On the financial crisis
People say to me Hey, Uncle, it’s been a good hour or so since congress failed to save us and, well, I kinda thought we’d all be dead by now. And I’m not. So, what’s up with that?
Well, the problem is a bit overstated. You see, a while back someone decided that home ownership was good. So, people came up with ways to ensure more people could own homes. With more buyers, property values went up. Or, more likely, prices were inflated so that these ways to ensure more people could own homes would be profitable. Now, the trouble is that these inflated housing prices have come down. This sucks if you’re the owner of some property or the mortgage holder on the property and you borrowed or loaned money when the price was high. Now, you’re not screwed yet, if you can still make payments. But if you can’t, then these folks that loaned you money now have financial instruments valued at less than the assets they have a secured interest in. I mean, the loans still have value and are, most likely, still profitable. But there’s some risk.
Then they say to me Well, that doesn’t sound that bad. I mean, it’s not great but it doesn’t sound like the Apocalypse is coming. After all, whenever you lend money there’s a risk that’s why people charge money to loan money. What was the point of the bail out nonsense, then?
Well, for political posturing, of course.
And they say No, I mean what would the bail out have done?
Oh. Well, it would have given money to people who made bad business decisions. It would transfer assets held to the .gov. And we’d start over and be in the same mess. Imagine you’ve been stabbed in the neck. The bill would have been akin to cleaning up the blood instead of actually stopping the bleeding. More here.
Update: Wall Street does not agree.
September 29th, 2008 at 5:26 pm
I would say that the bill is more akin to someone else getting stabbed in the neck while they use your blood as an infusion, all the while completely failing to stitch the hole back up.
But that’s me.
I’m going to go have a beer. Maybe two.
September 29th, 2008 at 6:12 pm
Update – The single Sierra Nevada didn’t do the trick. Another one would be called for, ‘cept somehow I got stuck being Mr. Mom tonight, and I know if I hit the second, the third isn’t far behind.
September 29th, 2008 at 6:16 pm
I’m thinking Bohemia myself, or maybe Leinie’s Oktoberfest.
September 29th, 2008 at 6:24 pm
For the life of me I can’t tell if you’re being sarcastic, or if you really don’t have a clue what this crisis is really all about. Do you understand why the bad mortgages are causing trouble? Do you understand why the mortgage crisis has triggered a credit crisis? Do you understand why a credit crisis is bad for business in general?
September 29th, 2008 at 6:25 pm
It’s exactly like you describe, only you left out the part where the equity markets collapse because businesses can’t get enough credit to stay afloat. And the part where millions of people get laid off to free up capital. And the part where the newly unemployed discover that 20% of their retirement accounts disappeared since the last statement. But not to worry, they’ve still got equity in their homes… oh wait….
September 29th, 2008 at 6:26 pm
Not a Bush fan, but it is documented that on at least 17 occassions he tried to get Congress to address this issue back when the meltdown could have been avoided.
Well before that, Clinton and Reno actually threatened lending institutions with sanctions, both legal and economic, if they didn’t make more of these type loans to minorities and the poor. Loans they would not have made otherwise.
This resulted in a housing boom and an artificially induced housing shortage which resulted in aritificially inflated prices. A situation that was bound to correct due to the immutable laws of economics.
Fannie Mae and Freddie Mac then bought up the majority of these loans to pad their assets statements, which made them look much more stable and profitable than they were. This allowed the huge bonuses paid to the higher echelon employees and administrators.
A goodly number of our politicians warned about this collapse years ago, but every attempt to rein in the rampant fraud was blocked by the Democrats. The preceding sentence is a broad generalization, as there were those in each party who fell on opposing sides of the issue, but overall the dynamic reflected is accurate. Among those raising the alarm were J.C. Watts, McCain (another one I am not a fan of), Boehner, and others. Blocking were the likes of Pelosi, Shumer, Frank, Waters, and others.
It’s not like this wasn’t seen. But it is exactly like those holding the balance of power didn’t give a damn as long as they got theirs, because they knew all along they could stick us with the bill.
If the market is going to correct itself, it needs to be left alone. NO bailout. Let the consequences occur. The market will right itself, prices will ameliorate, along with wages, unfortunately, but at the end, the dollar will be more sound than it has been in decades. NOw that is a nice side benefit. Uh huh, that’s what I said. A side benefit. The real and primary benefit will be the mass turnout of incumbents in Washington, D.C. If the full effect of the collapse is felt by the public without buffering, none of those jobs in the capital are safe.
Make no mistake about it, the bailout isn’t about saving the American economy or protecting the citizen. It is about job security for the people who intitially caused the problem. They will point fingers at everyone who isn’t them,and claim to have done something to help in the crisis and hope the American people are too stupid to realize they caused the problem, they profited from the problem and they are profiting from the phony fix, while gathering even more power over our private lives and businesses.
Unfortunatey, they are probably correct. We do seem to be too stupid quit being used and too stupid to quit rewarding those who use us.
September 29th, 2008 at 6:56 pm
Yes and yes.
I thought I just explained that.
Yes and yes. I don’t know how you figured I didn’t other than the fact I just didn’t mention it.
Except that all that hasn’t exactly happened yet. It could.
September 29th, 2008 at 7:02 pm
Hey Unc,
From what I’ve gathered, it isn’t the mortgage mess per se that they are trying to fix. This “crisis” is that there is very little liquidity and that credit has suddenly dried up. The .gov is planning on buying up mortgages from banks so that those banks can in turn take that cash and loan it to businesses, etc. to keep the economy humming. Seems to me that there is a better way to accomplish this goal without .gov owning more of the home mortgage market than it already does.
yes, straightarrow its all the Democrats fault. Bush tries to impose regulation when the Republicans had a majority in Congress and somehow not getting stuff passed is because of the Democrats.
Well before that, Clinton and Reno actually threatened lending institutions with sanctions, both legal and economic, if they didn?t make more of these type loans to minorities and the poor. Loans they would not have made otherwise.
nope. None of that explains why the investment banks were involved or AIG, neither of which are covered under CRA.
September 29th, 2008 at 7:10 pm
SA,
I think you’re correct on the gist of why what happened has happened and if the punishments and the pain could be restricted to just the scumbags who caused the problem I’d be right there with you.
The problem is that to punish the scumbags you also have to enact policies that will demolish the average joe and his 401k even though he has not done anything wrong.
Seems to me we’ve got two options:
1) Punish the scumbags and as a side-effect punish the innocent.
2) Help the innocent and as a side-effect help the scumbags.
That the scumbags have left us with only these two choices just makes me even more pissed off at them.
September 29th, 2008 at 7:34 pm
It’s actually not so much a dry up as people just aren’t lending. And those that are lending are being a bit more cautious.
September 29th, 2008 at 7:55 pm
It’s actually not so much a recession as the economy just isn’t growing.
Unc, banks not lending is pretty much the definition of credit drying up. Most businesses don’t operate on their own cash. When that cash isn’t available those businesses can’t operate and have to layoff workers. Workers who now can’t pay their debt and so banks don’t have the capital to lend and the downward spiral starts.
September 29th, 2008 at 8:31 pm
Everyone’s going to get punished except the guilty if this stupid bailout happens.
Straightarrow got it right, and yes, the Republitards had a hand in it too, in that the went along with the Dems, as they often do. A few years ago Bush was bragging about his “ownership society” in which a record number of Americans were “home owners”. Well now we know how that happened– socialism, or more approproiately, Fascism, initiated by Domocrats and perpetuated by Republicans who had not the courage to undo it.
Manish; the answer is mortgage-backed securities.
Now the price of oil has gone below 100 bucks a barrel. See, there’s one benefit right there. Stock prices are way down. Buy! More opportunity. Real Estate prices are down. Now people who can acutally afford it can get a good deal. More opportunity. Prices go up, and some people benefit while others take a hit. Prices go down, same deal. Some benefit and others lose. Government needs to stay the hell out of it. Their job is to protect our rights, not meddle with our business. They can only screw it up. Then when they’ve really screwed thing up, we’re suppose to look to them for the “solution”. Uh, no. In a free society, they’d be impeached before they had a chance to screw it up in the first place.
What was that saying– “I’m from the government and I’m here to help” is the most frightening thing you could ever hear? It’s true. That is, if you know what it means.
September 29th, 2008 at 8:38 pm
Okay, lets start with a thought experiment. Let’s say you own a small-to-medium business right now. You need cash to stay afloat. Do you: a) get a credit account, b) sell your capital, or c) lay people off?
Option a is impossible, option b is impossible. Hope you like being the grinch, because people are going home with a pink slip.
September 29th, 2008 at 8:55 pm
hyp, it may surprise you to know that I know how it works. we’ve just not seen the doom and gloom yet.
September 29th, 2008 at 9:37 pm
One can get credit for a business – at a hugely higher rate, which will break a business model pretty quickly.
One can sell a house – at a hugely lower price, which will break personal finances pretty quickly.
Lower house prices in Florida and California and elsewhere, will kill property tax assessments and cause huge budget shortfalls in local government. One can balance a budget – at a hugely lower dollar amount, which will lead to potholes and fewer firemen before it leads to fewer payments to single mothers with no jobs, hurting communities.
The sky could fall. More likely, here in the US the next two to five years will be a replay of the Ford – Carter years economically, with high unemployment, low growth, and severe malaise. Overseas countries less developed than, say, Brazil, will head toward the status of hellholes, generating the likelihood of regional wars as exists currently in the Congo or Somalia.
Better to work through this. Chrysler paid back its loans from the .gov at a profit to the US. While the mortgages would likely never be handled well by the feds, the feds could and would sell the Mortgage Backed Securities at a true market value to investors who would be able to wrangle both a profit and an owned home from the mess, similar to the RTC after the S&L debacle.
I say go for the profit to the feds, not the creation of multiple regional hellholes around the world.
September 30th, 2008 at 1:11 am
Yu-Ain Gonnano Says:
“Seems to me we?ve got two options:
1) Punish the scumbags and as a side-effect punish the innocent.
2) Help the innocent and as a side-effect help the scumbags.”
The problem is that only number 1 is on the table. If number two was on the table there would be proposals to bailout the distressed homebuyer with a mortgage. There aren’t. There are only proposals to bail out the financial markets who will only extending credit and financial backing to the big boys. I don’t know your age, so don’t take this as a slam, but I remember the Ford/Carter years and the first few of Reagan. We had had a terrible recession/stagflation cycle. Yet banks and S&L’s were going under every damn day, even though more than 80% of their small loans (homes, cars, small businesses etc.) were timely honoring their commitments.
However, that segment of society couldn’t get a loan at any price. At the same time, S&L’s, banks and lending institutions of all kinds were drowning in bad paper due to all the loans they made to land speculators, oil exploration companies, and livestock feeders. They continued to make those loans right up until they collapsed and were taken over by the RTC(?).
It will be the same thing this time. The small businessman, the prospective homebuyer or vehicle purchaser will be locked out of the credit market while the “major” players are rescued. The only difference is that the new rescuees will be have different company logos.
Manish, I believe I made it clear that there was enough guilt to go around. But if you wish to know more, research the hearings regarding this issue in 2004. My basic statement stands and is correct.
September 30th, 2008 at 2:54 am
SA..you earlier wrote:
Unless you can show me a filibuster in the Senate, the Democrats can’t, in and of themselves, block something without the help of some Republicans while they were in the minority. The only thing I’ve seen is this spliced together hearing in 2004 that shows Republicans calling for regulation and Democrats saying things were fine. If this were completely true the thing would have left committee, passed the full House and gone to the Senate.
If that same youtube video, in that style of taking comments out of context were about some Republican screw-up, you would be rightfully skeptical.
September 30th, 2008 at 8:47 am
Here are two additional points. Both illustrate that this situation was intentional as a way to destroy our way of life.
Cloward-Piven Strategy
American Thinker
Uncle, I’ll forward you a lengthy email that is making the rounds that speaks on the same subject.
I find the situation frustrating because it really does appear that this was intentional.
September 30th, 2008 at 9:10 am
You know…I know several small business owners and I don’t know any who rely on credit for day to day operations and to make payroll.
I’m no MBA, but it seems to me that if a company is relying on credit to make payroll, they’re in trouble all ready. Cutting off their credit may be doing them a favor.
That would not be a very efficient business model. Assuming that business operate in the real world…the same one I occupy…credit IS a bill, not something used to PAY the bills. Robbing Peter to pay Paul and all that.
It seems to me that a credit crunch (which, other than within the sub-prime mortgage industry, I have yet to see any evidence of) would only cause slowdowns in the expansion of businesses. Business that have to lay off employees because they can’t make payroll without loans were failing anyway…having credit available would seem to me was only delaying the inevitable.
As far as Wall Street’s reaction: investors are as flighty as a herd of Gazelles in Cheetah country. Paulson and company have been screaming that the sky is falling and Congress failed to “save us”…of course the stock market took a hit.
September 30th, 2008 at 9:23 am
What Credit Crunch?
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=nyt_gets_it_wrong_credit_has_n
http://mjperry.blogspot.com/2008/09/new-banking-data-wheres-credit-crisis.html
September 30th, 2008 at 10:01 am
SA,
I disagree that #1 is the only thing on the table. Perhaps it’s the order I listed for #2 that is the problem?
1) Punish the scumbags, punish the innocent
2) Help the scumbags, help the innocent
I don’t disagree that personal credit won’t be harder to come by with the bailout. That said, I don’t see any evidence that consumers will retain access to personal credit without the bailout. As I see things, personal credit is going to become just as tight for just as long no matter what happens. Thus, it’s a non-issue.
But, unlike Sailorcurt’s observation about small business’ not operating on credit, most medium and large one’s do. Wal-Mart, Home Depot, Ford, and others do not operate on their own cash. Without credit access, (not because they aren’t credit worthy, but because no one has the capital available to lend) those companies will fold-up shop or down-size (I hate that term, BTW) drastically resulting in a large increase in unemployment and a devestated stock market. So, even if I were to grant that personal credit would remain available (which I don’t), I see no reason to believe that that would outweigh the harm done elsewhere.
September 30th, 2008 at 10:02 am
Good Lord, I need to learn when to use apostrophes.
September 30th, 2008 at 12:46 pm
I?m no MBA, but it seems to me that if a company is relying on credit to make payroll, they?re in trouble all ready
it depends on what type of business you are in. Think about it this way…a small business catering to other businesses has to pay its rent on the first of the month, pay its employees on 15th and end of the month, but doesn’t get paid until 30 days after rendering service. The business is fine and solvent, but it expenses come before its revenue and thus working capital keeps things moving. In a way, needing working capital to keep things running is no different than needing electricity to keep things running.
September 30th, 2008 at 12:51 pm
Easier way to think about it is if you operate at a margin of 20% and your borrowing rate is 5% then profit. However, if you borrow at 5% and your margin is 3%, oops.
September 30th, 2008 at 1:48 pm
manish:
As far as I can remember, Republicans at no time had a veto-proof majority. So Democrats could and did block reforms of Fannie Mae and Freddie Mac. They did so repeatedly, and they did it with their hands out to Fannie and Freddie, scooping up campaign contributions as protection money.
September 30th, 2008 at 4:12 pm
mariner:
Do you even know what you are talking about?!? The President was a REPUBLICAN. If its the Bush Administration that wanted reform, Congress could have passed said reform and Bush wouldn’t have vetoed given that that’s what he wanted. A majority in the House can pass any legislation that it wants to.
You may be thinking of a filibuster-proof majority in the Senate. Well, show me a Democratic filibuster in the Senate on a Fannie/Freddie reform bill and I’ll concede the point.
September 30th, 2008 at 6:41 pm
You have to go back to ’93 and come forward. And mariner is correct, though with Bush in, veto proof majority should not have been a factor, but the super majority thing certainly was.
September 30th, 2008 at 6:45 pm
If you remember the Republicans stupidly offered shared committee chairmanships, super majority necessity for types of bills, the Democrats then used that shared power to block almost everything that was good for us.
Republican stupidity doesn’t pardon Democrat perfidy.
October 1st, 2008 at 11:30 am
here you go, manish, with related views at same site.