[JohnnyTheA]

Okay my background is EE, CE, and CS... I don't know very much about finance except what they taught us in Eng School which was mostly about what optimizing processes... I don't understand anything about global markets, the fed reserve, banks... In talking to my parents (who can remember the Great Depression) they are really concerned about:

http://www.iht.com/articles/2008/09/...s/15lehman.php

Can someone who actually has a background in macro/global finance explain why everyone is concerned about a couple financial companies going under? Is it a "house-of-cards" situation? Nobody would be this concerned if this was John Deere. For some reason AIG, WaMu, and Lehman going under is something really scary to a lot of folks...

No Comprendo..

JTA

[apple007]

It's the Daddy State run amok. When individuals or firms know Uncle Sam will bail them out when times get rough -- whether it's a homeowner who skips buying flood insurance or a huge bank like Lehman -- they'll not only act recklessly, they'll inspire others to act recklessly. Once Uncle Sam bails out person or firm #1, it's hard to say no to #2 and #3, etc. Vicious cycle ensues.

Anyway, in a perverse way, it's sort of funny how this all came full circle so quickly. Not more than 2-3 years ago, liberals were bashing big banks for not giving enough loans to people with shaky credit. (Remember all the so-called "red-lining" "scandals"?) Now the same folks are bashing the banks for "causing" the current housing and foreclosure crises.

Gee, who would have thought giving huge loans to millions of people with bad credit and no money would be a bad idea?

[naren]

Originally Posted by apple007 Anyway, in a perverse way, it's sort of funny how this all came full circle so quickly. Not more than 2-3 years ago, liberals were bashing big banks for not giving enough loans to people with shaky credit. (Remember all the so-called "red-lining" "scandals"?) Now the same folks are bashing the banks for "causing" the current housing and foreclosure crises.

Your understanding of the causes behind the current financial crisis is lacking. Try researching the subprime mortgage crisis for a little more background on what we're going through.

[torifile]

apple, in the interest of getting some real answers to the question posed by Johnny, would you please edit out that flame-bait? I'm curious, too, about what's led up to the current crisis.

[colivigan]

The thing is, it's not just one or two reckless firms run amok. It's a whole bunch of big powerful financial houses in trouble. Alan Greenspan says it's the worst he's ever seen.

Lehmen is about to declare bankruptcy, because nobody will buy them. Merrill Lynch is selling in a panic to BoA. Things are getting pretty messy.

[apple007]

Originally Posted by naren Your understanding of the causes behind the current financial crisis is lacking. Try researching the subprime mortgage crisis for a little more background on what we're going through.

Not in the least. The subprimes made tons of cash when things were hot, and then it was "adios," just like anyone who sat through Econ 101 knew would happen. There's simply no such thing as a never-ending bull market, yet the subprimes (and now, even the majors like Lehman) are shocked, just shocked the gravy train stopped rolling.

Originally Posted by torifile apple, in the interest of getting some real answers to the question posed by Johnny, would you please edit out that flame-bait? I'm curious, too, about what's led up to the current crisis.

I suppose one man's pesky facts are another's flame bait. Either way, I won't be editing my earlier comments, which answered 'JTA's question in the most succinct manner possible ("Daddy State run amok ...").

Originally Posted by UncleJohn The thing is, it's not just one or two reckless firms run amok. It's a whole bunch of big powerful financial houses in trouble. Alan Greenspan says it's the worst he's ever seen. Lehmen is about to declare bankruptcy, because nobody will buy them. Merrill Lynch is selling in a panic to BoA. Things are getting pretty messy.

As soon as the first big bail-out happened a few months ago, it was only a matter of time before the dominos started to fall. But looking past the events of the past 1-2 years, this whole mess is a product of the overall financial recklessness with which the U.S. has been operating since the '60s. The federal government is in massive debt. Huge numbers of state and local governments are in massive debt. Entitlement programs like Social Security and Medicare aren't remotely close to fully-funded just a decade or two down the road. The average American is up to his ears in debt.

At some point, the music has to stop, and things will need to get uncomfortable. But I sense even *this* crisis won't force any real change -- just more paper debt, government-funded bail-outs, etc., etc.

[torifile]

I suppose one man's pesky facts are another's flame bait. Either way, I won't be editing my earlier comments, which answered 'JTA's question in the most succinct manner possible ("Daddy State run amok ...").

I suppose it was too much to ask.

Nevermind. I'm going to go back to avoiding posting in these threads and just read hoping that people who know the answer can post it before you wreck the place.

[apple007]

What is it you're waiting to hear, exactly? The current problem is that banks, large and small, allowed themselves to get massively undercapitalized (mostly by granting loans to risky borrowers), and as assets stopped performing (i.e., mortgage holders stopped paying), the banks get perilously close to not being able to fund withdrawals.

The next problem is that global credit is very tight right now, meaning foreign investors aren't jumping to bail out the idiot bankers who brought on this mess.

Approaching insolvency + really bad short-term U.S. real estate market outlook + lack of investors = big, big problem.

Long term, the best thing would be to just let these firms fail. But Americans just don't have the stomach for that.

[Luca]

apple007, I'm going to have to cautiously agree with torifile here... I welcome your input and analysis to the thread, but I think you're letting your emotional hatred for liberal politicians interfere with what you're really trying to say. I'm not saying that there aren't any liberals who can be blamed, at least in part, for the current financial crisis. But you seem to be tying this crisis to them because you simply dislike them.

Look, a lot of liberals like to blame Bush for absolutely everything that goes wrong as well. And that's just as short-sighted as what you're doing. If you really think it's all "the liberals'" fault, fine, but I think that's a gross oversimplification, and I agree that it's flamebait. So go ahead and speak your mind, but if you want to accuse the politicians from one party of causing problems, try to back it up with some facts.

[apple007]

Originally Posted by Luca apple007, I'm going to have to cautiously agree with torifile here... I welcome your input and analysis to the thread, but I think you're letting your emotional hatred for liberal politicians interfere with what you're really trying to say. I'm not saying that there aren't any liberals who can be blamed, at least in part, for the current financial crisis. But you seem to be tying this crisis to them because you simply dislike them. Look, a lot of liberals like to blame Bush for absolutely everything that goes wrong as well. And that's just as short-sighted as what you're doing. If you really think it's all "the liberals'" fault, fine, but I think that's a gross oversimplification, and I agree that it's flamebait. So go ahead and speak your mind, but if you want to accuse the politicians from one party of causing problems, try to back it up with some facts.

With all due respect, you and 'torifile' seem to be overly focused on one side comment I made while ignoring just about everything else I've said. My comment about liberals bashing banks for "red-lining" is a historical fact. If you can find any conservatives who were demanding banks extend loans to people with no money and bad credit, then I'll be more than happy to lambaste them as well.

Regardless, at no point in this thread have I alleged it's "all the liberals' fault" or anything like that. I bet 95% of my sentences in this thread are totally lacking a political POV.

[turtle]

What's really interesting is how America really is a debt driven country. I know of only a small handful of people who don't carry a debt load. If they have any debt it's against a house or a "charge" account that's paid in full every billing cycle.

This is in far contrast to most of this country. I'm in a get out of debt mode right now because of the noose it is around my neck. Thankfully my only debt now is against a house and a vehicle.

How this ties in though is I was in the process of buying a home for my family about two years ago while the market was still "good". I had offers for home loans that sucked. I didn't realize I was in the sub-prime levels because of the rental home and credit cards.

The lenders didn't call me sub-prime because they just wanted the loans. My credit was good at the time but not good enough because of the rental. Now I'm thankful I used my head and didn't agree to an ARM or interest only. Dear God, I could be one of the people in foreclosure now. I am however smart enough to know it's not the government's job to bail me out.

To more answer the OP, there's more to come as America shifts and realizes you can't give credit cards and loans to people who can't pay. There's a movie I watched (due to a recommendation) that hit on why lenders were willing to lend at such risk, Maxed Out. It's full of sensationalism, but has some valid points. Bottom line is the lenders make more money on you not paying than when you pay regularly. Penalties and fees are free money to them. Debt gets written off or sold to collection agencies.

Now these larger bank who bought the loans are holding on to empty assets. They lost their money and now can't pay their bills because the loans they own aren't paying back. Imagine selling your house to someone so you could take the money to buy another house. You then buy the other house but the guy who bought yours doesn't pay/check bounced. Now you still owe for that house on top of the new one you bought. Do this several thousand times over and you have an idea of why these banks are folding.

[torifile]

turtle, I get your points and they make sense. I've been a big believer in never having a balance on a credit card and living within my means but I know I'm the exception.

My question is: why now? Why is this coming to a head at this very moment in time?

[JohnnyTheA]

What I am wondering is---> Why not let them fail? If it was in any other sector people wouldn't be freaking out so much. Is it because they owe money that if not re-paid will make other companies go under? I just can't see what the big deal is. Are people afraid of a panic of some sort? Lehman's stock has already tanked so, to me, the market has already corrected the problem. Companies go under all the time just like companies explode in growth all the time. Why are these financial company failures being called "the worst economic catastrophe since the great depression" ? Unless you own stock in one of these companies should it matter? I would imagine other companies will probably come in and liquidate their assets and THEY will be probably be getting a good bargain in the long run...

JTA

[torifile]

Originally Posted by JohnnyTheA What I am wondering is---> Why not let them fail? If it was in any other sector people wouldn't be freaking out so much. Is it because they owe money that if not re-paid will make other companies go under? I just can't see what the big deal is. Are people afraid of a panic of some sort? Lehman's stock has already tanked so, to me, the market has already corrected the problem. Companies go under all the time just like companies explode in growth all the time. Why are these financial company failures being called "the worst economic catastrophe since the great depression" ? Unless you own stock in one of these companies should it matter? I would imagine other companies will probably come in and liquidate their assets and THEY will be probably be getting a good bargain in the long run... JTA

My understanding is that we don't own the debt. It's bigger than just the banks and the individuals involved. Much of our debt is owned by China and the Mid East. If we allow these banks to fold, they'll pull out of other investments. Debt in the US will be worth nothing. The dollar will collapse and we'll see huge rates of inflation.

IOW: If you think the situation is bad now, what would happen if inflation went up even higher? Oil would double and triple in cost. Food would go up. Our exports would be worth less. People wouldn't be able to afford to get to work, reducing supplies of everything. Further increasing costs. It would be an even bigger nightmare.

[Kickaha]

This is very true - not only are we in debt, we're in debt to other countries because they bought it. They have the cash to invest, we don't. If they pull theirs out, we're in a world of hurt. No liquid assets to be spread around.

[torifile]

To further elaborate on Kick's point - if the government bails out banks, as they did in the case of Fannie and Freddie, they're securing the debt. They're telling other countries, "Don't worry about how bad things are here, we've got their back. Your money is safe with us because we'll foot the bill if things go south."

When there's this type of assurance from the US government, investors are going to continue to be willing to invest here allowing things to remain liquid because there will continue to be money coming in. Of course, when the federal government guarantees something, it's on the tax payers to pick up the slack. And this is where we are - banks made billions and trillions of dollars on risky loans and we've got to foot the bill otherwise we're screwed.

[scratt]

Originally Posted by Kickaha This is very true - not only are we in debt, we're in debt to other countries because they bought it. They have the cash to invest, we don't. If they pull theirs out, we're in a world of hurt. No liquid assets to be spread around.

Unfortunately for the rest of the world this old adage applies...

When you owe your bank a few million dollars you are in trouble. When you owe your bank a few billion / trillions dollars they are in trouble!

Hence the fallout around the world right now.

[scratt]

Originally Posted by torifile And this is where we are - banks made billions and trillions of dollars on risky loans and we've got to foot the bill otherwise we're screwed.

Yup. This really irritates me, and it's going on in the UK too...

Banks make tons of cash loading us money, and yet when it all goes wrong (which is simply down to the banks not doing their job correctly) we have to bail them out? A few years down the line they'll be loaning 'us' the money which we have bailed them out with + interest! Madness!

Treat them like any other business. Treat them like an airline. If they mess up, close 'em down, use tax payers money to bail out the real people, their customers, by all means. But retrospectively take those fancy cars and homes, and shimmering steel towers away from the banks and their CEOs and put them back in to state control. Permanently.

[turtle]

Originally Posted by torifile turtle, I get your points and they make sense. I've been a big believer in never having a balance on a credit card and living within my means but I know I'm the exception. My question is: why now? Why is this coming to a head at this very moment in time?

ARMs are adjusting, balloons and kicking in and people can't afford the payments anymore. Also, because of the over-inflated housing prices the localities are raising estimated values for tax reasons and therefore raising property taxes too. It's a double-whammy for someone who could barely afford the house they bought but then added insult to injury buy financing the furniture to go in the nice new house too!

[Banana]

I've posted it before, and I still think this is relevant:


The thing about US being indebted to other countries should be disquieting to voters- it's practically a throwback to old feudal system where you belonged to a fief. There will be no sane behavior in the market until we actually allow bad loans to fail and bank to close up. Indeed, I wouldn't call it a free market if we bailed out bad decisions made by a bunch of overeager bank CEOs and money-grubbing politicians.

It also has to do with the fact that banks has been loaning out more than they actually have on hand. In old days, if they ran out of cash on hand, people would gather together to celebrate an event called "run on the bank". Good times! Most of time, when a bank suffered a run, it usually meant it was out of business. But this has been done away with Federal Reserve which, to oversimplify things, will ensure that no bank run out of cash but only in fact moves the "run on the bank" to a different level, and this is what we're seeing, IMO. Regardless of what they would like to tell us; they simply can't loan what they don't have.

[thegelding]

i'm always surprised that tor hasn't had some people put on ignore...life is too short to get mad on the internet so much...

now back to banking

g

[Kickaha]

Originally Posted by torifile To further elaborate on Kick's point - if the government bails out banks, as they did in the case of Fannie and Freddie, they're securing the debt. They're telling other countries, "Don't worry about how bad things are here, we've got their back. Your money is safe with us because we'll foot the bill if things go south." When there's this type of assurance from the US government, investors are going to continue to be willing to invest here allowing things to remain liquid because there will continue to be money coming in. Of course, when the federal government guarantees something, it's on the tax payers to pick up the slack. And this is where we are - banks made billions and trillions of dollars on risky loans and we've got to foot the bill otherwise we're screwed.

The flip side of this, however, is where apple007 and other financial conservatives have a valid point... businesses can only engage in highly risky (and highly lucrative!) behaviour *if they know there's no downside*.

The left policy says "Shore it up!" the capitalist industry says "Why thank you! We can now maximize our profits by..."

As long as things go well, it's spectacular - but so is the fall when things go poorly. And then you have the left screaming about robber baron evil capitalists as proof that further regulation is needed, while you have the right saying "we told you so" about how messing with the system to shore it up in the first place is how we got into this mess.

You have to let businesses fail... but you can't let industries fail. The normal mechanics of a free market make the failure of an entire industry extremely difficult to have happen... but when you artificially prop up an entire industry, you're in for a world of hurt. And that's where we are. Screwed.

[billybobsky]

Originally Posted by apple007 It's the Daddy State run amok. When individuals or firms know Uncle Sam will bail them out when times get rough -- whether it's a homeowner who skips buying flood insurance or a huge bank like Lehman -- they'll not only act recklessly, they'll inspire others to act recklessly. Once Uncle Sam bails out person or firm #1, it's hard to say no to #2 and #3, etc. Vicious cycle ensues.

Actually, the government has little to do with bailing the private firms out -- the problem is that as you point out, international credit is terrible, the US economy is slowing way down (it has been doing so for a while, but everyone ignored it because the real estate marker was booming so well), and solvent nations aren't willing to put money into the US pot to keep it from going under :/). What is most notable here is that the treasury secretary is known to be a complete non-interventionalist, meaning your suggested cause of behaviors is rather weak...

Anyway, in a perverse way, it's sort of funny how this all came full circle so quickly. Not more than 2-3 years ago, liberals were bashing big banks for not giving enough loans to people with shaky credit. (Remember all the so-called "red-lining" "scandals"?) Now the same folks are bashing the banks for "causing" the current housing and foreclosure crises.

I had to look it up to remember... It was more like six years ago, and red-lining has nothing to do with banks providing loans to people who are relatively insolvent. Let's put it this way -- it isn't the ghetto that is pulling down the economy. In point of fact, the vast majority of people caught in the foreclosure/banking crisis are lower-middle class suburbanites. They are affected most because property prices in the suburbs boomed while urban areas lagged behind. Again, red-lining, the term for banks refusing to provide loans for geographical areas, usually within cities, has nothing to do with this... I am not surprised that a conservative wants to put the blame on liberals and the poor but, really, apple, do try next time.

Gee, who would have thought giving huge loans to millions of people with bad credit and no money would be a bad idea?

Evidently not the banks or Bush:

Originally Posted by From whitehouse.gov Expanding Homeownership. The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago. President Bush's initiative to dismantle the barriers to homeownership includes: American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families; Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes; Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.

While Bush's stated desire was to increase minority home ownership, the results of this encouragement from the administration are being born out in the crisis we see today...

[Banana]

Originally Posted by Kickaha You have to let businesses fail... but you can't let industries fail. The normal mechanics of a free market make the failure of an entire industry extremely difficult to have happen... but when you artificially prop up an entire industry, you're in for a world of hurt. And that's where we are. Screwed.

My impression has been that we've been doing it for quite a while; too long, if you ask me.

This is a bit of tangent, but when industry become a essentially monolithic oligarchy of transnational corporations, it's very hard to let industry fail; and the question should then be: "how did they get so big that they couldn't even support their own weight?" If we did had free market, those companies wouldn't have existed; there's a limit on efficiency, regardless of which aspect we want to look from, once we reach a certain size (whether in terms of employees, territory, volume, or whatever is appropriate here)... you know the law of decreasing return. But thanks to collusion with government, we now have this unholy monster.

People like to scream {Big Business! | Government!} but they're overlooking that giant bed the Big Business and Government has been sleeping (and racked) for countless nights.

[billybobsky]

Originally Posted by Banana My impression has been that we've been doing it for quite a while; too long, if you ask me. This is a bit of tangent, but when industry become a essentially monolithic oligarchy of transnational corporations, it's very hard to let industry fail; and the question should then be: "how did they get so big that they couldn't even support their own weight?" If we did had free market, those companies wouldn't have existed; there's a limit on efficiency, regardless of which aspect we want to look from, once we reach a certain size (whether in terms of employees, territory, volume, or whatever is appropriate here)... you know the law of decreasing return. But thanks to collusion with government, we now have this unholy monster. People like to scream {Big Business! | Government!} but they're overlooking that giant bed the Big Business and Government has been sleeping (and racked) for countless nights.

Huh?

I am not sure I follow you here. Are you referring to Fannie Mae and Freddie Mac? or the entire banking industry itself?

There is no law of diminishing returns when it comes to banking. In fact, the opposite is true :/

[Banana]

Well, banking industry is a big part of the problem, but it's not the only industry where there are relatively few players and they're all morbidly obese. So I was actually referring to various industry with the similar patterns.

As for law of diminishing return not applying to banking, are you thinking that the bigger a bank gets, the more they have to loan out or something like that? I can see how it would come about, but it doesn't change the fact that what they are doing is unsustainable, and government propping it up doesn't make it any more sustainable.

[turbulentfurball]

I think this chart, (courtesy the BBC) says lots. House prices here were booming out of all control and some kind of correction was needed in the market. This, however is completely insane.



About 18 months ago, I could have applied for a graduate mortgage for 105% of the value of a house, and now, such a thing doesn't exist. At least a 10% deposit is required. There seems to be bit of anger from people who thought that easy access to such credit was a right, but I'm glad the mortgage lenders have tightened their belts. The surge in demand for mortgages and the corresponding massive house price inflation is due almost solely to irresponsible lending, and that, along with oil and food price inflation has led not just the US or the UK, but most of the developed world into certainly the worst financial mess in my lifetime.

[billybobsky]

Originally Posted by Banana Well, banking industry is a big part of the problem, but it's not the only industry where there are relatively few players and they're all morbidly obese. So I was actually referring to various industry with the similar patterns. As for law of diminishing return not applying to banking, are you thinking that the bigger a bank gets, the more they have to loan out or something like that? I can see how it would come about, but it doesn't change the fact that what they are doing is unsustainable, and government propping it up doesn't make it any more sustainable.

Yes and I agree, but while it may be true that the government propping it up doesn't increase its sustainability, one major failing of basically all economic systems is that returning to equilibrium after a disaster or a boom decreases the efficiency of the economy as a whole -- the faster it happens, the more resources are devoted to making adjustments to the changing scenario. In other words, I think that the institutions should be allowed to fail, but the government has some responsibility as steward of the economy to bring about that failure in a controlled and entirely expected manner.

Just like the Fed does it's best to control the long term growth of the economy, the Treasury department should take responsibility to make sure that a disaster in one industry doesn't bring down the entire industry OR the entire economy with it.

[Swox]

I don't know a lot about economics, but couldn't appropriate regulations have prevented this mess?

I know a lot of people like pointing their finger at government, or big business, or both (and often not without justification), but I always blame three things: greed, hatred, and ignorance. The blanket Buddhist explanation for everything bad . So long as they exist, people will always find ways to cheat others to make a quick buck, whether you have a socialist system, or a totally free market.

I haven't partaken of the AN political forum mana for a while, needed to get my fix .

[Luca]

The problem with just increasing regulations is that these same businesses will simply find ways around them anyway. They might help but they are not the solution. A few extra regulations would not have prevented this crisis. Maybe softened it up a bit.

Like Kick said, it's all about risk/reward. When there's no risk, why bother doing things carefully? The people at the top of these companies always make a shitload of money, enough to retire many times over, no matter what they do. They have "golden parachutes."

I don't know how to prevent the top executives from always making sure they are covered no matter what, but if the government were to stop bailing out large companies, that would help.