Take A Deep Breath: Some Perspective On The Financial Crisis
from the bailouts,-moral-hazard-and-adverse-selection,-oh-my! dept
I've been spending plenty of time talking to people, reading up and listening to various views on the whole financial crisis. Last week, I asked a bunch of folks I knew in the tech, economics and financial worlds for their thoughts on the situation and I'm hopeful that I may end up with a few guest posts out of it. In the meantime, I wanted to start with my own thoughts. First off: this situation is complicated. The deeper you dig into it, the more you can begin to sketch out a picture of what's really happening, but no one (no one!) can accurately understand all the different variables at play here. Anyone claiming to have all the answers is wrong. They're either ignorant or lying. Also, the blame game isn't just pointless, wrong and silly, it's dangerous. I've been seeing too many folks on both sides of the political aisle trying to use this crisis as a political football, and all that's doing is making it that much more difficult to come up with real solutions. If you see anyone focus on playing the "blame game," ignore them. They're not worth listening to and they'll only be misleading. Finally, any explanation you read that isn't multiple-book-length will probably be greatly simplified -- including this one. But I'm hoping that it at least kicks off an interesting discussion.So, what happened?
Well, there are tons of good resources that can give you bits and pieces of it. A good place to start, however, may be The Giant Pool of Money podcast that was on This American Life a few months back (which we mentioned recently). The NY Times just had an article about what led to that podcast being created. It's also worth noting (oddly not mentioned in the NYT piece) that the two reporters who put that together -- Adam Davidson and Alex Blumberg -- are collaborating on a new daily podcast and blog for NPR called Planet Money, which is fantastic. They're also working on a new episode of This American Life for next week about the current crisis. That will be a must-listen as well, I'm sure.
But, the basic summary is that a chain of events all resulted in more and more money being put into riskier and riskier mortgages, where much of the risk was hidden away by computer models and the repackaging of those risky mortgages in bulk. Normally speaking, the idea of bundling up a bunch of risky projects into one actually does make some sense -- because you're figuring that while some will fail, the successes will greatly outweigh the failures. And, in many cases, that's true (it's basic diversification). But the problem was that very few, if any, of the models seemed to take into account the fact that these weren't independently risky items, but that many were very dependent on each other. Thus, rather than a small group of risky deals going south, outweighed by the success stories, people started to realize that you could have a domino effect, where a large portion of the risky stuff going bad could actually lead to even more of it going bad. That's just what you get for creating bad models that don't take dependencies into account.
What made this even worse, however, is that a bunch of the risk was eventually pawned off to the least knowledgeable investor: the public markets. In a world where you're always looking for the last sucker to invest, the public markets are always going to be your best bet -- and many investment banks took advantage of that. While, historically, many investment banks were partnerships, where the partners understood the risk of what they were doing, once these banks were public, the risk was shifted from the folks who at least understood some of the more complex details to those who didn't. Whether that rises to the level of fraud, in falsely portraying the real risk at hand, is something that we'll leave to federal investigators to sort out. Either way, we had a long chain of players, who effectively kept "laundering" the risk through various ways until it ended up being held by people who simply had no clue how risky the products were that they owned.
Then, once stuff started to go bad, the dependencies started to snowball and make everything worse -- and the confusion over how bad and how risky things were made those who actually had money on hand reasonably afraid to keep lending it to those who couldn't accurately express the risk. That resulted in a lack of liquidity -- effectively the oil in the economy's engine. Without liquidity, a lot of stuff freezes up pretty quickly and dangerously. That's what caused Treasury boss Paulson and Fed chair Bernanke to ask for the "bailout" plan.
Why are we "bailing out" those who created this mess?
Actually, while almost everyone is calling it a "bailout," it's not quite a true bailout, and it's not clear that it really "rewards" those who created the mess. Like everything else, it's quite complicated. Personally, I like Fred Wilson's use of the phrase "The Splurge" to describe it, because in many ways it's more accurate than a bailout. Basically, the government is asking for $700 billion to try to buy up distressed assets. The details suggest that it's starting out with $350 billion, with another $350 billion to be handed out later, if necessary. There are plenty who believe that $700 billion is just the tip of the iceberg, and eventually that number will grow to be much higher.
So, why isn't this a full "bailout"? Well, because the government would be getting equity back as well, and there are plenty of smart folks who believe that this could lead to the government making a profit. Indeed, buying up distressed assets historically isn't a bad way to make a profit -- if you know what you're doing. Lots of folks tend to shy away from distressed assets, and a good fund manager can buy up distressed assets for pennies on the dollar and figure out ways to sell them down the road for nickels or dimes on the dollar. It's a perfectly reasonable business proposition, and historically, there are plenty of stories of folks who made out like bandits buying distressed assets following bursting bubbles. So, if the government can drive a hard bargain and buy up these assets at a reasonable price, it could work.
So, the good news is that there's a chance that the "splurge" could result in a best case scenario: it pumps liquidity into the market, stabilizes things, gets the economy moving again and lets the government profit.
But that's the best case scenario. Others are a lot less sure, noting that the upside pales compared to the downside risk, and even if an upside scenario may seem a lot more likely, the cost of the downside is much, much bigger (at least $700 billion at this point, and perhaps more). In fact, there are those who suggest that a poorly done splurge will almost certainly make things even worse. And, plenty are pointing out that the smart money seems to be betting that the government is entering the game as the "last sucker" we were discussing earlier. Given that there's still confusion over how the gov't will value these assets, it seems reasonable to worry. Plus, there's the thought that if the hard bargain is really a good bargain, then others will come in and do the deal -- such as JP Morgan Chase buying up WaMu or Barclays with Lehman or BofA with Country Wide or Merrill Lynch. But, there's a question of how much those companies can handle, and if it's enough to keep the economy from stalling.
So, really, a lot of it comes down to how well such a government fund is managed -- and right now that's a huge open question. If it's managed well, by folks who actually have the ability to get a pretty good read on the likely real value of these distressed assets -- then the splurge plan could work wonders. But how often do you see the government do anything right -- especially when it comes to managing money? So, while, in theory, I don't have a problem with the government entering the market as a buyer, you have to worry significantly about the fact that it's the government, and they're prone to screwing things up badly -- especially once politicians get involved. Once you have people trying to get elected on a regular basis messing around with the decision making, you know things are going to get bad fast. That's why, if such a plan does need to move forward, I'm actually all for limited oversight from Congress if (and this is a big if) there's real transparency into what the fund is doing. I might be more convinced if there were oversight from a group of economists instead.
Also, you've probably heard a bunch of folks warning about "moral hazard" lately, which is an economics term basically meaning that if you protect someone via insurance of some sort, it makes them more likely to do risky behavior. That is, if you tell someone you'll protect their downside loss on something, they're more likely to do it. Or, more specifically, if you tell someone that if they jump out of a tree, you'll catch them, they're more likely to jump out of that tree. In this case, the idea is that "rescuing" the banks makes them more likely to do risky things again, knowing that the government will rescue them. In this case, however, the risk of moral hazard seems overblown. This is hardly a pleasant time to be working in the financial sector, and I don't think this is exactly an enjoyable experience. Plus, if the Splurge works by buying stuff at pennies on the dollar, that's not going to be particularly pleasant either. It may be more like saying you'll have insurance to fix your broken legs from jumping out of a tree. Yeah, you've got insurance, but the broken legs are pretty good incentive not to do this again.
Oddly, there's almost no talk of the risk of adverse selection, which is moral hazard's sibling in looking at any sort of "insurance" market. I would think that the risk of adverse selection is much greater here than the risk of moral hazard. With adverse selection, the problem is that when you have asymmetric information (one party has a lot more info than the insuring party), the riskier deals end up gravitating towards the insurer. Thus, the insurer thinks its covering a uniform population, but only the riskiest bets take up the insurer. That seems a hell of a lot more likely in this scenario. The government does not know how to value these distressed assets, but the banks selling them probably have a much better idea, and are more likely to try to pawn off the worst of the worst on the government -- meaning that the gov't may get stuck with assets that are more distressed than they expect.
Perhaps the most worrisome aspect of this is the rush to get this done. Deals done in a panic are rarely good deals. And while I can understand and agree with the idea that perfect is the enemy of good, rushing through isn't a good idea either. Will it mean that some firms go into bankruptcy in the meantime? Yes, almost certainly. But is the whole economy going to collapse? Unlikely to happen right away, and it should be preventable with minor tweaks while the larger details are worked out.
But isn't this just about Wall Street?
There's a common refrain among many, many people, that this is just the result of greedy Wall Street bankers, and the proper thing to do here is to just let them all fail. It's not that easy. The ripple effects here would be pretty serious -- and while I don't think the economy would fully seize up, it would be really painful across the board. The lack of liquidity in the commercial paper world (short term lending, mostly) would impact a lot of businesses that you might not think have such exposure to Wall Street. And that, in turn, could create an ongoing spiral.
It would stop somewhere, but where is anybody's guess at this point, and it may be pretty far down a hole, with a pretty massive destruction of wealth in the meantime. Some may believe this is the best way to get through things (the rip the band-aid off quickly belief), but the overall damage could be significant, and not so easy to come back from. Ripping the band-aid off quickly doesn't always yield the best result if it rips the scab with it, causing more damage. So, simply letting everything fail, while an option, could have serious long term consequences.
And what about Silicon Valley/Tech?
Well, for those of us in tech, the good news is that we're more insulated than others. The tech industry is less reliant on investment banks for cash (with some exceptions) and, on the whole, doesn't have huge exposure to the commercial paper markets either. There is some fear of a loss in customers, especially for those who service Wall Street -- but there should be lots of integration work in the meantime. On the startup front, VCs still have plenty of cash for investing, and while they only put out cash calls on committed money when it's needed, it's unlikely that most limited partners (i.e., investors) in VC funds will be unable to meet those calls. The big investors, like university endowments, aren't likely to be impacted too badly. You'll likely see some slowdown in startup investing, as VCs get nervous about the overall environment and the potential decrease in exit opportunities.
But, for the most part, that should just mean better and stronger startups get funded, as the investors end up asking better questions, and only the best survive. Downturns are the times when the best startups get created.
I'd expect there also to be some fallout in the online ad market, for a few reasons. The mortgage/real estate industry has always been a big spender in the space, and that's going to drop off (if it hasn't already). Some of the other businesses impacted by the whole mess will also cut back on advertising. However, the market may start to consolidate around advertising models that actually show strong ROI, but will move away from "advertise and pray" models. Once again, the long run result may be better advertising models, rather than a lot of the crap we see today -- and that's a good thing.
To sum it all up
It is a huge mess, no doubt. The splurge is quite risky -- and while I can appreciate the upside potential, if done right, that "if" scares me a lot. I'd be much more comfortable with it if it wasn't being pushed through in its entirely in such a quick manner, with partisan players on both sides going on the news yelling at the other side each night. Instead, focus on a smaller initial package and spend a bit more time working out the bigger deal later, with a lot more input. In the short term, there's still going to be a fair amount of bloodshed, and the downside will impact companies outside of the financial sector, but for those in tech, the good news is that we're probably more isolated than other industries, though certainly not completely isolated. And, since everything is changing so rapidly, you never know what shoe might drop next.
However, in the long run, there is still money out there, and there are still opportunities. People will need to put that money to work one way or another, and rather than freaking out, now is a time to be looking for the opportunities created by this mess, and the tech industry is likely to have a lot of those opportunities. Remember that for every bubble bursting, something ends up getting devalued below its real value. The trick is just figuring out what it is before anyone else notices.
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Filed Under: adverse selection, bailout, ben bernanke, economy, financial crisis, henry paulson, moral hazard, mortgages, splurge
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Oh yeah?
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Re: Oh yeah?
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When has doing anything that Bush wanted worked out well for the American people?
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And never mind that the calls for reform for these entities was sponsored by republicans and opposed by democrats for the last few years.
But let's proceed with the uninformed political bashing please. It is more entertaining than coming up with a viable solution is it not?
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Re:
That assumes it's all completely worthless. That's highly unlikely. There are real assets in there.
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How do you call buying used toilet paper for $700 billion anything but a giveaway to Bush's rich friends?
You misunderstand. This isn't party money, this isn't a giveaway. This is plugging the hole in the titanic.
Those large institutions, they are foundation. They're the bedrock. They're broken, and if they fail completely they take us down as well. We are, in essence, already stuck with the bill.
The question isn't should we pay. The question is, is it cheaper to pay now by propping them up, or pay later to fill in the void they leave?
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Re: dossquatch
Surely any supplier failure in a market with demand produces a new supplier, and any market without demand has no need of suppliers. What is special about large banks that 'takes us down as well'?
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Re: ... and they all fall down
What I have not seen is an explanation as to why large banks should be treated differently than any other business.
We aren't talking about a business failing, we're talking about an industry failing. Very different.
Any one bank going under isn't really that big of a deal. I mean, it matters, but it's a blip and the world moves on. But it's not just one bank.
Let's start small. Say you go bankrupt. What does that mean? The short answer is, you are bankrupt when your income and assets are not sufficient to cover your debt in any timeframe agreeable to your creditors. Those creditors, typically, are banks. The difference between what you can come up with and what you actually owe has to be absorbed in some way. As long as the bank is sufficiently liquid, there's no problem.
A business goes bankrupt - say, something like the local Ace Hardware, much the same, somewhat larger numbers.
A bank goes bankrupt, it's still the same thing - insufficient access to capital to cover debts - but a bank's creditors in a lot of cases are other banks.
Again, as long as there's enough liquidity, the differences can be absorbed somewhere along the way. But in a stressed market, like we have at the moment, all of the slack has been taken out, so when a bunch of people can't make mortgage, the bank fails. When the bank fails, it causes other banks to fail.
The dominoes fall, the industry fails. For an idea of what happens when an industry fails, look at all of the gold boom ghost towns from the turn of the last century. Look at Allentown.
The damage to the area is devastating.
The bank industry is global. The damage is pretty much going to be everywhere. Look at the markets worldwide right now.
The "bailout" isn't so much about bailing, it's more about putting the slack back into the system.
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This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
l[rauflo*&mcE
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Page 1 of2
Septembe3r 0, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVENA , HOLMES
ln a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae
Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York
metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not
good enough to qualifu for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by
next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton
Administr4fq4.!oexpandmortgageloansamonglowandmoderateincomepeopleandfel@s
t6- mainGffiLen&nenal gto;nflr in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more
loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough
to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional loans.
"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment
requirements," said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many
borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying
significantly higher mortgage rates in the so-called subprime market."
Demographic information on these borrowers is sketchy. But at least one study indicates that l8 percent of the loans in
the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving. even tentativelv. into this new area of lendine. Fannie Mae is taking on significantly more risk. yhich may
not pose any difficulties during flush ec o troubld
iiTfeconomic do@overnment rescue sim
"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter
Wallison a resident fellow at the American Enterprise Institute. "If they fail. the government will have to step up and ,
bail them out the way it stepped up and bailed out the thrift industry."
Under Fannie Mae's pilot program, consurners who qualiff can secure a mortgage with an interest rate one percentage
point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages
about 7 .76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point
premium is dropped.
http://query.nytimes.com/gsVfullpage.html?res:9C0DE7D8153EF933A0575AC0A96F958260&91s2e 5c:1&2s0p0.8..
FannieM ae Easesc redit To Aid MortgageL ending- New york rimes Page2o f2
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it
purchasesl oans that banks make on what is called the secondarym arket. By expandingt he type of loans that it will buy,
Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellarc redit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualifi, for a
mortgage. But they add that the move is intended in part to increase the number of minority and low income home
(owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of
mortgages extended to Hispanic applicants jumped by 57.2 per cent from 1993 to 1998, according to Harvard
University's Joint Center for Housing Studies. During that same period the number of African Americans who got
mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because
blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001,50 percent of Fannie Mae's
and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the
loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the
automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit
applicants.
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Re: This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
This is, by far, the most idiotic statement I have read regarding this whole economic mess.
When a house is built for $50k and sold for $125k to a family whose income is only $35k, there's going to be a problem no matter how much anyone looks into it.
And while I give kudos to Mike (and crew) for giving some attempt at educating those who don't understand, points are lost for not delivering the true cause of the current situation: Corporate greed.
I am not surprised by any news I hear regarding the current economic woes. Finger pointing, bail-out plans (now failed), and so much crap and yet very, very few touched on the very reason why such things failed as they did.
Those who suffer are the workers, who now must get up daily wondering if their job is still around. Given the Dow's largest drop in history, there's really not much good news left to look forward to. Especially when people, such as one comment poster, are losing their very savings after being told "it's the thing to do to prepare for retirement". How in the hell can anyone retire on $10k?
Like with all gambling, the winner remains the house. Now that these houses are calling bankruptcy, the few players who won will never see a dime.
What I'm about to say may piss some of you off. Just remember it's my opinion. Agree to disagree if you must.
I hope the recession falls into a financial depression. I hope this depression spreads around the globe.
I hope lenders (who charge higher interest to those who can barely afford the payment) go bankrupt.
I hope credit lenders fail so miserably, they never return (especially after lobbying for better bankruptcy protection only to turn around and charge borrowers 4%).
I hope mortgage companies fade away into their adjustable rate oblivion.
I hope builders lay off millions so they quit building houses for $50k while others sell at $125k.
I hope business fail when people are homeless because they took advantage of increasing their prices just because the price of oil went up, but refused to lower their prices when the price of oil went down.
I hope Americans lose their jobs so they can clearly see why they don't have one, and realize their demanding incomes fuels the rise in cost of consumer goods.
While many of you will disagree, there's one thing that'll sum up why I wish for all this: NO LOAF OF BREAD ON THIS PLANET SHOULD EVER, EVER COST MORE THAN $1.00.
If you don't understand that, then you deserve this economic recession.
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Re: Re: This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
That's so wrong it's difficult to know where to begin. I already pointed out that it's dumb to point the blame finger, but pointing it at greed is so incredibly wrong.
Please, learn some basic economics. It wasn't *greed* it was screwed up incentives. You really ought to learn the difference.
Given the Dow's largest drop in history, there's really not much good news left to look forward to.
The drop in points is meaningless. This was hardly a large drop in % terms. Focusing on the pt drop suggests a fundamental misunderstanding of basic finance.
I hope lenders (who charge higher interest to those who can barely afford the payment) go bankrupt.
I hope credit lenders fail so miserably, they never return (especially after lobbying for better bankruptcy protection only to turn around and charge borrowers 4%). I hope mortgage companies fade away into their adjustable rate oblivion.
My goodness, Twinrova. You really ought to learn some basic economics. What you are suggesting would harm everyone. Significantly.
You're talking about destroying the fundamental economy.
While many of you will disagree, there's one thing that'll sum up why I wish for all this: NO LOAF OF BREAD ON THIS PLANET SHOULD EVER, EVER COST MORE THAN $1.00.
Please, please, please, learn some basic economics.
Economic growth is an important aspect of society. Stagnating economic growth or even fixing prices is about the worst idea you could possibly come up with. You're talking about the wholesale destruction of the economy, based on a fundamental misunderstanding of how the economy works.
If you don't understand that, then you deserve this economic recession.
Yikes. I beg of you, please learn at least a tiny bit of economics before trying to tackle this subject again. What you are suggesting would massively shrink the economy and harm the folks you think you're protecting much more than anyone else. If you cannot understand the importance of lending and credit in making an economy run, then you need to go back to the basics.
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Re: Re: Re: This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
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Re: Re: Re: This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
I'm pretty sure I heard interviews with the guys who were giving out these NINJA loans and they out and out said they were greedy.
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Re: Re: This is a NY times article Sept. 30 1999. Clinton put us here.. and now Bush takes slack for trying to fix it
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Indeed. That's the big fear. But it wouldn't really be "the government" doing it, as they'd hire a firm, perhaps PIMCO, to actually manage the fund.
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Re: Forget the government...
Consider: Lehman falls, but AIG is bailed out. Okay, but that also happens to save AIG partner Goldman-Sachs $20 billion. Coincidence?
I think AC #3 above has a point. The government isn't going to get bargains. In fact, odds are good that the government will manage to OVERPAY for all of those distressed assets.
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Re: Re: Forget the government...
I was bouncing ideas back and forth earlier today to a co-worker, as time goes on, the more I believe as taxpayers we won't be buying anything of value.
A piece of the Chrysler Building?
Oh, that's already sold.
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The real problem was the existence of the giant pool in the first place and that lies squarely at the feet of the American people and their enablers; in particular, Alan Greenspan. By consuming more than they produce, Americans created a situation where foreigners (primarily China and gulf oil exporters) held vast quantities of American dollars, which could only be spent in America and were hence lent back to America. This is the source of the giant pool. The low interest rates created by Greenspan made this a viable proposition to Americans. Why did Greenspan cut rates in the first place? The dot-com crash blew a hole in US stock markets and pushed the economy into recession. Because this was deemed so problematic, low interest rate policies were set in motion to mitigate the recession. These policies now put us at the precipice of a depression.
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That's a fair point... but if you're going to do that, you could trace it all the way back to the first time people recognized you could leverage some money into a lot more money.
And, I'm not so sure I agree with the foundation of the Giant Pool of Money being from whence you described. There's no doubt that fed policy contributed to it, but global economic growth had plenty to do with it as well. In fact, I'd argue that a much bigger portion of the global pool of money came from outside the US.
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The Blame Game
We had the S&L problems in the late eighties. Basically the same network of people has made new and exciting errors, but for the same old motivations. Were we to focus solely on the mechanism of mistakes, we'd fix our old problems but would not be able to see the new ones. If, however, we not only looked at the mechanism but also whom to trust, we could buy a little time.
One is patching a server, the other is finding out who in your own network is opening up backdoors. I make this an internal issue because these are not external users attempting to game the system, but instead corrupt sysadmins. The analogy is a little strained, but you can see the parallels. These are decisions made by people with enormous access to assets, with extraordinary privileges, and can operate with little oversight at times (or worse yet, oversight by those with whom they are in collusion).
While punishment would be emotionally satisfying, in elevating ourselves to the intellectual issue of solving the problem, we must not automatically absolve those responsible for creating it, simply because our collective anger is a base emotion.
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Re: The Blame Game
There's a difference between figuring out where the problems occurred and "the blame game." I'm all for figuring out where the problems happened and seeing if there are ways to avoid those problems in the future, but that's quite different than playing the blame game, which is just about pointing fingers at *who* was responsible, not *what* made things happen.
The blame game focuses on scapegoating someone, not understanding why the actions happened. If you follow the trail of what happened, you'll find out that much of the problems weren't from someone doing something bad or malicious, but poorly aligned incentives.
So I'm all for punishing actual out and out fraud, but very little of the problem seems to have stemmed from fraud.
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Text of the Bailout Legislation
Very interesting and insightful, as usual, Mike.
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Re: Text of the Bailout Legislation
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Re: Re: Text of the Bailout Legislation
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No, the blame is important. Democrats are blaming the free market, and therefore proposing more control over the market. Republicans are blaming government control, and the few that don't have their tails between their legs are proposing free market solutions. Also, some people (on both sides) are blaming new accounting rules that were made as a result of Enron and therefore are proposing repealing those rules.
The blame is very important when finding a solution. Unless the blame is placed appropriately, then we'll just be postponing a crisis instead of solving it.
Sorry for short circuiting. I'll read the rest of your post later, but demeaning the debate as "political football" is wrong. It's important to identify causes when solving a problem, and the debate here clearly defines the difference between Democrat and Republican (if the Republicans would actually act like Republicans).
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Re:
Again, I'd argue that there's a big difference in figuring out what went wrong, and figuring out who to blame. It's that distinction that I think is important. The blame game is a political football designed to make others look bad.
Figuring out what actually went wrong is a constructive process in trying to fix the system.
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Re:
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Trickle down
Higher monthly payments and less rolling credit will surely impact a lot of individuals as they start to default on their credit card bills.
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Re: Trickle down
When you and I needed credit, we had a tangible asset (car, boat, house, etc) that the bank could take if we stopped paying. Sure, maybe the house isn't worth as much as the loan now, but the bank can still get most of it back.
When the bank needed credit, they had these garbage mortgage-backed securities as collateral. So in the example above where you and I started defaulting on our mortgages, the bank only loses a little money. Now multiply that by the thousands of thousands of mortgages that went into default. Now, add on top of that the speculative premiums tacked onto the top of these securities. It starts to stink pretty quickly. So when the bank offers up this rotting mess of securities as collateral for a loan, the loan-provider says, "No thanks." And then the bank fails.
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Re: Trickle down
Credit card companies have been ripping us off with their, what was once considered usury and illegal, methods anyway.
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Is tech really insulated?
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Re: Is tech really insulated?
This 700B bailout is no different. You're taking from the poor in order to patch a leaky system from which people have made hundreds of millions from over the past decade. I'm against this bailout on so many diffent levels I can't even begin to express my anger over the thought of it. Does it surprise anyone that both parties have players that want to get the bill passed? Take from the poor, give to the ruling party.
There is not way at all that I directly or even indirectly benefit from this action. Let the corrupt system fail. From the ashes will rise the phoenix. It's called free market, stupid.
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The mess
Great points as always, I should read your stuff more often. I think you missed 1 point though, (although I may have missed it in reading quick), that point is in describing the problem you forgot to mention the word leverage! The real mess stems from the fact that you take all these assets with their own specific risks and bundle them together in the hopes of getting the risk closer to the systematic risk of the mortgage market. Well, that's all good and partially true, but when you sell the assets to the market and then an investment bank uses the asset to leverage 30 or 40 to 1 you are hosed. This is how a Bear Stearns fails with less than 3% defaults - it's 3% x 40:1 leverage that gets you.
Now the buying up of the assets is an attempt to deleverage the whole system and take these 'poisoned' assets out of the system so that institutions can trust the assets that they are leveraging. We'll have to see how this all works out. But if you figure it's 700B in assets then it's in the trillions of $ that you're actually pulling out of the global financial system.
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Re: The mess
Actually... that's a good point. I had wanted to discuss leverage, but the post was getting really long. I sort of implicitly pointed it out in discussing the dependencies (which, in part, are the result of the leverage), but you're right. It deserves to be pointed out as well...
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But it works..
The final result of all these "xx buys yy assets" plays is that the original risk is reduced, the market starts to rebound (simply because money is moving--if the 1970s taught us anything is that in a crisis, as long as money is moving it won't get too bad), and stability comes back.
So at the end of the day: The market works. Surprise!
Business that consistently made bad choices go away. Which is fine, they need to. Your original model may have been wrong, but unless you stick your head in the sand for years, you'll hear about other folks and this "mortgage crisis" and do something about it.
I'm curious how much of this "crisis" will go away if we just let the market figure out the problems and fix it themselves. Every single bank and mortgage company out there realizes that there is still a fortune to be made here in the US. And from the bottom of a correction, there is a huge upside just waiting to happen. These companies are just salivating to start the money mill back up. And if they manage to bilk the government out of $700 billion of extra fuel to run the machine, so much the better for them.
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This Just In...
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Adverse selection: it may be worse than that
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Re: Adverse selection: it may be worse than that
Indeed. But you have to believe that folks there recognize the true value of what they have a lot more than an outsider. I'm not saying the understand it perfectly: they don't. And I agree that they lied to themselves while everything was going up. But that doesn't mean they don't actually have a pretty good understanding of the value.
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Re:
As I noted in an earlier comment, you *could* go all the way back to the original concept of lending and receiving a return via interest if you wanted to follow it all the way back.
My focus was on the current crisis specifically. You can go back to all different points in history, but eventually you'd find yourself back to the point where people figured out what fiat money was and you could put some of the blame on them.
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Re:
Any explanation that starts with the housing crisis
I'll go one further - any explanation that places the predominant blame on the housing crisis is inherently wrong. The housing crisis is the canary in the mine - an indicating symptom, not a cause.
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Re: Re: to Dosquatch
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3 points...
1. The mess can be traced all the way back to the 70's when GOVERNMENT INTERVENTION caused the mess by enacting legislation that forced banks and lenders to lend to riskier borrowers and lift credit restrictions against low income families. (Please read recent pieces in Capitalist; New York Times; and Economist). Fannie and Freddie were created to backstop these poorly issued mortgages and loans.
2. The least discussed, but perhaps most dangerous piece of what is going on has to do with "derivatives." It is too difficult to explain in less than 5000 words, BUT it is a huge hidden piece in all these rescues...
3. The media is actually the worst perpetrator in this whole mess -- as they continue to fan the flames of public distrust and thrive off of scare tactics with limited information and facts. The reality is that we need some form of government involvement at this point just to calm a scared populace. It is not the size of the dollars -- it is just the reassurance that everything will be okay which may be the most important factor in passing a bill.
Hate the media -- they create panics and fear drives ratings!
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Re: 3 points...
Post.
Ever.
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Re: 3 points...
2. Derivatives are not difficult to explain and they are the true cause of this mess. They magnify the losses and gains and because these were not regulated markets these banks were able to apply all the leverage they wanted. Also because the barriers between investment houses and banks were broken (more deregulation) the lines became blurred.
3. The media is reporting the crises not inventing it.
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Re: Re: 3 points...
2- agree
3- Nope -- Please explain WaMu and their customes basically running the bank and withdrawing 17 *billion* in deposits in only one week. This mini-run was caused by the media reporting the *possibility* of WaMu crashing. When 17B in capital was removed the crash was all but guaranteed. The Media is at fault here for not better explaining FDIC
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Re: Re: Re: 3 points...
More to the point, *I* put money in a bank so I don't have to worry about it. If I DO have to worry about it, I'm finding a new bank.
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House rejected bailout deal
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House rejected bailout deal
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Information Theory
Clearly the house has *some* economic value, but for any given house, nobody knows what that number should be right now. Normally the value of a house is based (of course) on how much buyers are willing to pay for that house (and interestingly, that generally has very little to do with the cost of actually building the house), and this value is generally pretty well known by the marketplace a whole on a house-by-house.
But the easy credit of the housing bubble caused prices to inflate unnaturally, and nobody yet knows what the correct stopping point is for the fall: "What is this house really worth, in a sane market?"
Because nobody knows what the houses are really worth, nobody knows what the lenders are really worth.
This pundit's point was that (in principle) a nation could implement correct policy if it knew the true economic value of the problem, but failing that, you're forced to flounder. Or put another way, the problem isn't tight credit, per se, but a marketplace that doesn't currently know the correct fair market value of many of its largest assets.
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Re: Information Theory
Notice I'm not indicating that any of these raise or lower the price. It is up to Consumer Confidence...and that is the entire basis of economics.
You can have all the factual inforarmation about a house/property that you want. If the market is willing to pay beyond that price for WHATEVER reason, then the value of that property is higher than the info can justify.
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Please explain to us less informed how and by what linkage the crash in the US housing market caused the Russian stock market to crash before AIG's failure.
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1. A large number of loans went bad and real estate prices generally declined, but the reason this mess is as bad as it is was not mentioned. The amplifying reason was that all these banks were impossibly leveraged with derivatives. Therefore relatively small drops (i.e. 10%) in prices cause impossibly large losses to banks. Everybody was betting that prices would continue up.
2. Yes, it's okay to point the finger and identify exactly why this happened. It happened primarily because of legislation sponsored by Phil Gramm (former McCain campaign financial adviser and likely Treasury Secy should McCain get elected) that was signed by Bill Clinton.
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Living beyond means
It seems the system was structured in such a way that the money would was expected by the banking industry, but when payments couldn't be guaranteed, the cards started to fall. In your mind, is unemployment and subprime mortgage mess were a non-issue completely separate of the bailout? Point I am trying to make is that it appears a move back to textbook Keynesian Economics would be beneficial to all.
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I spent 16 yr building a college fund, it is now gone
In the last 4 months that value has been reduced to less than 10,000. So 16 years of saving, do what was right has been nearly wiped out in less time than my statements. Now you and I both know that the CEO's, CFO's, and other corporate bigwigs will have golden, or silver parachutes clauses in their contracts, and the companies shareholders, will have their bite at the Government teat, since the companies assets will be acquired by the government. So my question, is where is my reward for being a thoughtful, hard working software engineer ? My reward is to see all these politicians, and corporate cronies be paid to just leave the area, with nothing more than a few millions to call their own for their efforts.
My son could go to college, if not for these politicians, My son could go to trade school, if not for these politicians, and corporate fat cats.
I am pissed, I am mad, and not matter how I vote, there is nothing I can do!! I saved, I worked and now after 16 years I have virtually nothing to give to my son, to show for all my effort. That is real!!!
Try being in my shoes, or in the shoes of the waitress down th street, who saved and invested and is now left with little to nothing to show for years of working, and saving. She and I should have bought the Fancy car; I drive a Ford Focus for the last 3 years. There is no reason to support these politicians, these corporate oil, pharma, or other companies.
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Re: I spent 16 yr building a college fund, it is now gone
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Re: Re: I spent 16 yr building a college fund, it is now gone
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Re: Re: Re: I spent 16 yr building a college fund, it is now gone
Most people don't know how to invest or evaluate the risks correctly. If you want a larger return, take larger risks.
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Re: I spent 16 yr building a college fund, it is now gone
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Re: Re: I spent 16 yr building a college fund, it is now gone
I hate it when people I know look at a stock they cashed out on a few weeks earlier and then say "I lost XXX by selling". No, you didn't. You took whatever gain/loss YOU decided to take a few weeks ago; if you weren't happy with the gain/loss you shouldn't have gotten out. But you did and now ignore that stock as you have NO interenest in it.
Either you are in an investment for th long haul and should only be casually monitoring it, or you are in it for the quick hit and you are simply gambling. It is the gamblers that cause instability (though they also cause some of the quick gains).
There is nothing wrong with slow, conservative growth. And this from someone who is "liberal".
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Media Frenzy
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“Also, you've probably heard a bunch of folks warning about "moral hazard" lately, which is an economics term basically meaning that if you protect someone via insurance of some sort, it makes them more likely to do risky behavior. That is, if you tell someone you'll protect their downside loss on something, they're more likely to do it. Or, more specifically,”
These are fine points but they really over look the principal issue of the whole housing bubble.
Lets do this by example.
The morning news, this morning, 5:00 AM has a debate by the Jefferson County commissioners which has still not been resolved about the Jefferson County Sewer System and wither the county will declare bankruptcy today or not.
Thinking that Jefferson county bonds could be a good but, hay I live here and can use them to pay county taxes, I looked them up at several bond breakage houses.
Rating for Jefferson County Alabama Sewer Bonds AAA
Price 105
And that for a bond that is for all practical purposes bankrupt in a market in which the stock market drops 777 points because the Feds will not bail out banks.
All this points to a big big problem.
The rating agencies are liars and can not be trusted.
The implication of this is that you have something for sale, I want to buy it and neither of us has a clue of what it is worth.
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Money
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WOW Mike.... Finally not free!!
The New Deal was the worst thing to ever happen to the US economy and we are still suffering from it now. Do we want to do that again in a grander scale for future generations?
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The Blame Game - Cont'd
The blame game focuses on scapegoating someone, not understanding why the actions happened. If you follow the trail of what happened, you'll find out that much of the problems weren't from someone doing something bad or malicious, but poorly aligned incentives.
We're almost in agreement, Mike. However, part of the problem is that, in this scenario, the incentives are created by some of the very same people responsible for the actions involved. It's not as dirty as Enron is (I don't think you could leave "bad" or "malicious" out of that situation), but we're still in a situation of the fox guarding the henhouse. If you and I are buddies, and I hand you money to rate something for me, and I keep coming back to you, then I have incentivized (is that even a word?) the idea of overrating bonds. It's a benefit to both of us.
The revolving door between government and business means that you cannot isolate who is creating incentives from who is following those incentives. Paulson, what's on his resume?
And business is fighting the idea of more oversight, every step of the way. What's preferred by them is just an outright splurge, without guarantee or equity for government/taxpayers.
Daddy hasn't set the ground rules poorly and Junior has misbehaved; Dad made up his own rules, and has been naughty - Mom's doing the bills and is in a panic.
I agree that the setup is a lousy one, and people tend to follow their greed. No doubt. But we must look at how we got there, because we've been there before; it might just be time to stop and check who is sending us down the wrong trail for the umpteenth time.
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Allegations of self-dealing hurt Paulson
"The only Wall Street chief executive participating in the meeting [to save AIG] was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm ... A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said... Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion."
http://www.nytimes.com/2008/09/28/business/28melt.html
If Paulson bailed out AIG to save his personal fortune, that would be bad.
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Re: Allegations of self-dealing hurt Paulson
This is very disturbing considering last Thursday, the House voted in favor for a $612B budget to cover DoD thru March 2009. However, this seems this was done in secret. Today, it's on it's way to the Senate. So let's not forget that money can certainly be printed. But it still doesn't change the fact that I feel like I am in a movie. Last time I felt this way was when 9-11 occurred.
The Movie Ocean's 12 comes to mind.
But the question that should be asked is what public buy-in is needed? It's well known that money is only what we believe collectively it's worth and after reading "The Creature from Jekyll Island" really opened my eyes. I find it interesting that those with lineages to with Jekyll Island dealings are now buying banks. JP Morgan and Citicorp for example. Not hurt at all by the credit crunch and are buying banks on the cheap.
Baron Nathan Mayer Rothschild, from this family, is quoted with saying "I care not what puppet is placed on the throne of England to rule the Empire, ...The man that controls Britain's money supply controls the British Empire. And I control the money supply.
Another remark I recently came across said "The Rothschilds had rapidly propelled themselves into a position of immense financial power and political influence. They were an independent force in the life of Europe, accountable to no one and, to a large extent, reliant on no one. Popular lampoons depicted them as the real rulers of Christendom..."
http://www.rense.com/general77/POWERS.HTM
Mayer Amschel Rothschild, father to the current international banking system once said: "Give me control of a nation's money and I care not who makes the laws."
"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance."
- President James Madison
http://www.rense.com/general77/POWERS.HTM
So I'm convinced that they decided to let one slip. It could have been as quiet as the DoD bill. But they wanted a President to continue and made it into a national affair.
Who is really in charge? Who does the Great-Grandaughter of Rothschild support? What can you do? Well, go forward and vote. But vote for the one who has not been corrupted by the love of money or power. Considering one candidate left his wife to marry into a large fortune, this should be a relatively simple decision.
Vote for the one who wants to do the right thing.
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Re: Re: Allegations of self-dealing hurt Paulson
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Re: Re: Allegations of self-dealing hurt Paulson
".. .vote for the one who has not been corrupted by the love of money or power.. . Vote for the one who wants to do the right thing."
.. .doesn't match your arguments.
The bankers/money changers (Rothschilds) said they didn't care who sat on the throne or made the laws, they would still be in control because they controlled the money supply. Madison clarified that they (the money changers/bankers) maintained control through "abuse, intrigue, deceit, and violent means". Who controls our money supply today? A PRIVATE banking cartel called the Federal Reserve. And the head of the Fed stands shoulder to shoulder with the Treasury Secretary (former head of a major bank) in proposing the bailout.
The proposed bailout law includes: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." If the idea of creating a financial emperor more powerful than the president doesn't scare you into opposing this bill you are beyond hope.
You present one piece of evidence that one major candidate has been corrupted by money. Can you look at the political history and voting record of the other major candidate and not see that he has been equally corrupted by power?
Wash DC in general, and the US Congress in particular, is one big cesspool of corruption due to the influence of power and money. Both major parties roll around in and are covered with this filth. Anyone who believes that "the other side" is dirty, and somehow "my side" remains clean has allowed themselves to become a pawn of the larger forces at work.
The Founding Fathers set up the Constitution to LIMIT government in order to protect the people from the abuse of power. Ever since, those actually in charge (per your quotations, the bankers/money changers) have been manipulating us into removing those limits - in order to tighten their grip. And this has continued under congresses and administrations controlled by both parties. And you think one of them ".. .wants to do the right thing"?!
If you think back to the primaries you may recall one candidate who's overriding message was to shrink government back to its constitutional limits. He has been a consistent critic of the financial industry in general, and the Fed in particular, and predicted years ago that their actions and policies were going to get us into the type of mess we are in today. And his voting record matches his rhetoric (imagine that, an honest politician). Do you think it's a coincidence that the major media outlets chose his candidacy (out of the middle of the pack of also-rans) to exclude from their coverage? He never had a chance of being elected, any more than any of the other minor candidates. But it was his messages: that government is corrupt from top to bottom, that the financial industry is out of control, that were considered so dangerous to the status quo that the powers-that-be had to limit our ability to hear them.
If a candidate isn't getting this type of opposition from the Establishment, you can know for certain that they don't really intend to ".. .do the right thing".
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Why
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Blame...
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Re: Blame...
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Can we cut out the middleman?
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Weak
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Why The Attach On Silicon Valley?
Dorpus, that's off topic, but I'll bite. U are foolishly taking the micro view, and neglecting the overall impact of Silicon Valley.
Sure, lots of companies go under. Sure, there are oodles of bad startup businesses here. Some of them even funded by reputable VCs. But the VCs, and the courageous entrepreneurs who are trying to build something know that success is a possibility, and that it is richly rewarded. BUT they also know that failure is a 90% probability.
So, yeah, 9 out of 10 will fail, and will look pitiful. But that 1 out of 10 creates value. Value for the founders, value for the staff, value for the VC, and...guess what, value for the country. This region produces real jobs that pay HIGH taxes, we produce knowledge that advances the world (whether patented or not!), we produce products that benefit people, we produce goods that are exported and help our balance of trade. And we do it all from scratch, and it's usually very environmentally-friendly (writing software doesn't pollute). Value created out of nothing, and you would call this region to task???
Do we need to even bother with some examples? Has anyone in the country made money off the growth in value of these names that were once start-ups?:
HP, Intel, Oracle, Peoplesoft, Cisco, Juniper, Yahoo, Google, Netflix. There are dozens more that are similarly famous, and thousands more that aren't.
Don't argue that some of those companies lose value, because remember, they were created from a ZERO to where they are today. Any value is a positive value.
Have you ever noticed that every other region, country, province has sent delegates HERE to study our region, and to try and understand the recipe that makes such dynamism and incomparable economic growth? That they want to emulate US, and will spend tax dollars to jump-start it. I've hosted such delegations and understand their desire to boost their economies in the way this region does for CA and the USA. Ever hear of "Silicon Valley East" or West, or North, or Europe, or Asia. I've heard of dozens of places that local reps try to liken to us. Why do they want to be like this region? So they can play foosball? You're very naive if you can see a few stupid startups, a few lazy execs, and think you've captured the essence of Silicon Valley.
I'm surprised you can live in Silicon Valley and still not understand the massive contribution we make. Too bad for you. Maybe someday you'll get a chance to see the upside of our region.
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I have been saying it for years
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Government could make a profit?
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Re: Government could make a profit?
I think you are a bit over-optimistic here. If there were money to be made, venture capitalists would be stepping up to the plate. Let the market correct itself. It will be painful, but we'll get through it. More government intervention will only make things worse.
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Re: Re: Government could make a profit?
Yes and no. First, it wouldn't be venture capitalists buying, as venture capitalist focus on investing in startups. I could see private equity and hedge funds stepping in, and I would bet that some are buying on the margins right now. But, the issue is that with everything up in the air, it's not clear what the value of what is -- and that may cause the whole market to freeze up before it's really possible to buy up those assets. Letting everything fail, when a little liquidity could solve things isn't a good option.
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Re: Re: Government could make a profit?
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Look to the long term
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There is one thing that caused this problem
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Re: There is one thing that caused this problem
SOUNDBITE SUMMARIES
Investors being suckered into deals that they didn't understand because the soundbites drew them in.
It could be argued that those investors were "greedy". Personally I'd argue they were blistfully optimistic. Most weren't in it for the big payout, they were in it for the comfortable retirement.
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WASSUP $$$$
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2.) Get back to the gold standard.
3.) Kill all international bankers.
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Fuzzy on the profits
From what I can tell, these firms that are holding the distressed assets can't sell them for any value high enough to prevent their own collapse (due to leveraging I'd imagine), so how can this be profitable for taxpayers to buy these assets at a value that can save the firms?
Secondarily, unless I am wholly mistaken - we'll have to borrow the money for the bailout from overseas, at interest rates high enough to make the "profit" equation even worse.
Something is fundamentally wrong when a country needs a loan to cover its private institutions' bad loans. This culture of debt is getting ridiculous.
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You lost me at
Let me see, Paulson pulls this figure out of his ass, lack of transparency, multiple CDOs with the SAME ASSETS. Everything was hunky dory a week ago now we need a this thing passed with no debate, like Iraq or the Patriot Act. Sure, lets just cut them a check and hope they won't screw us again?
It's pretty simple actually; deregulation allowed investment banks to fraudulently sell financial instruments whose sole purpose was to obfuscate the risk. The instruments would only become toxic if the the already questionable value dropped, or if investors got wise to the scam. What goes up must come down, cliche yes, but it would certainly help if the investment bankers stop pretending not to known this concept.
While I kind of understand the lack of will of assigning blame, especially since most of the deregulating makes it quite futile. That still doesn't remove the need for oversight and transparency. While not assign direct blame, the details should be uncovered so blame will be apparent.
To me this is no different then someone taking a Yugo, and attempting to put a Ferrari body on it and sell as such. Yea in the real world no one would be able to get away with it, but in the finance world where you have use vague identifiers like "instruments" to describe the SCAMorithm that a physicist/mathematician created it becomes very difficult to know that's Ferrai is just a shell on a cheap platform.
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Online Marketing
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We, along with this generation, have decided to hold back and hope that someone will take the torch and run.
The sad thing is, Gen. Y isn't scared of this.
Number 1: They don't care.
Number 2: This is something they look forward to: The collapse of a system they don't believe in. The collapse of a system that neither care nor wants them.
Number 3: Whether they understand it or not--and this article does a very good job of explaining it--they don't care.
And I for one don't blame them.
Yes, they are privileged but who put them there?
Everyone says stand up but no one is. No one is saying how to stand up.
Walk around the White House with signs?--that's not going to do anything.
Write a letter to your congressman--that's certainly not going to do anything. That was already done by high standing academics in the financial field.
We're coming to a crossroads in our lives not just our economy and nation. We're coming to a crossroads in our livelihood.
This is scary but it's time is due.
Did we really think it wouldn't happen?...
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Re:
I didn't understand the value of Gen-Y until I learned that truly great companies were actively seeking them out and fast-tracking them for key positions, above GenX. Being lucky enough to be in one of these positions, I saw how things happen at a higher level. In a meeting with someone, I was shown Christmas Cards hand signed from quite obvious competitors. Your Gen-X family members and colleagues don't care. A few months ago I had a discussion with a PHd Boomer, who was in charge of creating fancy standards for a well known standards body. He was in China in the time, (Expensive call) and we shared many thoughts and ambitions. This was months ago and I recollect him saying, quite bluntly, that "Gen-X sold us out". He continued to share how things didn't work and how Gen-X made new things to fit their mold. I could see congruences-- they didn't care as long as they drove the $80k car and had the house on the lake. Things were fine for them, but they failed to see the longterm picture.
So don't give up. I've come to learn that Gen-X is a thorn in Gen-Y's side. Gen-Y understands, embraces, and pushes forward technology and adoption where Gen-X doesn't quite get the technology most of the time. Gen-X is going to be lurking in the background, somewhat mad of your discontent of current things, and your willingness to shoot an email off to the CEO of the company to ask for advice will piss them off. They will feel a sense of entitlement and need to put you back in line.
As you enter the workforce, know that there will be days, months, even years where you may need to revert to old college days of eating Ramen to get us out of the mess of today which was created with easy money without a focused effort for return on profit. But you can do it. Just know GenX doesn't necessarily hate you, but they want you to prove yourself.
I've provided a link below from Harvard Business Review. I invite you to listen to 5:00 forward. Even Paul Michaelman doesn't seem to like you. Odd.
http://traffic.libsyn.com/hbsp2/HB_IdeaCast_Episode_95-Gen_X_Future.mp3
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Derivatives
Also would love to see someone detail the specific laws that added up to the deregulation mess that enabled this fiasco. Let's create a list of the protections that used to be in place, identify the laws used to eliminate them, and then make reinstatement of those rules among the quid pro quos for ultimately passing the son of splurge.
And wouldn't that be the ultimate irony - the effort to "modernize" regulation of the financial services industry that everybody is calling for essentially reinstates the former regulations that helped make the US the envy of capital markets around the world?
Thanks again!
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Re: Derivatives
Maybe someone can shed light on this subject.
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Good article
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Economic Ideas
Free markets and private ownership should not be confused the basic banking model which is to borrow long and lend short term. After the bank failures of 1893-1907, it was found to be in the public interest to have a built in bailout facility in the form of the Federal Reserve system. We crossed that intellectual milestone in 1914, so forget about calling this a bailout. The banking system is based on the concept of bailout, at least as to liquidity. Most banks in the world include the investment banking function, but after 1934, the US chose to split the commercial and investment functions. The inevitable interaction between financial masses has been pulling these functions back together ever since. The final tectonic correction occurred with the demise or absorption of the big 5 back into the banking system over these last several weeks. The uneven oversight and deregulation over 70 years, seems certain to have ended with the reunification of banks and investment banks under the stricter bank regulatory system. In other words we might have been better off with a unified or universal banking system with one set of regulations over that seven decade period. The housing industry would never have been as big as it became in the 1950's without the separate savings and loan banking system, nor would the S& L's have to have been reabsorbed into the banking system in the late 1980's through the RTC, nor would collateralized debt obligations (CDO) or collateral debt securities (CDS) been as big a factor had they been under direct bank regulation. On the other hand neither would economic growth have been as spectacular over the last several decades. Real houses have been built, and will take pressure off the cost of occupancy in the coming years.
Freddie and Fannie have shown what pure socialism means in the long run: inefficiency, cronyism, corruption, looting, political protectionism, hoarding of capital,and incestuous political contributions. The lesson is that private ownership suffers consequences of real moral hazard for bad decisions as do taxpayers. Another lesson is that professional management runs an organization for their benefit, not the interests of shareholders or the taxpayer. It is up to the directors to protect capital and not abrogate authority to professional management. Politicians are inherently incapable of effective management of assets, which is why the FED is a separate institution.
The securitizing of debt obligations is an innovation that is not dead, it just needs the referees and rules to catch up.
The need now is to park the long term assets in a place that will allow them to mature. Accounting losses have run ahead of real economic losses because of well intentioned but flawed accounting rules. However, if banks have to take accounting losses or are forced into premature losses through liquidation sales, the amount of capital in the banks will shrink and real economic losses will be a self full filling policy of economic destruction. The best thing to do is put these Troubled Assets into the social security trust fund, where they will be the first real assets committed to funding the extant obligation. For these assets it will not take future tax revenue, where there are only 2 tax paying workers for every recipient, to pay part of those obligations.
The next thing to do is have the government buy newly issued stock in banks and pass them through to every citizen. This will recapitalize the banks, and people that need cash can sell the stock. Then the banks will be able to loan again with a larger capital base.
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Re: Economic Ideas
So as we are blessed to have a week to logically evaluate changes in our living environment, and events that led us to this point, I remain quite curious of how CODs and CDSs will be handled going forward. Is this a system we want to continue to support, or do we change from this point forward?
I, along with you, disagree with the socialistic position of Freddie and Fannie. Unfortunately, they are necessary evils that we can't make disappear overnight. But I remain confused. Are you proposing a new government agency, a parking lot, if you will, to place CDOs and CDSs like what was done to pay for the Vietnam war with Freddie and Fannie?
When we consider the size of failures within Freddie, Fannie, AIG, Goldman bailouts, I remain skeptical. What are the fundamentals of these companies that were able to change from incredible profitability, to bankrupt with billions in debt seemingly overnight? Are we facing another Enron? These issues of supposedly came from nowhere? This all seems quite interesting.
Another question I have is "Who are the beneficiaries of the $700B?" The Treasury department says that $700B was a "real big number" that they picked out of the air. As for beneficiaries to this bailout, to this point, no companies are named; surely someone is buying something from someone. Is the omission deliberate? From my side, JPM or CIT should be completely out of this buyout. It will be bad for considering their recent buying spree.
So does this bill merely recapitalize the credit market. If it is. Yikes.
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Bubbles
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Bubbles, sorry to repeat...
By very careful management of bank and finance firm mergers, they were able to keep things propped up and did not take too much from taxpayers.
A thorny problem was touched on above. How far do real estate prices have to fall to get to fair value? Well, that gets worked out over a long period. Selling into price troughs or buying on false spikes is risky, so a lot of Japanese people just sat tight. Business fundamentals were ok, and they had a trade surplus. Speculators lost big because they were highly leveraged, but the little guy was usually able to save himself. That might give some clues as to what America should do. Sort out the assets and give workouts first to people who need only a little help.. a little support for them will go a long way, and it can be done for many people. Then keep doling out money to those who need it least....
What is left is a hard core of speculators. They wait the longest, if they can, and go bankrupt if they can't. Oh well. Problem solved.
It is a terrible setback to lose 30% of the value of your biggest asset, but people can recover. Speculators, as one might imagine, recover best anyway. Very few people in Japan went to jail, but many many more were disgraced at having been so stupid to speculate wildly. Public humiliation was ... common. I would call the outcome good and, although not perfectly so, fair.
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Capital is the seedcorn of humanity... really it is so for all of us. In these speculative blowouts like the one now and the one in 1987 and the one in 1990 or so in Japan, vast amounts of capital just disappear. This is a terrible loss. Think of all the collateral that cant be used now to fund a young person's dream business or education. Retirements are just consumption, but there is a lot of growth that is going down the tubes. R and D will be cut. Even charitable giving. Municipal projects. It is not just the actual loss right now of someone's savings that is the real problem. All of the lending of that capital disappears too... forever.
etc.
As I said before, it took Japan a decade or more to work that out. Bitterness and grim perseverance... A lot of broken promises. I do not think that a typical American person will be able to bear it well.
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Re:
Capital is one thing. Greed is entirely something else.
When a company purposely takes risky actions, when there is no need to, at the expense of its employees or consumers, it's greed. This is just one reason millions are currently struggling to maintain the "American Dream".
One of the significant purposes for a company to sell shares is to allow individuals to take a chance on a future investment. These monies are where R&D come from, not by taking advantage with over-inflated priced consumer goods.
I boil economics down to the cost of a loaf of bread. If it's more than $1, something's very wrong with our economy.
Consumers willing to pay more than $1 for a loaf of bread is vastly different than forcing the price upon the consumer (and this doesn't even take into account price fixing, which we know is going on).
When was the last time you saw a loaf of bread for $1?
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What happens if they DO spend $700Billion?
As far as I am aware the US National Debt is currently the highest it has ever been, thanks in a large part to a costly war in which Trillions have gone unaccounted (despite there being checks in place)
Adding nearly another trillion instantly to the national debt cannot be a good thing for the economy surely?
And lets face it - by the time they've finished it will be over a trillion. In 6 months time it will be "we just need another $300billion to end this - do you really want to waste the 700 you already spent?" Honestly does anyone think it will be otherwise - they run the economy like players with a habit
Either way - take $700billion out of the economy now and that's a LOT of money the tax payer doesn't get to spend anymore. Allowing for roughly 150,000,000 taxpayers (50% of the population) that's roughly $5,000 each that will be required in taxes
That's $5,000 per taxpayer that doesn't get spent on items, services, consumables etc etc. That's a lot of money suddenly not being spent and ceasing to move. As far as I was aware this type of thing is one of the primary causes of inflation
Now given that the whole thing was cobbled together by Paulson and co in a week or so, and that this is a guy who has already been on camera at regular intervals over the last 12 months, basically stating "the worst is over" (the last time he stated this was the day before Lehman Brothers collapsed), given that he already looks like a firm believer in cronyism for the AIG bailout. How rock solid bloody certain are people that this is not just going to work, but that it won't actually make things worse?
Are the checks in place really likely to be effective? Like I already stated they had checks in place for the Iraq war fund and they can't account for 3.5 trillion of it last time I looked (OK it's probably not all gone into private hands but even 10% of that figure would be appalling)
Yes move fast, but carefully and intelligently - you're in dangerous waters and the first ship on the horizon might just be manned by pirates
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Re: What happens if they DO spend $700Billion?
The $700B would not be "spent" or "taken out of the economy" and the government will not have to increase the national debt or take up a collection from taxpayers to finance the program.
If done correctly, the federal funds disbursed would be used to purchase distressed assets at fair value so that the holders of those assets can have currency to go about their business. Those who sell these assets to the government will have already incurred their losses, and are not being "bailed out" since they are not being compensated for the losses. They just can't sell the assets on the open market for anything close to fair value because of panic and lack of liquidity.
Here's a simple analogy: the carnival just left town but you have a pocket full of ride tickets that you spent $1.4 Trillion to buy. Lucky for you, Uncle Sam will buy your tickets for 50 cents on the dollar since he can wait until next summer for the carnival to roll back into town.
Housing price inflation was the carnival, mortgage backed securities are the ride tickets, and the capital markets are afraid the carnival won't come back next year. Let Uncle Sam buy the tickets.
EG
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Re: Re: What happens if they DO spend $700Billion?
I foresee this will be the situation for quite some time so the money is not going to move for the foreseeable future which will only help slow the economy in areas unrelated to housing
Sorry if this seems ignorant but I genuinely don't get how this isn't a bailout - If I buy broken stock that no one will take off me and the government steps in to help I'd consider that a bailout - regardless of the transfer of assets. I just walk away thanking my lucky stars and go on to buy more risky assets knowing I can't lose as GoverSchmuck will buy them if they fail - OK I still lose a little but my risk is reduced while my possible reward will still be as high
Who sets the fair price? Are these the same people who decided that the prices Haliburton charge in Iraq are 'fair'?
I can see your analogy but at the moment no one in the market that I am aware of has anything but a finger in the air guess at which assets are totally dead and which are OK, sorting this out will take a lot of time and the speed of this deal excludes this, meaning that the government is likely to buy a lot of duff assets (an unknown number of duff assets - this isn't blind panic in the markets, its there for a reason)
A LOT of these assets are dead - people have defaulted on their mortgages and loans in record numbers, if inflation rises this number is only going to rise. Yes the government owns the homes if they buy the mortgages but the house prices are now lower than they were, meaning they are buying into negative equity. The costs involved in managing and selling on of repossessed homes is high (why do you think banks like to try to 'help' to stop it happening? They make more money if you pay your mortgage) so there will be more losses there, and that's without the additional drop in price deserted homes are usually subject to
What happens if next time the carnival comes to town the rides are only 40cents and half of them are no longer there?
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Re: Re: Re: What happens if they DO spend $700Billion?
If you are investing for the long term (as the US government implicitly is) it does not matter if some of the assets in your portfolio are not liquid, i.e. immediately convertible to cash. Eventually, when economic conditions improve and when the underlying value of the assets (based on the borrowers' ability to repay) can be determined, they will become liquid again.
Having these illiquid assets held in Uncle Sam's balance sheet, rather than the balance sheets of thousands of investors, actually increases liquidity in the financial system.
The assets are not "dead." Housing has real economic value, and claims on borrowers' income (i.e. "loans") also have real economic value. Speculators overbid and overpaid for these assets and now nobody wants to touch them. The government is the only entity with the resources and the patience to sort out the fair value and wait out the markets.
Fair value can be determined by textbook financial formulas -- present value of future cash flows, discounted for risk -- and by the restoration of stable markets. I agree that this would be a bailout if investors are compensated for more than fair value.
The only scenario in which both homes and loans would be worthless is one in which the entire nation is bankrupt, which is pretty unlikely, but less unlikely if this credit crisis is not resolved.
EG
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Re: Re: Re: Re: What happens if they DO spend $700Billion?
Yes I fully expect to have the same done back to me (and kind of hope so actually)
Fair point re liquidity though
I still worry that the value of the homes will be a lot less by the time sale comes around, you are right housing does have real economic value, but overall values have dropped a lot lately and the houses concerned are not shrinkwrapable items
A lot of these houses are already having problems getting shifted, the presence of empty houses lowers the overall values in the area, thereby lowering the concerned properties values even further by comparison. Add to this the human and natural factors - green pools, raccoon infestations, deterioration etc do not sell homes and strippers removing the pipes and faucets is going to devalue them further
Same goes for loans - tracking down the defaulters is highly costly which again reduces the value of the assets
I do believe the government should be assisting, but at the moment it seems a bit of a shotgun approach to what should be a little more surgical - its also the top down relief of pressure which feels morally wrong. Are they even addressing the right areas? The present problem was not caused by lack of liquidity at the top - that's actually a symptom in my opinion. Something else caused people to default on their mortgages in the first place sparking off this problem - just a thought
There seem to be a lot of people especially at the very top of the pile running around with phrases like "everybody knows if we don't do this...". Strikes me that nobody knows what would happen either way (especially since as previously mentioned a lot of these same people went on the record several times in the recent past stating that there was no problem)
Where do all the "let the market sort it out" people run to when the going gets bad?
In summary, something just feels instinctively wrong about this one and based on recent past performance I'm just waiting to find out what the catch is
Thanks for you replies though - I really hope for all our sakes you are right and I am horribly wrong!
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Re: Re: Re: Re: What happens if they DO spend $700Billion?
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Question
I say quit pointing fingers and do what we sent them there to do. Let's fix it and move on & learn from it.
Life goes in cycles-deal with it.
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For those that asked about deregulation
http://www.bloomberg.com/apps/news?pid=20601039&sid=a6M1QA55PB9Y&refer=home
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financial crisis
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The whole shebang
As someone from another country (albeit one tied closely to the US economy), I have great faith in your collective ability to pull through this as you did with: the S&L debacle of the 80s; the dot.com bust; stagflation in the 70s; the interest rate crunch of the 80s; the staggering cost of (another) ruinous war in the 60s and 70s.
And those are just a few of the ones people my age muddled through.
Keep the faith, baby....
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Anyway, what I'm wondering is, where did banks get their loan-making power to begin with? Because nowhere in written law are they given the power to create money from nothing, which is essentially what they're doing when they create loans. They don't legally have that power, as it's not in the Constitution nor is it written anywhere else. So technically, all loans should be null and void, and the debts created by those loans also void. I read online about a guy who went to court against the banks about this, in Minnesota I think, and won. I'll see if I can find the story if any of you are interested.
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Credit Bubble?
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Mdme. Speaker
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The Gold Standard
I'll take on comment #65 by Lucretious "Get back to the gold standard."
The reason we ditched the gold standard is because it artificially pegged our economies against a precious metal that just happens to be buried in the crust of our planet. It has nothing to do with some usefulness or value that gold itself provides.
Let me put it this way: if you're starving in a depression, what would you rather have? A dollar's worth of bread, or a dollar's worth of gold? Bread will be scarce, and nobody will give a @#$ about gold, because you can't eat it.
When we had the Gold Standard, our economies money supply could not grow beyond the supply of gold. This meant that as efficiencies improved, capital accumulated, tools got better, workers became more productive, more infrastructure existed around the country, we COULD NOT increase the money supply because the supply of gold could never keep pace with the rapid human progress. Money is the grease in the economy, and the grease was in short supply. Artificial friction was the result, based on the scarcity of some totally unrelated mineral.
So we got what we call fiat money - money based on faith. The faith is roughly based on the economy's productivity, or the GDP of the nation. The money supply can grow or shrink, with the price of the currency dependent on the faith people have in its real value in terms of things produced or services rendered. Central banks grow or shrink money supply in various ways like reserve requirements on banks, or printing at the mint.
You'll observe that currently, the US dollar is not held in as high esteem as it was...um...not getting political, let's just say pre 2000.
Relying on the gold standard is a terrible idea. It's as artificial as fiat, but locked to limited growth, and unlike fiat, not linked to real productivity and GDP.
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everyone out
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GET OUT OF IRAQ
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However, I think we are to quick to give us common folk the pass. I think there is a bit of a riot mentality that happens in open markets. The concept of 'Heck if it has a .com attached to it I will throw my money at it, because its value will go up since everyone else is doing the same', is the biggest part of the problem. I think we got to see the same thing happen in housing markets recently... And obviously those that that have the most money and partake in this activity cause more of an impact.
Unfortunately by the time something initiates a "correction" the damage is so far reaching it can no longer be traced back.
I do think that banks should know better though... and I also believe that of that proposed $700 billion the administration would find ways to eat up $300 billion in the managing and consulting related to using up the other 400.
What concerns me most is less about the current crisis, and more about the fundamentals of monetary system. I think the more we see banks consolidated, the less we will see exchanges between banks, which may have an exponential effect to money multiplication. Also, will folks realize what money really is...
Anyways, I feel bad for how we have perverted Friedman's concepts into bad policy. I do think some folks should be indited+convicted for adding to the problem with others' money. I also think this could have been avoided if we learned from the "asian flu" and its roots in inflated home values and mortgage speculation.
Last but not least... politics. This stuff is messed up. From the last debate it seemed obvious to me who had the best grip on the subject, but dangling by one finger is not exactly a grip. The country my grandfolks died fighting for is dead, bought and sold with a big frito lay sticker on the side. If any of you are real patriots I recommend learning how to survive and buy a rifle. It is time for this sold out govt to remember who's country this is.
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Distressed Assets?
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Distressed Assets?
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can we say inflation?
See the movie Money As Debt. The real problem is the Federal Reserve and other central banks. why does the government take loans and pay interest on its currency in the form of income taxes when it could just print the money itself with no interest?
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Cited for a project
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