Are we in the middle of a financial meltdown?

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Didn't an earlier poster suggest buying farmland and guns? We might nearly be there.

Yes, I said that.

 

Now, where's that German gun permit no one has?!?

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I'm not sure on all this bail out business for the banks.

If the shareholders don't want to take the rough with the smooth, why can't they just give up their share certificates to the state and we can have a publicly owned banking system.

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That's what the Germans did after the war. And they've ended up in exactly the same place ... if not worse because there was no shareholder accountability whatsoever! The public shareholders are the biggest losers, followed closely by bondholders. The winners? The creditors! Inflate your way out of it or nationalize/guarantee it ... same result. A few days ago I said 'keep your eye on the Euro". My newest pronouncement is 'keep your eye on Iceland'.

 

Just waiting to see when the skeletons really start rolling out of the closet and Steinbrueck starts looking even more like Dean Wormer. "Munich Re, you double-crossers ... now you're on double secret probation!"

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I'm not sure on all this bail out business for the banks.

If the shareholders don't want to take the rough with the smooth, why can't they just give up their share certificates to the state and we can have a publicly owned banking system.

er, that is effectively what is going on already.

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Maybe I'm misunderstanding it, but I thoght the banks were getting HUGE sums of money to carry on operating as before.

If the state has to step in, then I don't think the goal should be to allow the bank to go back into private hands again when the the crisi is over.

 

It is worship of the so called "free market" that got us into this mess and those resposbilbe are laughing all the way to the errrrm, bank.

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Maybe I'm misunderstanding it, but I thoght the banks were getting HUGE sums of money to carry on operating as before.

If the state has to step in, then I don't think the goal should be to allow the bank to go back into private hands again when the the crisi is over. It is worship of the so called "free market" that got us into this mess and those resposbilbe are laughing all the way to the errrrm, bank.

There will be no "business as usual". Look at the US savings and loan business. There was no going back. There will be no going back to the "wild west" of CDOs/CDSs/hedge funds/dark pools of "liquidity" and the rest of the unregulated world. The great irony is that the regulated markets (stock and cash) are now being dragged down the drainpipe, too. Which is why governments are so apoplectic now.

 

The "free market' can be simply viewed as the "not run by political hacks market" ... but EVERYTHING goes through these cycles as we try out our sea legs. If the government ran the internet, we'd be getting our 20-year-stress-tested 56Kbit modems right about now. A few speculators got blown up in the internet bubble, but we all ended up with the ridiculously cheap internet we enjoy today as a result.

 

After WWII, there were lots of pop icons terrorizing the landscape riding around on Harleys. Then the Japanese made bikes cheap and available as a mass product. And then thousands of untrained/unlicenced riders started getting smeared on the highway. And then testing/licensing requirements went into place.

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There will be no "business as usual".

Nah, different colour and different name, that's all. They had trust funds in the twenties, mutual funds in 1970ths and 80ths, now they have hedge funds. When there is to much money concentrated in to few hands financial problems appear. Bernanke should have employed a few more helicopters to spread the doe into the masses and they would have kept playing the music longer. Now the musicians have a drink break but I doubt they will keep quiet for long.After all the show has to go on.

It just so happens they cleaned out all the margin holders and in the process the longs hurt too and the shorts are laughing all the way to the bank.(for now)

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Bernanke should have employed a few more helicopters to spread the doe into the masses and they would have kept playing the music longer.

What you mean like redistributive taxation a la Europe would have achieved?

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Maybe I'm misunderstanding it, but I thoght the banks were getting HUGE sums of money to carry on operating as before.

If the state has to step in, then I don't think the goal should be to allow the bank to go back into private hands again when the the crisi is over.

 

It is worship of the so called "free market" that got us into this mess and those resposbilbe are laughing all the way to the errrrm, bank.

Wrong, wrong, wrong. GSEs like Fannie Mae and the encouragement they got from politicians for risky behavior (including the implicit government guarantee for their debt) are anything but free-market; furthermore, neither is it free market to encourage a relaxation of mortgage lending standards.

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neither is it free market to encourage a relaxation of mortgage lending standards.

That is 100% false. Fannie and Freddie are hardly the root cause of the economic collapse we're seeing. The root cause of the credit crisis is precicely due to the relaxation of mortgage lending standards caused by the unregulated free market that found new ways to package risky assets and sell them as low risk investment vehicles.

 

Banks were freed from traditional risk associated with granting loans, and they went crazy. The free market also played a cozy factor when credit rating agencies could be shopped around for. Who ever gave your crappy loan package the safest rating got your business. It was 100% the free unregulated market at work.

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If the state has to step in, then I don't think the goal should be to allow the bank to go back into private hands again when the the crisi is over.

Actually, Kommrad, many many economists actually agree with you. Instead of the giant gift of cash they are getting, the better idea is to do a "stock injection plan" which would essential make the banks owned by the government as preferred shareholders. Naturally, the bankers are 100% against this, as are many "Free Market Republicans" who don't like the idea of the government owning private businesses (but somehow are unsettled by the idea of the transfer of private debt to public trust)

 

The recent bailout plan had language to this effect slipped in it very late, so hopefully that's now the route they go.

 

FYI, for those a little lost, I highly recommend listening to NPR's Planet Money Podcast.

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The root cause of the credit crisis is precicely due to the relaxation of mortgage lending standards

I don't think anyone disputes that statement, even President Clinton (if you've been listening) has said he pushed for this so everyone could own a home, when he realised how bad it was and wanted tighter regulations on FM and FM the House Democrats fought against him. His own party thumbed their noses at him when he was President, Bush had no hope of working with that committee. In fact, this crisis is the first time these guys are even admitting there is a problem with relaxing the mortgage lending standards and encouraging that behavior, but now they are trying to spin it off on Bush. I find it Ironic that Clinton of all people is taking up for Bush on this point...

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But the real problem is the financial instruments which were designed to hide debt, not FM & FM which is really a sideshow.

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That is 100% false. Fannie and Freddie are hardly the root cause of the economic collapse we're seeing. The root cause of the credit crisis is precicely due to the relaxation of mortgage lending standards caused by the unregulated free market that found new ways to package risky assets and sell them as low risk investment vehicles.

 

Banks were freed from traditional risk associated with granting loans, and they went crazy. The free market also played a cozy factor when credit rating agencies could be shopped around for. Who ever gave your crappy loan package the safest rating got your business. It was 100% the free unregulated market at work.

A free market does not in and of itself relax lending standards. Care to say exactly how a market influenced by government policy and GSEs can be "free"? The problem was the poor creditworthiness and/or speculative nature of too many buyers/home purchases. If the risky loans had not been made numbers they were with government encouragement, they would not have been out there to cause problems down the line.

 

It is easy to complain about "the free market" which was anyhow somewhat illusory in the US residential housing market, and a lot harder to cogently say what one thinks should have been regulated, how it should have been regulated, and what any side effects would be.

 

I think you are on firmer ground when complaining about the ratings agencies, although again, that is not an indictment of the free market per se.

 

 

But the real problem is the financial instruments which were designed to hide debt, not FM & FM, which is really a sideshow.

Designed to hide debt? All mortgages are debt instruments.

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Not a side show, It's the opening act. It is what made all of this possible. If you didn't have those congressmen pushing for this to happen and making rule changes the ball never would have started rolling. Sure once it got going it spun out of control. But you have to hold the guys accountable. Maybe they will learn from this, maybe a few will turn around and dedicate their time in the House to making sure this will never happen again. Or at least working against it happening again. That would be something positive to come out of it, I think the guy in Georgia will probable turn out to be one of those.

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FM&FM don't explain what's going on in the UK which is suffering in exactly the same way from a mountain of hidden, unquantifiable debt.

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A free market does not in and of itself relax lending standards.

That's my point. It does. The lending standards being relaxed had very little to do with government "encouragement". It had everything to do with the combination of two things:

 

1) Unregulated packaging of debt into increasingly complex vehicles.

2) Rating agencies willing to rubber stamp a safe rating onto risky debt.

 

That is exactly why we have a global banking credit crisis, and not just the failure of Fannie and Feddie, which as you know, everyone expected for quite some time. What we're seeing is something entirely different.

 

 

The problem was the poor creditworthiness and/or speculative nature of too many buyers/home purchases.

It's tough to argue as an economist, then say that the "problem" is "people acting in their own rational self interest". That's what people receiving these loans were basically doing. The banks didn't care, because they passed the buck (risk) upward, Wallstreet didn't care, as it sold off the packages at a profit... and the buyers (China) didn't care because they thought the US debt was safe.

 

Government played no role in that process, but it should have.

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Yep, even politicians who like to claim a teensy blush of being centre-left like Bill Clinton or New Labour in the UK were happy to let the housing finance madness continue. And people who questioned it were shouted down as "commies" or whatever.

 

It is easy to get into hair splitting over what is "the free market".

I think it is to a large extent often a myth anyway.

Why were more and more lower income families buying houses?

Becasue mortgages were artificially "cheap" and renting artificially expebsive and that was a deliberate political policy.

 

Regulation could have gone some way to preventing the madness.

 

No loss leader deals on mortgages, allowing maximum 90% mortgages, forcing banks to offer better service in case of mortgage default, restrictions on house price speculation and of course, a greater role for the state in housing provision in itself.

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That's my point. It does. The lending standards being relaxed had very little to do with government "encouragement". It had everything to do with the combination of two things:

 

1) Unregulated packaging of debt into increasingly complex vehicles.

2) Rating agencies willing to rubber stamp a safe rating onto risky debt.

1) was in large part a result of the origination of risky loans that if a bank had to keep on its balance sheet would almost certainly not have issued.

2) did have something to do with it

 

 

Government played no role in that process, but it should have.

TFL, you really cannot credibly claim that government encouragement had nothing to do with it. Subprime loans in such large volumes would never have been made without government prodding.

 

 

That is exactly why we have a global banking credit crisis, and not just the failure of Fannie and Feddie, which as you know, everyone expected for quite some time. What we're seeing is something entirely different.

You apparently misunderstood me, but the crisis would not have occurred without the issuance of so many bad mortgages that defaulted. Fannie and Freddie were also pushed to take on more risk, thus making it easier to issue such loans.

 

 

It's tough to argue as an economist, then say that the "problem" is "people acting in their own rational self interest". That's what people receiving these loans were basically doing. The banks didn't care, because they passed the buck (risk) upward, Wallstreet didn't care, as it sold off the packages at a profit... and the buyers (China) didn't care because they thought the US debt was safe.

It's not in your rational self-interest to lie about your income and to borrow way too much money, including doing so without having a job.

 

Government played no role in that process, but it should have.

 

 

Yep, even politicians who like to claim a teensy blush of being centre-left like Bill Clinton or New Labour in the UK were happy to let the housing finance madness continue. And people who questioned it were shouted down as "commies" or whatever.

 

It is easy to get into hair splitting over what is "the free market".

I think it is to a large extent often a myth anyway.

Why were more and more lower income families buying houses?

Becasue mortgages were artificially "cheap" and renting artificially expebsive and that was a deliberate political policy.

 

Regulation could have gone some way to preventing the madness.

 

No loss leader deals on mortgages, allowing maximum 90% mortgages, forcing banks to offer better service in case of mortgage default, restrictions on house price speculation and of course, a greater role for the state in housing provision in itself.

Restrictions on housing price speculation? Details, please. Forcing banks...Come on, MT, you have panned government policy, yet want more government involvement. .

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