For
Kazz those of you still wondering "what the fuck is going on?", here are some relevant quotes from earlier in this very thread:
relevant nyt article from 1999: [ugly fucking URL inexplicably posted straight]
THAD EDIT: The article is titled Fannie Mae Eases Credit To Aid Mortgage Lending, and lays out the beginning of the subprime mortgage trend.
also, if you haven't been paying attention, foreign currency is also unstable right now. the world economy will burn with the us economy. you will lose money. the past sixty years have shown that when all this turns around, the us dollar will gain faster than other currencies. you would lose money if trends continue as they have in the time of modern economics.
I'm going to try and detail my understanding of the issue; someone please tell me how wrong I am.
1-The government deregularizes mortgages in order to encourage banks to lend to the poor and to minorities.
2-The banks start loaning money to people in order to get them to buy houses they can't actually afford.
3-Now that there are lots more people who want to buy houses, the prices rise across the board due to the increased demand.
4-It turns out that the people who couldn't afford houses really couldn't afford them. A foreclosure epidemy ensues.
5-All the foreclosures kick property values in the nuts. The people who still have houses are stuck with mortgages much more expensive than what the actual houses are worth. The banks are stuck with devalued houses worth a fraction of what they paid for them.
6-The banks run out of money and collapse under the weight of the debts they've incurred in exchange for all that worthless real estate. I guess they gambled that it was more likely that home prices were going to continue to rise, and therefore that it didn't matter too much that the home buyers would never be able to repay them.
7-Now since the banks are all bound together, insuring each others' debt in an arcane, incestuous network that involves massive amounts of money that never existed in the first place, they all fall like dominoes.
8-Everyone freaks the fuck out and wants to get back whatever cash they can salvage out of this wreck, therefore thoroughly raping the stock market all over the place.
So, am I close?
Close enough to serve as a quick-n-dirty explanation for the everyman. An bit of an expansion would help though:
Debt has a value as an investment. If I hold your mortgage, I can
drink your milkshake be (in theory) assured of regular mortgage payments (i.e. dividends on my investment). The banks got very very good in the last decade at slickly repackaging mortgages as solid, reliable investments. These were typically purchased by other financial-sector firms (the firms like Lehman brothers, who are in the worst shape).
Now, before deregulation, this worked out, because mortgages OVERALL had a reliable default rate, which you could work into the calculations. After deregulation, a viscious cycle was started, where mortgages were progressively offered to more and more people who wouold never be able to afford them normally. The problem was exacerbated by several factors:
1 - People though the banks were doing good by helping ordinary folks buy homes who might not otherwise be able to.
2 - Since the mortgages were often sold to other firms, the banks who did the credit checks on the homebuyers were not assuming the true risks for those bad loans, which removed a vital check against overextension of credit.
3 - The US economy has been encouraging expansion through credit-fuelled consumerism for two decades now (a problem with deeper roots).
4 - The investments became so popular and profitable, that demand was insatiable and banks were constantly encouraged to find new ways to expans the number of people who were eligable for mortgages.
5 - Important credit rating agencies, who are supposed to provide impartial appraisals, allowed the wool to be pulled over their eyes and gave the repackaged investments their highest triple-A credit rating, lulling many industry players into a false sense of security.
6 - Extreme short term thinking and the 'fast buck' mentality has been a problem in the north american corporate world for some time now.
6-The banks run out of money and collapse under the weight of the debts they've incurred in exchange for all that worthless real estate. I guess they gambled that it was more likely that home prices were going to continue to rise, and therefore that it didn't matter too much that the home buyers would never be able to repay them.
Maybe. But anecdotally, I heard a caller on NPR yesterday who said he knew people on Wall Street who just shrugged and said "If this goes south, the government will bail us out."
Where the "let them fail" argument DOES have merit is that if we bail them out this time, they'll run their businesses like they expect one next time.
Where it doesn't, again, is that if they go, they'll take everybody else down with them.
Important addendum by Thad ^
Personal responsibility took a walk at the highest levels here. And I'm cynical enough to believe no one will learn from this unless things become much, much worse.
there are three parts of the collapse that haven't been discussed, that i've seen. the intertwining debt mentioned came about from banks and lending groups bundling together toxic assets (failure mortgages, bad loans) and selling them to people who didn't know any better. the organizations would give them billions in credit to take up these bundles of loans, assuming the loans would then pay off and return a profit.
many of these organizations were international entities, based in china and europe. the joke that's been going around economic circles is, "yeah, china's been selling us all these toxic toys, foods, and everything else. all we've been selling them is toxic assets."
the third part of this is all that credit these outside organizations are extending in exchange for toxic assets is that once they caught a smell of what was happening, when the loans started really turning sour, they stopped extending that credit to companies like lehman and bear sterns, not to mention freddy and fannie. without those credit lines, these companies could no longer afford to continue making bad loans, which meant they could no longer make any money.
but they had so much credit they were trying to cover from previous bad loans that the debt over just a few days of not earning retard money collapsed companies worth hundreds of billions of dollars.
if these companies aren't saved, their creditors crumble in the same way they have.
and now two interesting solutions i've heard, one which bails out the world market at the sacrifice of the US dollar and economy in general, and one that erodes the world economy, lowering all world currency to be competitive with the dollar again. both plans include a few depression years, but, honestly, i don't think there's any avoiding that at this point.
the first plan extends the bailout money to money managers who have proven themselves responsible by avoiding this huge collapse. spread it evenly among as many of these banks, funds, groups, whatever you can find. attain the real value of the assets that are currently showing highly inflated value (which is one reason the paulson plan was so bad: he wanted to buy toxic assets at the value the companies who tanked set them, or close to it, with no way to assess their true market value) and have a big auction. smart money managers will obviously pay only the closest thing to their true appraisal of market value as they can get and still profit from it, so they will not assume toxic assets, they will be granted privilege to refinance the deals in an appropriate way after getting the assets at cost.
this would lead to profit and, in the end, ways to reduce the pressures on outside creditors.
the other option is to take the bailout money and use it to invest in infrastructure and industrial programs, new deal-style. create jobs, factories, etc. then use those factories to produce american goods at affordable prices, sell them to other countries, and actually have an american product worth exporting for the first time since cheap chinese goods came on to the market. after a few years of global depression, quality goods flooding the world market could put america back on top.
Additional blather ^
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Topic: It's the economy, stupid! (Read 73235 times)