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Not sure if it was covered (too lazy to read through all these pages), but, for anymore that cares, you are missing two huge components of what happened. HnR)hT covered one of them, in that Congress pressured banks to lend to minorities (most of them couldn't pay their mortgages).
The second is a little more complex:
Amid the dot com bust and 9/11, Greenspan cut the target federal funds rate to 1% to keep the economy going. As a result the rates on the treasury bills fall drastically. Institutional investors, more so pension funds, want low risk investments that yield ok returns. Treasury bills are the "safest" investment, but the yields had fallen so low, it just wasn't what they wanted.
These pension funds are calling the banks asking how to find an investment that gives a better return. This 1% rate is exactly what banks wanted. It let the banks borrow money cheaply, and let them leverage to ridiculous amounts. They used their leverage to buy a lot mortgages from mortgage lenders. They packaged up all the mortgages into CDOs, cut them up by risk rating, and sold them off to the institutional investors. Pension funds obviously wanted the safest mortgages, and they got them. Investors who want more risk, more return, like hedge funds, took the risky mortgages. These safe mortgages were like the new treasury bills to pension funds, and they wanted more and more and more.
The banks want more and more and more money so they told the mortgage lenders to sell them more and more and more, and the mortgage lenders told their mortgage brokers to get more and more and more. The problem is that all the people who qualified for the loans already had them. But, the greedy institutional investors, banks, and mortgage lenders wanted more money, so this made the mortgage lenders lower the standards for giving out loans... Uh oh. The banks didn't care because what happens if the person defaults? Well, the bank gets the house, and house prices have been rising and rising; so they would just sell the house and make a profit.
As a result, more and more people started defaulting. This caused more supply of houses, which caused the housing prices to decrease. The "safe" mortgages the pension funds wanted were not so safe. Institutional investors stopped buying CDOs from the banks, and banks stopped buying from the mortgage lenders. Suddenly, they were all holding a bunch of useless securities, and the problem was that because the banks had bundled everything together, no one knew which piece they had; thus, writedowns were the big thing last year.
Another issue I want to address, and again, sorry if it has already been addressed, is AIG:
So, credit default swaps. Basically, you're a bank or someone and you loan out money. Because you want to make sure that principal loan is 100% guaranteed to get back to you, you engage in a credit default swap with a third party. The terms of this swap are, you pay some type of fee to the third party, and they will payback your principal if the loan were to default. When times were good, obviously these CDS insurance companies were not required to carry the amount of capital equaling how much they are insuring. However, once the loans started defaulting, lenders are running to the insurance companies holding their hands out. The problem is that these companies don't have all the capital to pay all the lenders their principal. You see companies like Ambac and MBIA suffering greatly.
AIG is another one of these. I don't know how educated any of you are on why the government bailed out AIG. Well, AIG is, or was, the largest insurance company out there. Obviously people want to do business with such a credible company. Most of these credit default swaps were between AIG and some lender. If AIG were to go under, none of those lenders would receive the principals that were defaulted on. This would mean that there would be more gigantic writedowns all over the world. There was major, and I mean, major systemic risk involved if AIG were to fail.
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somebody listens to rush limbaugh,
although i think pressure was applied, i dont think it was congress pressuring the banks.
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haha OP is also a policy debater
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On March 12 2009 18:05 cUrsOr wrote:
somebody listens to rush limbaugh,
although i think pressure was applied, i dont think it was congress pressuring the banks.
I actually do not listen to him. I've read up on a lot of this stuff since I am a finance major, and it interests me.
You are correct. I guess I worded it wrong. It was not the encouraging (I think that is a better word than pressuring) of Congress that directly caused these loans to be made; the main driver was through the institutional investors. However, the through the encouraging of Congress, I think these lenders were more at ease to do so.
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On March 12 2009 17:54 cAtAcLySmIc wrote:
Not sure if it was covered (too lazy to read through all these pages), but, for anymore that cares, you are missing two huge components of what happened. HnR)hT covered one of them, in that Congress pressured banks to lend to minorities (most of them couldn't pay their mortgages).
The second is a little more complex:
Amid the dot com bust and 9/11, Greenspan cut the target federal funds rate to 1% to keep the economy going. As a result the rates on the treasury bills fall drastically. Institutional investors, more so pension funds, want low risk investments that yield ok returns. Treasury bills are the "safest" investment, but the yields had fallen so low, it just wasn't what they wanted.
These pension funds are calling the banks asking how to find an investment that gives a better return. This 1% rate is exactly what banks wanted. It let the banks borrow money cheaply, and let them leverage to ridiculous amounts. They used their leverage to buy a lot mortgages from mortgage lenders. They packaged up all the mortgages into CDOs, cut them up by risk rating, and sold them off to the institutional investors. Pension funds obviously wanted the safest mortgages, and they got them. Investors who want more risk, more return, like hedge funds, took the risky mortgages. These safe mortgages were like the new treasury bills to pension funds, and they wanted more and more and more.
The banks want more and more and more money so they told the mortgage lenders to sell them more and more and more, and the mortgage lenders told their mortgage brokers to get more and more and more. The problem is that all the people who qualified for the loans already had them. But, the greedy institutional investors, banks, and mortgage lenders wanted more money, so this made the mortgage lenders lower the standards for giving out loans... Uh oh. The banks didn't care because what happens if the person defaults? Well, the bank gets the house, and house prices have been rising and rising; so they would just sell the house and make a profit.
As a result, more and more people started defaulting. This caused more supply of houses, which caused the housing prices to decrease. The "safe" mortgages the pension funds wanted were not so safe. Institutional investors stopped buying CDOs from the banks, and banks stopped buying from the mortgage lenders. Suddenly, they were all holding a bunch of useless securities, and the problem was that because the banks had bundled everything together, no one knew which piece they had; thus, writedowns were the big thing last year.
Another issue I want to address, and again, sorry if it has already been addressed, is AIG:
So, credit default swaps. Basically, you're a bank or someone and you loan out money. Because you want to make sure that principal loan is 100% guaranteed to get back to you, you engage in a credit default swap with a third party. The terms of this swap are, you pay some type of fee to the third party, and they will payback your principal if the loan were to default. When times were good, obviously these CDS insurance companies were not required to carry the amount of capital equaling how much they are insuring. However, once the loans started defaulting, lenders are running to the insurance companies holding their hands out. The problem is that these companies don't have all the capital to pay all the lenders their principal. You see companies like Ambac and MBIA suffering greatly.
AIG is another one of these. I don't know how educated any of you are on why the government bailed out AIG. Well, AIG is, or was, the largest insurance company out there. Obviously people want to do business with such a credible company. Most of these credit default swaps were between AIG and some lender. If AIG were to go under, none of those lenders would receive the principals that were defaulted on. This would mean that there would be more gigantic writedowns all over the world. There was major, and I mean, major systemic risk involved if AIG were to fail.
You're right on both accounts and the fact that i didn't address the former issue as well as the problem of global imbalances is just a testament to how comparatively little i knew 6 months back.
edit: i'm going to copy/paste what you have as a spoiler into the OP
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On March 12 2009 18:29 Pyrrhuloxia wrote:
haha OP is also a policy debater
parli debater and extemper.
yourself?
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when they risk and proffit, its their proffit.
when they risk and fail, government (taxes) bail them out.
whats what we call a win/win.
we should be in the fucking streets imo.
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United States20665 Posts
http://www.facebook.com/note.php?note_id=57528489733&ref=nf
All the inane idiots blaming everything from damn evil rich people to conniving profiteering bankers to corrupt dastardly congressmen should go read that note.
Though I doubt any of the ignorant proletariat will be able to understand the arguments set forth therein. Damned plebs.
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On March 12 2009 06:34 ahrara_ wrote:The idea that free market corrections are sufficiently fast acting is empirically denied. Carbon emissions even in countries with regulations have continued growing, although at a slower rate. The rate of growth of the rate of growth for developed countries, on the other hand, is rising. Moreover, free markets do not account for damage done to publicly owned resources such as the atmosphere. The tragedy of the commons ensures that free-market solutions will never be sufficient. An important thing to understand about the environmental cost of development is that any correction, free-market or otherwise, will likely be sudden and calamitous. This is how a population behaves when they overshoot the capacity of their environment to sustain them. Populations do not settle gently to a sustainable level because the impacts of resource depletion (or in our case, global warming) are delayed. So even if free-markets can self correct for environmental externalities, the price signals will arrive too late to prevent the population overshoot. Both animals and past human civilizations have followed exactly this trend -- why not us?
We may be talking about 2 different things. I think you were talking about the market correcting the problem of CO2 emissions. In that case you are right. The market does not take care of externalities like that.
I was saying that if we started running out of gasoline, the market would correct for that pretty fast because it is just a development problem and not an externality problem.
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china questioning the credit rating of US treasuries
http://www.nytimes.com/2009/03/14/world/asia/14china.html?hp
i thought it was funny how china and the US had that little military argument a couple days ago, it`s an interesting relationship that the US still thinks of itself as the superpower, while chinese investments are literally the only thing holding the US from collapsing
edit: to be fair, i`m not an economist, and i suppose china relies on the US quite a lot too
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What's your point? It's a lot of money regardless of whether you look at it physically or not. But either way, eocnomics should not be governed by visual emotions.
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On March 14 2009 08:40 a-game wrote:china questioning the credit rating of US treasuries http://www.nytimes.com/2009/03/14/world/asia/14china.html?hpi thought it was funny how china and the US had that little military argument a couple days ago, it`s an interesting relationship that the US still thinks of itself as the superpower, while chinese investments are literally the only thing holding the US from collapsing edit: to be fair, i`m not an economist, and i suppose china relies on the US quite a lot too
The Asians know the score.
http://www.atimes.com/atimes/Global_Economy/KC14Dj04.html
+ Show Spoiler [FTA] +
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.
Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.
...
By facilitating and encouraging the massive global flight into Treasuries, and by issuing a huge new supply of US sovereign debt, emerging markets, their governments and banks, and US businesses are deeply suffering. As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all. Investors are demanding very high yields to exit the relative "safety" of Treasuries to invest in corporate and government bonds in the emerging markets and in large swaths of the US and Western Europe as well.
...
Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.
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While the US is coming close to record levels of debt compared to GDP, historically and compared to other countries with similar rates of growth, it's really not that high. Blaming treasuries for the credit crunch is just silly. Investors will put their money into whatever asset they feel is safest. If the value of treasuries in circulation weren't able to absorb the large volumes of currency investors are throwing at it, then they'd put it in the next best place -- government bonds in the euro zone, for example, or commodities. The downside is that investing disproportionately in the US is like putting all your eggs in one basket. If, in the extreme unlikelihood of a major devaluation or default, the global economy would be fucked. But since politicians are probably aware that the consequences of default or devaluation are worse than cutting spending, the latter will probably happen first.
Of course, government spending rarely matches private sector borrowing in terms of growth potential, so that is one concern. But sometimes it can -- like (arguably) with the stimulus package and financial bailouts.
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Ok, I just wanna throw this article out there and see what people think.
http://www.cato.org/pub_display.php?pub_id=10033
Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation.
If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they?
The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
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On March 15 2009 14:41 ahrara_ wrote:
While the US is coming close to record levels of debt compared to GDP, historically and compared to other countries with similar rates of growth, it's really not that high. Blaming treasuries for the credit crunch is just silly. Investors will put their money into whatever asset they feel is safest. If the value of treasuries in circulation weren't able to absorb the large volumes of currency investors are throwing at it, then they'd put it in the next best place -- government bonds in the euro zone, for example, or commodities. The downside is that investing disproportionately in the US is like putting all your eggs in one basket. If, in the extreme unlikelihood of a major devaluation or default, the global economy would be fucked. But since politicians are probably aware that the consequences of default or devaluation are worse than cutting spending, the latter will probably happen first.
Of course, government spending rarely matches private sector borrowing in terms of growth potential, so that is one concern. But sometimes it can -- like (arguably) with the stimulus package and financial bailouts.
I don't think the article was blaming treasuries for the credit crisis. His point was that it is dangerous for everyone to simultaneously go into treasuries. Obviously from the housing bubble, you can't expect the market to prevent them from happening.
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That was actually surprisingly fun to read and see.
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On March 15 2009 14:47 ahrara_ wrote:Ok, I just wanna throw this article out there and see what people think. http://www.cato.org/pub_display.php?pub_id=10033Show nested quote +Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation. If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they? The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
That's amazing. I don't know the answer, but I hope that the rise in price level is a little correction for overshoot deflation. If inflation continues during a recession/depression, then we are messed up on both ends.
I hadn't heard this. Thx for post.
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it must have got to the stage where the amount they are pumping in in freshly printed money is greater than the amount being lost through deleveraging
will inflation keep increasing when another 10 million are out of work and demand falls? hard to answer...
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On March 15 2009 14:47 ahrara_ wrote:Ok, I just wanna throw this article out there and see what people think. http://www.cato.org/pub_display.php?pub_id=10033Show nested quote +Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation. If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they? The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
Starting note: Balance sheet is a financial statement that measures assets, equity (ie. stock), and liabilities. A balanced balance sheet should have assets = equity + liability.
To answer your question about asset prices, it's really hard to say because of mark to market (MTM) accounting. There's been a lot of talk about mark to market accounting lately and long story short, MTM is basically valueing your financial assets at fair market value. The theory behind it is that because financial institutions deal with so many instruments that constantly change in value, pricing these instruments at fair market value gives a more accurate assesment of the balance sheet (and/or relative strength) of these companies. But the reality is that these instruments are very hard to value.
Last year, one or the primary reasons why the crisis quickly expanded out of the subprime sphere was because of MTM. When the companies were strong, auditors really had no measuring stick for these types of CDOs because they were never really used before. The only method of valueing these assets was probably based on cash flow...which was probably fine if everybody made their mortgage interest payments. But once too many subprimes were sold and people defaulted on their payments, thus too the payments stopped. Because the auditors had idiotically created their valuation based on cash flow, no payments = no value. This quickly evaporated the assets of all the investments banks who had heavily leveraged on CDOs...and now they had way too much liability relative to assets. The pivotal point though, in a credit based system that banks run, was that this in turn triggered margin calls by lenders (margin calls are based on liability+equity:assets ratio) and all the lenders demanded to be paid. Investment banks suddenly had no cash, no assets, and a ton of liability so they demanded their loan payments from other institutions. And the chain goes on, so nobody had any cash to go around, and nobody would loan to each other (hence the credit crunch).
But back to the original question of whether or not assets are still undergoing a correction. If you are talking about homes, then I'd say it doesn't matter. If you are talking about financial assets, then I'd say yes. Even months now from the October volatility, auditors and SEC alike still have no idea how to value these CDOs. And because of this, that is why the government keeps pumping cash into the investment banks and buying up these "toxic assets." Cash keeps their balance sheet up on the equity/liability side, buying assets keeps the asset side down. But really, they are just stalling while trying to figure out how to deal with all these financial instruments. And if they're stalling, the cheaper and probably better fix would be to simply suspend mark to market accounting. Let the assets equal what they were originally sold at, margin calls wouldn't trigger, and everybody could start lending again. It's a hell lot cheaper than giving billions in cash and spending billions more to buy up a bunch of mortgages.
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EPT![[image loading]](http://carrier.pbwiki.com/f/carrying%20capacity.gif)
