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NDTA!

(close cousin to NIMBY; Not During This Administration!)

The good news to the global financial meltdown? The Chinese are going down hard.

/nods

Most excellent. The Chi-coms were getting a little too big for their britches.

Totem

Lol, true. Anti-freeze in your vitamin pills or rat poison masquarading as a sugar substitute will slow your economic recovery juuuuust a bit.
:D

Totem

I'd be worried about the Chinese melting down. What happens if the Chinese need to raise capital quickly. The sell all of the US debt the own (which is a ********** Even at fire sale prices, it would be enought to sink the US further into oblivian. Some of you may have heard about it, I even think there was a thread on it...the nuclear option.

Lol. Yeah. It's not quite as neat as that, but is basically correct. The US could buy back it's debt at a fraction of what it owes if that were to happen. It's not really much of a "nuclear option" at all for China. They're still screwed. It's not like we'll end up owing "more" than we do in any case.


As to the OP. At the risk of stating the obvious, the problem that caused the current crisis wasn't low lending rates. It was loans made at below prime rate (hence the term "sub-prime"). More broadly, it was the volume of loans made at lower rates than the risks involved in the loan should have required (most of which weren't sub-prime).

The actual rates aren't relevant to that kind of problem, no matter how much you don't understand the market. The reason for lowering the lending rate is to allow those banks who are horribly strapped for cash right now to borrow some from the Fed so that they can begin lending it themselves. It's a bandaid of course, but one that does help a bit. Normally you'd be adjusting the rate to counter some trend in the market (hot or cold spots basically), but in this particular case it's purely about making it so that banks don't have to pony up as much cash over time to pay the interest on new loans. They're that low on capital that it actually matters right now...

Shadow. As I pointed out the last time you made this argument. We've been using a credit based economic system for over a hundred years. Yes. It can occasionally cause problems, but by itself the system of borrowing money to create and expand business has generated vastly more positive than negative effects.

It was not the mere act of borrowing that caused this. It was a combination of regulations on the lending market that made certain assets appear to have greater value than they actually did that caused it. When the head guys at Fannny/Freddy are telling everyone that home loans are so safe that 3-5% assets to credit isn't really necessary and it should be perfectly safe at 2%, that's going to make the rest of the banking industry think that it must be true (and consequently accept and trade the sub-prime loans which was what the folks running Freddy/Fanny really wanted). And when that turns out not to be true, the whole thing comes crashing down.

Add in the knee-jerk SOX requirements that assets be calculated on current market values even if they aren't being sold at the moment, and you end up exaggerating any negative market trend. Assets suddenly aren't worth what you thought they were. You have to cover your credit and sell some of your assets to cover. This causes the value of your investments to drop, resulting in yet more relative asset reduction, forcing another round of selling, yet more drops in value, etc...


While there are many people who keep chanting the mantra that deregulation caused all this, when you actually look at the components that are hurting us the most in the market right now, they're all regulatory components, not deregulatory ones. The expansion of the CRA. The requirement that merged financial/commerical banks trade CRA loans. The Mark to Market rules in SOX. All of those have combined to cause the housing crash *and* the financial credit crunch *and* the broader market value drop (the loss of like 4000 points on the DJI in the last few weeks is a great example).

What we're seeing right now is the next ripple. But the core problems that make these ripples really bad are and were the direct results of economic changes that the Democrats fought to have put in place. They used the culture of victimhood to force CRA loans into a broader spectrum than they should have been and called anyone who opposed this a racist. They played on the "evil big business" feeling after Enron to impose yet more market rules that are now playing havok. Yeah. It sucked that Enron was able to play games with the apparent value of their assets in order to make it look like they had more than they really did. Um... But what they did was already illegal. By forcing market assessment changes to prevent that they've now created a market condition that massively exaggerates any significant negative trend.


Again. It was over regulation that caused this. Can we please start seeing what's really happening instead of insisting on tossing accusatory labels at the problem?

Yup. And you see how if the government creates a loan program to help poor and minority people own homes and requires that the banks treat those loans as though they are worth exactly the same amount as a loan that was only given out to people who could afford to pay that this makes it appear as though the "real value" of their assets is higher than it really is, right?

You can grasp that concept right? This was not a problem of the banks borrowing more than they could afford to borrow. It was a problem of the government telling the banks that some of their assets were worth more than they really were. Both sides of the equation are relevant. How much you can safely borrow is a function of how much you actually own. Suddenly finding out that your assets are actually worth less than you thought when you borrowed some money creates *exactly* the same result as if you borrowed more than you could afford.


It was government regulation that caused the financial institution to think it had more assets than it really did. Your entire premise is flawed because you fail to see that one single very obvious fact.



The rest of your post is just gross ignorance. Not even going to respond...

Edited, Oct 9th 2008 3:21pm by gbaji

Yes. But they were required to by the government.

See. Banks normally can set credit requirements for loans. If you don't meet the requirements, they don't give you the loan. Simple right? But the Democrats realized that this "redlining" of loans wasn't letting poor and minority people buy homes, so they created the CRA. That program required banks to grant those loans anyway.

And, as I've been saying for over a week, when the CRA requirements were pushed into the investment banking system, it created a condition where the loans appeared to be equivalent in value to any other loan but weren't. The folks handing out the loans knew that they weren't "safe", but the folks trading them treated them the same as any other. They had to because the CRA requirements didn't allow them to "discriminate" against different types of loans. See. If they could choose not to buy or trade CRA loans, then banks would value one type over the other and no one would want to grant CRA loans.

See how that causes a problem? It was *not* deregulation that caused this, but regulation. Specifically, regulation that the Democrats insisted be applied to the new banking rules for merged investment/commercial banks.


That's the core cause of this problem, and it absolutely was the Democrats who made it happen.