Can’t Grasp Credit Crisis? Join the Club - Tilted Forum Project Discussion Community

Cynthetiq · 03-20-2008, 07:31 PM

Quote:

View: Can’t Grasp Credit Crisis? Join the Club
Source: NYTimes.com
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Can’t Grasp Credit Crisis? Join the Club
March 19, 2008
Economic Scene
Can’t Grasp Credit Crisis? Join the Club
By DAVID LEONHARDT
Raise your hand if you don’t quite understand this whole financial crisis.

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages.

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.

So let’s go back to the beginning of the boom.

It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage?

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.

Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week.

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

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well.

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse.

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence.

“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”

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.

snowy · 03-20-2008, 07:39 PM

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.

Willravel · 03-20-2008, 08:02 PM

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.

shesus · 03-20-2008, 08:39 PM

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.

Hektore · 03-20-2008, 08:40 PM

Quote:

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

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:

Quote:

Originally Posted by Paul Krugman

What I don't know is how serious the real consequences of the financial-market stuff ends up being on Main Street. If all of the fancy financial instruments that have been so popular these past couple of decades sort of roll over, it's still not entirely clear to me how that ends up affecting the real economy. Will a lot of business investment just go on unaffected because companies can pay for it out of retained earnings or by borrowing with good old bank loans? How much in the end does the ability of consumers to keep spending get affected by what's going on in fairly abstruse financial markets? So I'm not quite sure how this works. Maybe that's a reason for hope. Maybe it'll turn out that all this Wall Street stuff is just less important than we think it is.

Blah, I get so frustrated when I really don't understand something, I'm a terrible novice in general.

Willravel · 03-20-2008, 08:41 PM

Quote:

Originally Posted by shesus

I heard that Hyundai is going to stop selling cars here because it isn't worth it.

The feeling is mutual.

Baraka_Guru · 03-20-2008, 08:53 PM

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.

Hain · 03-21-2008, 02:22 AM

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.

Sion · 03-21-2008, 02:37 AM

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.

roachboy · 03-21-2008, 03:36 AM

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.

Baraka_Guru · 03-21-2008, 07:00 AM

Quote:

Originally Posted by Augi

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.

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

Manuel Hong · 03-21-2008, 07:07 AM

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.

Cynthetiq · 03-21-2008, 07:34 AM

Quote:

Originally Posted by Manuel Hong

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.

Willravel · 03-21-2008, 07:36 AM

Cynth, owing money can be interpreted as being indentured.

Manuel Hong · 03-21-2008, 07:44 AM

Quote:

Originally Posted by willravel

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.

Hain · 03-21-2008, 07:46 AM

Quote:

Originally Posted by Baraka_Guru

It isn't isolated to America.

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

snowy · 03-21-2008, 07:52 AM

Quote:

Originally Posted by Baraka_Guru

It isn't isolated to America.

NPR Morning Edition had a piece on this morning about the effects of the credit crisis in the UK:

Quote:

In Europe, the financial markets are laying off employees, homeowners are worried that house prices might start to fall, and businesses are concerned by a potential recession. Most observers blame financial insecurity in the U.S. for the downturn.

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

Quote:

After watching their company get sold for a song this week, Bear Stearns employees can probably be forgiven for engaging in a little black humor.

In that vein, the firm's economists released a report Wednesday titled, "Other than that, Mrs. Lincoln, how did you like the play?" The report partially blames the collapse of the 85-year-old investment bank on the Federal Reserve Board, saying the Fed played a big role in creating the housing bubble and waiting too long to react to the current problems.

But the reasons behind Bear Stearns' demise go well beyond the timeliness of the Fed's actions — or inactions.

Even on ultra-competitive Wall Street, Bear Stearns stood out. Money wasn't just important, it was pretty much all that mattered.

Small Businesses Squeezed By Credit Crunch:
http://www.npr.org/templates/story/s...oryId=88690005

Quote:

The collapse of Bear Stearns has become a symbol of the credit crunch. But the effects of higher borrowing costs are being felt far beyond Wall Street. Across the country, smaller businesses are also struggling to get loans.

Addressing Listeners' Economic Concerns:

Quote:

Keeping up with the fast pace of recent economic news and understanding the ramifications of this week's developments is no easy task. Laurence Meyer, vice chairman of Macroeconomic Advisors, talks with Michele Norris, Robert Siegel and Adam Davidson.

http://www.npr.org/templates/story/s...oryId=88689999

Cynthetiq · 03-21-2008, 07:53 AM

Quote:

Originally Posted by willravel

Cynth, owing money can be interpreted as being indentured.

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.

Quote:

Originally Posted by Manuel Hong

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.

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.

Tully Mars · 03-21-2008, 07:58 AM

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.

Manuel Hong · 03-21-2008, 08:12 AM

[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.

Cynthetiq · 03-21-2008, 08:19 AM

Quote:

Originally Posted by Manuel Hong

Quote:

Originally Posted by 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.

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"

Shauk · 03-21-2008, 08:22 AM

Quote:

Originally Posted by willravel

The feeling is mutual.

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

Baraka_Guru · 03-21-2008, 08:40 AM

Quote:

Originally Posted by Augi

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

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.

Manuel Hong · 03-21-2008, 08:52 AM

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

Baraka_Guru · 03-21-2008, 08:54 AM

Quote:

Originally Posted by Manuel Hong

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.

Manuel Hong · 03-21-2008, 08:57 AM

Quote:

Originally Posted by Baraka_Guru

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

Hmm... Explain.

Baraka_Guru · 03-21-2008, 09:04 AM

Quote:

Originally Posted by Manuel Hong

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.

Cynthetiq · 03-21-2008, 10:22 AM

Quote:

Originally Posted by Baraka_Guru

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?

flstf · 03-21-2008, 10:48 AM

Quote:

Originally Posted by Cynthetiq

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

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.

Baraka_Guru · 03-21-2008, 10:57 AM

Quote:

Originally Posted by Cynthetiq

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 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.

Cynthetiq · 03-21-2008, 11:02 AM

Quote:

Originally Posted by Baraka_Guru

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.

Baraka_Guru · 03-21-2008, 11:15 AM

Quote:

Originally Posted by Cynthetiq

Ah, gotcha, so the municipal bond investments.

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

roachboy · 03-21-2008, 11:22 AM

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:

Quote:

"I do not recall a decade free of surges in angst about the mounting debt of households and businesses," he wrote. "Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress."

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

Baraka_Guru · 03-21-2008, 11:25 AM

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.

roachboy · 03-21-2008, 11:27 AM

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.

Baraka_Guru · 03-21-2008, 11:36 AM

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?

yellowmac · 03-22-2008, 08:26 AM

Quote:

Originally Posted by Baraka_Guru

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.

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.

Seaver · 03-22-2008, 09:17 AM

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).

Tully Mars · 03-22-2008, 09:34 AM

Quote:

Originally Posted by yellowmac

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.

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.

Hektore · 03-22-2008, 10:00 AM

Quote:

Originally Posted by Tully Mars

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.

View Poll Results: Do you understand how the current credit crisis happened?
Yes.	24	64.86%
No.	10	27.03%
I don't care.	3	8.11%
Voters: 37. You may not vote on this poll

03-20-2008, 07:39 PM	#2 (permalink)
snowy Kick Ass Kunoichi Location: Oregon	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. __________________ If I am not better, at least I am different. --Jean-Jacques Rousseau

03-20-2008, 08:39 PM	#4 (permalink)
shesus Fancy Location: Chicago	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. __________________ Whatever did happen to your soul? I heard you sold it Choose Heaven for the weather and Hell for the company

03-20-2008, 08:53 PM	#7 (permalink)
Baraka_Guru warrior bodhisattva Super Moderator Location: East-central Canada	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. __________________ Knowing that death is certain and that the time of death is uncertain, what's the most important thing? —Bhikkhuni Pema Chödrön Humankind cannot bear very much reality. —From "Burnt Norton," Four Quartets (1936), T. S. Eliot

03-21-2008, 02:37 AM	#9 (permalink)
Sion Dumb all over...a little ugly on the side Location: In the room where the giant fire puffer works, and the torture never stops.	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. __________________ He's the best, of course, of all the worst. Some wrong been done, he done it first. -fz I jus' want ta thank you...falettinme...be mice elf...agin...

03-20-2008, 08:02 PM	#3 (permalink)
Willravel ... a sort of licensed troubleshooter.	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.

03-21-2008, 02:22 AM	#8 (permalink)
Hain has a plan Location: middle of Whywouldanyonebethere	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.

03-21-2008, 03:36 AM	#10 (permalink)
roachboy Super Moderator Location: essex ma	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. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-21-2008, 07:07 AM	#12 (permalink)
Manuel Hong Addict Location: Land of the puny, wimpy states	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. __________________ Believe nothing, even if I tell it to you, unless it meets with your own good common sense and experience. - Siddhartha Gautama (The Buddha)

03-21-2008, 07:36 AM	#14 (permalink)
Willravel ... a sort of licensed troubleshooter.	Cynth, owing money can be interpreted as being indentured.

03-21-2008, 07:58 AM	#19 (permalink)
Tully Mars Living in a Warmer Insanity Super Moderator Location: Yucatan, Mexico	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. __________________ I used to drink to drown my sorrows, but the damned things have learned how to swim- Frida Kahlo Vice President Starkizzer Fan Club

03-21-2008, 08:12 AM	#20 (permalink)
Manuel Hong Addict Location: Land of the puny, wimpy states	[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. __________________ Believe nothing, even if I tell it to you, unless it meets with your own good common sense and experience. - Siddhartha Gautama (The Buddha)

03-21-2008, 08:52 AM	#24 (permalink)
Manuel Hong Addict Location: Land of the puny, wimpy states	Every dollar inherently has debt attached to it. It's the way the system was designed __________________ Believe nothing, even if I tell it to you, unless it meets with your own good common sense and experience. - Siddhartha Gautama (The Buddha)

03-21-2008, 11:25 AM	#34 (permalink)
Baraka_Guru warrior bodhisattva Super Moderator Location: East-central Canada	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. __________________ Knowing that death is certain and that the time of death is uncertain, what's the most important thing? —Bhikkhuni Pema Chödrön Humankind cannot bear very much reality. —From "Burnt Norton," Four Quartets (1936), T. S. Eliot

03-21-2008, 11:27 AM	#35 (permalink)
roachboy Super Moderator Location: essex ma	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. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-21-2008, 11:36 AM	#36 (permalink)
Baraka_Guru warrior bodhisattva Super Moderator Location: East-central Canada	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? __________________ Knowing that death is certain and that the time of death is uncertain, what's the most important thing? —Bhikkhuni Pema Chödrön Humankind cannot bear very much reality. —From "Burnt Norton," Four Quartets (1936), T. S. Eliot

03-22-2008, 09:17 AM	#38 (permalink)
Seaver Junkie Location: Fort Worth, TX	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). __________________ "Smite the rocks with the rod of knowledge, and fountains of unstinted wealth will gush forth." - Ashbel Smith as he laid the first cornerstone of the University of Texas