were maybe taking 1% on the loan off the top, the amount owed to them would grow, and the value of the property would grow, so if the buyer defaulted, they'd get more money down the line.


A theory which actually works, as long as everyone isn't doing it. What's happened is that as a result of the sheer number of these sorts of loans, there are more houses being foreclosed. Thus, there are more of these lenders trying to get their money back on the loans. Too many for the actual number of buyers out there (ones who can actually make the payments). So these lenders and their underwriters end up with a whole bunch of money tied up in property that they can't sell, and not enough liquidity to manage the debts that they have (cause they borrow money in turn to lend the money in the first place). Too many lenders doing this causes the kind of problem we're in.


I happen to be of the opinion that a business should reap what it sows. Unfortunately, due to the massive harm to the economy as a whole, Smash is probably correct that government will have to bail them out. And yes, economists on the left are saying this as well. It's not a left-right thing here. It's a "do this or the economy crashes" thing. I'd like to see some kind of punishment involved for lenders who participated in this though. Not sure how that can or will shake out...

Your claim that this crisis is unintelligible is, of course, unprovable, so let me be specific: would the requirement that banks (or whatever you call them, you know, the people buying the loans) have assets to cover some fraction of the homes have averted, or severely dampened, this crisis?

No. Some other crisis related to a declining market, sure.

Then clearly it's not a workable theory. Bank robbery works as long as everyone is not doing it. There are fundamental flaws with the system we have today, and most of those flaws come from the fact that people magically swallowed decades of ******** about how if we just left the market alone, everything would solve itself out. It hasn't, it never has, and it never will.

Allowing market forces and market mechanisms to work for specific purposes is fine. But it has to be regulated and overseen. The game that most of thees banks and lenders were playing were to "beat" the regulators. They were cooking their books, they were going as far as they could go in teh search for short-term profit, all the while knowing that, as you said, they were "too important" to be allowed to fail.

Who profited from those dodgy loans? Who benefited from them cooking their books? What benefit did those dishonest derivatives bring to anyone? To you, to me, to ordinary people, to the guys who took the loans? Nothing, it brought nothing to no one except the banks and lenders themselves. Short-term profit without long-term risk because they system was purposefully designed to be that way. And you were amongst its prime advocates, calling anyone who wanted a bit of state oversight a "socialist", or worse.

Personally, it makes me a bit sick. Cos all the while that this **** has been going on, these guys have been taking home bonuses of a couple of million quid every year, on top of their exhorbitant salaries. They haven't been paying any taxes. And what service have they provided by playing this extremely lax system to its full, until it finally collapsed? People whine about welfare scroungers and abusers, but fUck me they are blind as to who the real thieves are in all this.

If someone could explain to me why everyone is fine with a system where a nurse or a teacher is paid like **** and has scrap to live decently, while people who spend their lives doing nothing but playing a skewed system have several millions hidden in an off-shore bank account, I'd love to hear it.