Can’t Grasp Credit Crisis? Join the Club
 

Do you understand what the whole financial crisis is and just what happened to create this mess?

I've been reading and re-reading this article.

All that I can see is irresponsible behavior by all parties involved starting with the borrower all the way to investment banker. Everyone kept letting it ride and it was a longshot to begin with. If the roulette wheel is always hitting black numbers, betting on black is a good 1:1 payout, basically doubling your money. But from time to time red comes up, and sometimes even green. A run will always end.

I understand portions of the way that it unfolded but I cannot understand how it all was allowed to happen on a macro level. I don't get that part. I can see the parts, I understand that, but as the puzzle gets joined together, I get lost suddenly.

I listen to NPR on a daily basis, read the NYTimes, and generally stay pretty up on what's going on in the world. All Things Considered had a really great piece tonight regarding the collapse of Bear Stearns, and explaining how all of this happened. I'm really glad I caught it.

The problem is that people in the United States of America, in general, have been writing checks they can't cover--in all senses. Business rely on credit and small loans to pay day-to-day expenses, families rack up credit card debt by the thousands and buy homes they can't afford, and big banks invest in potentially risky mortgages without hedging their bets. Add rising oil costs, inflation, and the sinking dollar--and bam.

I'm pretty up on it. I'd say that I get about 80% of it, basically the stuff I need to know.

When I was a boy, my parents sat me down and explained the credit system to me. I thought the world had gone mad. People spending money that they don't have, only to pay back even more to those that they borrowed from? And banks only need to keep like 10% of the money put into them?!

I still think it's the biggest problem with the whole monitory system and economy. Being able to spend that which you do not have is enabling unrealistic budgets and is creating indentured servitude and impossible-to-break dependence. My grandfather taught me to always live below my means and I think it's the best advice I've ever been given. I'm sorry that everyone else wasn't provided with such a powerful lesson.

Cyn, I'm not a financial expert. I get confused with Wall Street and stocks and investments.

I understand the problem well enough. I can see that the economy is going to hell in a hand basket. It's already started with all the issues snowy mentioned.

Some side issues:
I heard that Hyundai is going to stop selling cars here because it isn't worth it.
I saw on the ticker earlier that Borders is possibly going up for sale and Barnes and Nobles is losing money.
A bank went under and Chase bought it up.

I think that these single issues can help get a bigger picture.

This is certainly going to be a huge election issue.

I was just talking with my dad about this very thing right here. I don't understand how someone could think the rise in home prices was real value and not bullshit. If someone said to me, we bought this house for $75,000 and put $15,000 in renovations into and now we're selling it for $400,000, I would be saying 'I don't care how nice southern California is, you're out of your damn mind wanting nearly half a million dollars for a 900 sq ft. house on less than 1/10th of an acre." Especially one worth $75,000 three months ago. You really thought the housing prices would stay up?

Worse than that, you really thought you could afford that 400k house on 60k a year? Worse still, you found a bank to give you the loan for that? With no down payment? Are they that stupid too? Maybe it's worse than all this, maybe they knew something I don't, and it really wasn't a bad bet at all. Is that the part I don't understand? People say 'well house prices have never fallen before so they can't possibly ever fall!' and I'm the dumb one because I have some objections?

And to top it all off, it's not like we can say, well, let the dumbasses rot, they did it to themselves because this has happened to the scale where that would hurt us all. Which is the really frustrating part, the people making bad decisions dragging down people who made far more reasonable choices. My only real hope lies in a quote from an article I read at Fortune.com:
Blah, I get so frustrated when I really don't understand something, I'm a terrible novice in general.

The feeling is mutual.

I understand it. Mostly.

It all comes down to consumer behavour. The American dream isn't for everyone.

Few people understand the credit lifetime cost of interest. What's the point in getting a good deal on anything when you end up paying twice as much for it when all is said and done?

Beyond basic necessities of living and work, if you can't afford to pay for it with cash, you probably don't need it. I'm guilty of falling into this trap, but I practice a lot of restraint. I know I have a low income and a high debt load. That's what I get for borrowing to earn a liberal arts degree so I can work in publishing. :thumbsup:

I have known about the housing bust from my boss when I worked in construction, but never saw the implications and results as laid out here. This frightens me a lot.

I think I will try to stay over here.

As I see it, the problem with Wall Street and the financial markets in general is plain old simple greed. Not satisfied with making 10% or 15% earnings on their money, which should be considered a good return on any investment, the people who REALLY run this country kept inventing more and more "investment vehicles" based less and less on actual performance and more and more on potential. Global financial markets have become a house of cards, a pyramid scheme of unimaginable size. And like any house of cards, it doesn't take much of a breeze to send it tumbling down. Like any pyramid scheme, eventually not enough money is coming in the bottom of the pyramid to keep it afloat.

it's not obvious that this financial crisis is so discrete...i was talking to a comrade a couple days ago who linked this back to the s&l mess under bush 1 and behind that to the twin deals of deregulation of banking under reagan--the dissolving of the separation between investment banking and mortgage debt in particular which, he said, is a terrible idea---and neoliberalism as an enabling ideology.

his claim is that no other banking system has allowed the separation of investment banking and mortgage debt to dissolve, that it has traditionally been understood as a very bad idea---that the reagan admin did this points to the role of neoliberalism as an enabling ideology (dont worry, be happy: markets always work, the invisible hand, while it grabs all it can, also helps Everybody).

if that's right, then this crisis is also the unravelling of the neoliberal experiment.

there is much within this that is murky to me, but it's the direction i am thinking in about this. in other words, i don't believe that the problems which are expressed through this are as self-contained as the ny times article argues they are. but at the same time, this is a kind of hypothesis so far as i am concerned. researching as the chance presents itself.

It isn't isolated to America.

UK housing market is 'overvalued'

U.K. Housing Market Was Worst Since 1992 in December

Housing market is facing a triple blow, warn experts

Credit crisis: the cracks are opening in UK's debt mountain

Perhaps I am a simpleton, but I see it all as another way for the Fed to call in loans and make more money. It keeps us enslaved.

Can you explain that a bit more?

by what I understand there, is that only a person who is a renter who has no credit cards and loans is not a slave.

Cynth, owing money can be interpreted as being indentured.

Thnaks Will,
That's how I see it. Funny thing is, Cynth hit the nail on the head for me: I'm a renter and I have no debt. I work for myself, make my own rules...
Still if I owned my own home (paid off), I would feel more comfortable. Nonetheless, I pay taxes (rassin'-frassin', dirty, no-good, rotton, stinky taxes), and IMO, that puts me where everyone else is: in debt.

:oogle:

Is it better that I know Spanish and am learning German?

NPR Morning Edition had a piece on this morning about the effects of the credit crisis in the UK:
http://www.npr.org/templates/story/s...oryId=88732648

Here are links to the All Things Considered pieces I mentioned in my previous post, for those that are interested; I found them very helpful in understanding what's going on.

Little Sympathy for Bear Stearns:
http://www.npr.org/templates/story/s...oryId=88690002
Small Businesses Squeezed By Credit Crunch:
http://www.npr.org/templates/story/s...oryId=88690005
Addressing Listeners' Economic Concerns:
http://www.npr.org/templates/story/s...oryId=88689999

i understand that, which is why I posed it as only a renter with no debt is not a slave.

i don't buy things on credit except things i truly cannot afford to pay cash for like house, car, education. the only thing left on the three is the house. Because there is a material benefit is the only reason i entered into such a deal. i ensured that i could maintain my monthly payments at a fixed rate for 30 years, whereas a renter I was guaranteed that it would go up with some regularity.

actually how can you make your own rules? as a landlord, I decide what can and cannot be in my renter's apartment. I specifically do not allow dogs, waterbeds and aquariums.

so it's the taxes that make you enslaved? again, this makes me understand then the only "free" people are children, who pay no rent, pay no taxes, they only are subject to the rules and regulations of their parents which revokes that "free" status.

I voted "don't understand" because I don't completely understand it. There's so many factors and how they interact is some what confusing.

I remember talking with my father about housing and credit a long time ago. He told me he bought his first two or three houses for cash. Said it wasn't uncommon years ago for people to save up and buy a house. He also talked about families only needed one income to survive.

I think these two factors, over time, have contributed to our current situation, IMO.

[QUOTE=Cynthetiq]

actually how can you make your own rules? as a landlord, I decide what can and cannot be in my renter's apartment. I specifically do not allow dogs, waterbeds and aquariums.
QUOTE]
Good point.
I meant making my own rules in reference to what I do with my time.

But fortunately, my landlord is really great. We pay a pretty high rent for a really nice house and it works out well. In some ways, better. Ultimately, I'm not the one responsible for repairs and property tax, and he's very accomodating.
It is true though, I would be in a far more stable position if I owned the house free and clear.

Back to the point, debt is debt, and so long as we are in debt, we don't really have control.

I do get your points, I pay for the property taxes and expenses incurred on the rental property, so I build that into my costs for renters.

but even with a free and clear property, I'd still pay taxes on the property including all the incidentals like sewer, water. so there's still some "debt" or cost I must be prepared to spend every year.

an interesting state of mind this "slave"

hey just cuz I hit you with my Tiburon.... :(

Maybe learn basic Cantonese and Mandarin?

* * * * *


I don't buy "debt = enslavement." For two reasons:

1) Much debt is self-imposed.

2) Blaming outside factors for your problems is counterproductive. Getting out of debt is possible if you plan for it. It is in your power.

*I admit, this doesn't apply to everyone. The impoverished are exceptions.

Every dollar inherently has debt attached to it.
It's the way the system was designed

It is a question of whether the debt is working for you or against you.

Hmm... Explain.

It was a passing reference to making money off of other people's debt versus paying other people for the privilege of the debt you carry. I hope one day to reverse my current "fortune" in this respect.

can you elaborate on that concept? I'm coming up short when reading it.

I bought a property with a 30 year mortgage. I rent it for a little more than it costs me in expenses. Is that what you are referring to in making money of other people's debt?

Not completely but I think this sort of thing could happen to almost any sought after commodity depending on how the companies loaning the money handle it. In this case we are talking about housing and mortgages. It makes sense to me that house prices and mortgages must be in line with the average house buyers' income and ability to make payments. This seems to have worked fairly well with conventional 10-20% down mortgages with payments about 25-30% of income.

As I understand it mortgage companies began offering zero down, subprime, ARMs, etc.. which allowed buyers to pay more than before and therefore sellers to ask higher prices. These unusual mortgages were bundled up and sold to investors as a safe high yield investment. This worked as long as house prices continued to rise and people could refinance before the payments reset to more than they could afford.

House buyers, house sellers and investors were doing just fine until prices started to fall. Then people who were unable to pay the higher reset mortgages were unable to refinance into a fixed rate affordable loan and began to default. As more people defaulted prices fell even more causing many more to default as the house prices fell below what they owed.

The investors holding these mortgages began to see their return diminished because of the number of defaults. This is where I get lost in this whole mess in trying to understand why the investors holding these mortgages can't just accept a lower return on their investment and be done with it. I don't quite understand how these holders of bad mortgages were able to leverage them to the point where they started to go belly up and cause a financial crisis.

Not exactly. Rent isn't debt; it's an expense. Even though you are making a net profit on your real estate, the bank (or other lender) is making money on your debt--the mortgage--through the interest expense you must pay on it.

Here's a comparison of what I mean:

Person A: Has a credit card balance of $1,000.
Person B: Has a government-issued bond worth $1,000, such as a Canada Savings Bond.

Person A is paying interest expense to the credit card company.
Person B is earning interest from the government.

The credit card company is earning an income on Person A's debt.
Person B is earning an income on the government's debt.

I want to be more like Person B, but, for now, I'm Person A.

Ah, gotcha, so the municipal bond investments.

There are also corporate bonds, and things such as mortgage-backed securities and preferred stocks.

but do you really think that this microeconomic perspective will help understand the current financial crisis?
it does not only consist in the effects of deregulation of banking, abandonment of oversight on mortgage loans, "risk management" etc.--it also has other dimensions--the crash of the dollar, for example---the spiking of energy prices/inflation--these seem of a different order/of different orders. then there's the impotence of the fed/nation-state level systems to manage this--it's almost like the united states is starting to experience the consequences of transnationalization in ways that it had previously been sheltered from, mostly because the us was the dominant player in the institutions that externalized many of these consequences via structural adjustment, etc..

i keep thinking that this is the limit of what in the states is called monetarism, but which everywhere else is neoliberalism, and that these are structural problems converging and not simply the result of a version of the "few bad apples" argument--you know, greed in banking, irresponsibility in borrowers--simply because the effect of these arguments is to abstract problems from the system level--you know, if it weren't for these "bad apples" things would be hunky dory--and i dont think that's true in this case.

maybe the problem is the entire ideology--and everything it has enabled--that you see in this statement from alan greenspan:

bit from this article in the washington post:
http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

roachboy, this is why I want to be extremely disciplined. No one should rely on government to make monetary or economic policy hunky dory. We need to protect ourselves on the family level.

maybe so, comrade, but is understanding the crisis and figuring out how best to avoid its consequences the same thing?

i'm fine either way--i happen to be thinking about this alot today, for some reason--but more as a structural matter.

It would help to understand the crisis, because some had even predicted it. We are in a long-cycle bear market. There is a reason why the likes of Warren Buffet didn't invest in the dot com bubble. These people understand long-term structures.

But what about the average person? Educate yourself. Don't be educated. I'm sure many people get their finance education and news via the media, ads, and brokerage websites. Scary. These parties are the most responsible for running the herd off into the gorge. They have done so in the past, and they will continue to do so.

We should teach finance throughout K-12. This is why the book isn't dead. Most of what I've learned beyond business finance in college was learned by reading books.

Don't have the time to read? Well, can you afford not to?

Exactly. I have heard that some states are mandating some sort of personal finance education into their high schools. Whether or not you agree with that, I think it's a step in the right direction, but I also think that parents have some degree of responsibility in teaching their kids the right things about personal finance. If personal financial literacy had been higher in America, we wouldn't have fallen victim into this crisis.

Credit crisis in short:

People want things now, but can not afford it now. Credit Card payments get behind schedule. Credit cards have rediculous %, people can't repay.

People want BIG house they can't afford, take risky variable rate mortgage to get BIG house now. Justify purchase because they think it's an investment that will pay off. Investment does increase in value, mortgage increases, people can't pay.

Mortgage company want BIG business now. People can't afford to pay mortgage, company invent variable rate mortgage to get people in BIG houses. People can't pay, company sucks the big one.

If you're confused, buy Dave Ramsey's book to help you in the future (or listen to him on the radio like me).

I agree schools should be teaching PF, I took it in HS. But in all reality I think parents should teach their kids about banking and financial matters. I know my father taught me from an early age about earning and spending money. His concept was pretty simply- spend less money then you earn.

I wish my parent would have taught me good money habits, unfortunately they don't know a whole lot about how to manage money and it's clear from their spending choices. Ultimately, I think that's what this all boils down to. A whole lot of parents(/people), while well intentioned, didn't make prudent financial decisions. When combined with the fact that lenders were making it easier for a bad choice to seem like a good one, you end up in the mess we're in now.

In short - yes, a money management/personal finance course sounds like great addition to public education.