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post #16 of 71 (permalink) Old 12-07-2008, 05:02 PM
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understanding the financial crisis

Financial Crisis for Beginners The Baseline Scenario

This site does not have all of the answers but it is a good place to start. I have enjoyed reading the current comments since they mirror many of my own thoughts, but I am afraid very few hit the real mark of WHY?
Maybe somebody has followed the money?
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post #17 of 71 (permalink) Old 12-07-2008, 05:15 PM Thread Starter
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You make a good point BUT!

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Originally Posted by SmokeyWren View Post
There were lots of hints of it coming. The basic cause of the meltdown was Federal law forcing banks to loan money to folks that couldn't pay it back. Like most moves towards socialism, it sounds good in theory - "affordale housing". Who's not for affordable housing? Then the financial world bundled those bad loans into securities that were sold to investors, but disguised so they no longer looked like bad loans. Then when there was a burp in housing prices, those bad loans began being foreclosed because the property could no longer be sold for enough to cover the mortgage. And the snowball began rolling down the mountain.

But lots of folks were warning about it long ago. Recently, as late as 2005, that senator who lost his bid for the Presidency was warning about it, and introduced legislation to help stop it. But the dreamers and socialists in the Congress shouted him down as being against "affordable housing".

One reason the stock market has gone south in a hurry is we elected more of those dreamers and socialists to make and enforce the laws. That's got to be bad news for business, and the stock market just reflects the prospects for business.
Were the banks in the entire world forced to make bad loans? I say the situation is more complicated!

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post #18 of 71 (permalink) Old 12-07-2008, 05:27 PM Thread Starter
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I think you are hitting closer!

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Originally Posted by GEARJAMMER View Post
Smokey, what you are saying is true, but you are still finger pointing. And this only addresses some of the problems in this country. It would be easy for me to point a finger at a former Texas Senator who snuck through legislation that deregulated much of the financial regulations. As Roof Editor stated this is a world wide problem.

I happen to agree with the above statement. Yes I'm finger pointing at the Middle East. When oil hit a $150.00 a barrel it sucked every one's economy dry. Take a simple look at your own budget and how high energy prices affected you. Multiply that for almost all citizens of the world and you can see why the purchasing power of everyone including governments' went south.

The price of energy is the culprit. Look how food and commodities prices rose in direct correlation to the rise of the cost of oil. How many businesses failed because of the price of oil? The cost of energy leaves nothing untouched. As oil prices rise, so must the cost of everything else. This is what I will call the "Snow Ball Effect" which once it starts down hill, it picks up momentum and grows larger as it goes.

It's next target is employment with the same effect. More blood is lost from the economy. One antagonistic point is that once the cat's out of the bag, prices are much slower to fall even though the price of energy has fallen.

Shawn
I'm not totally sure but "I" think we were living on the edge for years, doing OK on the edge but on the edge. The housing market going up 25% each year was not realistic and that had to end eventually. Next oil going from $30 to $150 in less than a year gave it the final kick in the butt, and that pushed it over the edge.

Again trying to avoid the "R" or "D" did it, this Paulsen guy is a smart guy and even he doesn't have a clue. He does have a clue on how to send 700 billion back to where he came from with no accountability to where it's going, and how it's going or to who? This in my opinion was a bad deal for both the "D" and "R" to vote for. Although both sides were pushed into this real hard, If it were me voting, I would have wanted some greater accounting on WHERE, WHEN, and WHO it was going to before voting on it.

Rewind. Remember sun micro-systems and a bunch of other worthless stocks selling for 100:1 PE and 1,000:1 PE and even NO PE? and people kept buying when there was nothing but smoke and mirrors there?

Although it's tempting to blame this on D or R, it's hard to blame what is happening in all of Europe, Russia, etc on D or R.....sort of gives them a lot more credit than they are due.

Too much junk/toys to mention, ever changing due to too getting bored too quickly. I need a 10 step program!
Want to call? I'm in the book. Want to argue....First explain the square root of negative one....lol


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post #19 of 71 (permalink) Old 12-07-2008, 05:41 PM
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Lack of regulation?!? Are you kidding me?!? How about too MUCH regulation!


The 1920s saw an expansion in the US economy. Through innovation, manufacturing costs were lowered and labor productivity was raised resulting in an increase in goods, a rising stock market, and a massive real estate boom. The Feds, in their infinite knowledge, attempted to stabilize the general price level via monetary policy. Given the expansion of the supply of goods and services throughout the '20s, prices would have been expected to begin a decline. Thanks to the Fed's policy, this did not occur.

They pumped huge additional quantities of money and credit into the banking system to prevent prices from "falling too drastically." In order to encourage this new money to be lent out to the public, the Feds then lowered the interest rates below the market equilibrium level. This resulted in insufficient savings to match the loans.

Towards the end of '20s, the Fed decided that their policy was threatening to induce price inflation so they put the brakes on the loose lending. Virtually overnight, the stock-market, investment, and real-estate house of cards came crashing down.

We can further place blame on the interventionist policies of Hoover and Roosevelt. Rather than allow the market to adjust, regulators prevented the required downturn of prices and wages.

This is often blamed as a "failure of capitalism" or as checkthisout suggests, a "lack of banking regulation."

I only go into the Great Depression to display the similarities between the events of the '20s with the events of the '90s and early 2000s. The Fed has been busy expanding the money supply once again as well as cutting interest rates to 1 or 2 percent.

Regulation is the cause, not the solution!

Roosevelt did what he did to keep the things that we needed like a stable food supply, infrastructure and jobs from being destroyed by an abusive Banking system.

Roosevelt's policies prevented anything like this from happening for 50 years until deregulation started under Reagan which led to the S&L scandal, then more deregulation in the 90's under clinton which rolled-back Glass-Steagall.

That's actually a really important element.

To keep it simple, what it means is that investors and people looking for returns on money invest in debt rather than in the production of tangible goods.
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post #20 of 71 (permalink) Old 12-07-2008, 05:45 PM
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I personally think that the price of oil going to $150 put a halt on a whole bunch of economic progress. Congress said no drilling, no nothing, so nothing happened, economically. No one drove anywhere to spend money. No one bought anymore SUV's or trucks. Congress and the Fed allowed everyone that could sign a piece of paper to buy a home that they couldn't afford. Builders were building homes as fast as the people who couldn't afford them would sign on the bottom line. They built too many and the Fed/Congress messed it ALL up. So what did we do? We voted more of them into office. We deserve whatever we are faced with; no sympathy here, just discust.

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post #21 of 71 (permalink) Old 12-07-2008, 05:47 PM
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WW II saved Roosevelt's butt, not his economic policies.

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post #22 of 71 (permalink) Old 12-07-2008, 07:23 PM
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WW II saved Roosevelt's butt, not his economic policies.
How do you figure?

Idaho isn't it?

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post #23 of 71 (permalink) Old 12-07-2008, 10:11 PM
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Is it really as bad as everyone on the news and the radio make it out to be?

I was born in 1983, making me 25 years old. I got married in Aug of 07 and bought a house in March 2008. I have had a truck payment since I was 18 years old and I just bought my wife a new Escape.

I remember listening to Rush Limbaugh with my dad and thinking the world was coming to an end. Now, I dont know what to think.

Being only 25 years old, this is the first "global financial crisis" that I have experienced. Of course I learned about the Great Depression in school, but just recently educated myself on the details of the early 80's recession and just now learned that there was a 2000-2001 recession.

Where does the current financial position of the U.S. compare to that of the Great Depression? Are we really almost to that point?

I have no real retirement savings or a 401k. I guess that I personally, have not really felt the effects of the Wall Street slump, atleast not in a way that makes a major difference in my day to day lifestyle.

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post #24 of 71 (permalink) Old 12-07-2008, 11:35 PM
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lonestar im young with you, 23...you sparked a mild rant from me:

i have dont have any hard numbers to compare this to the Great Depression, but it seems to me that there is going to be food the table. from what i know of the GD, times were tougher than what we have now...
now,if you cant afford food, you should probably cancel your $40/month internet and use the library if you need it. how about your $50/ month cell phone and $75 cable bill. Nowadays, how many people live in a household and how many cars are in the driveway? We have more fluff than we know what to do with. . think of what we see on tv (flat panel plasmas big enough for the neighborhood) about people still dont have easy access to clean drinking water...how many of us have a case in the house and garage? if you get in a bind, just go to any public facility and there is a plethora of water fountains. I think as Americans we forget how great we have it
Even as tough as times are....is this really that bad? Like the saying goes, a bad day fishing is better than the best day at work...i feel a bad day in America is better than any day anywhere else. Is that ethnocentric? maybe and leaning toward yes, but its pride of the Red, White, and Blue too.

I know that is off topic a little, but i felt this needed to be brought up.

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post #25 of 71 (permalink) Old 12-08-2008, 01:30 AM
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Quote:
Originally Posted by checkthisout View Post
Roosevelt did what he did to keep the things that we needed like a stable food supply, infrastructure and jobs from being destroyed by an abusive Banking system.

Roosevelt's policies prevented anything like this from happening for 50 years until deregulation started under Reagan which led to the S&L scandal, then more deregulation in the 90's under clinton which rolled-back Glass-Steagall.

That's actually a really important element.

To keep it simple, what it means is that investors and people looking for returns on money invest in debt rather than in the production of tangible goods.
Ahh… Excessive deregulation. I love that excuse.

Yes, there has been some deregulation of the financial markets in the last couple of decades, but much of that deregulation has actually produced incredible benefits for the American public. Aside from the customer-service gains that have come from the legalization of interstate banking and the ability of banks to offer a variety of products under one roof, the expanded range of investments that banks can take on enables them to diversify and lower their exposure to risk. Investments with little chance of actually losing any profit (the FDIC should ring a bell) simply encourages excessive risk.

Yes, a number of banks have had problems in the last year, but the number of bank failures since the 1999 deregulation has been exceptionally low. Between 1999 and 2007 only 40 U.S. banks failed. Compare that number to the same nine-year periods starting in 1969, 1979, and 1989. Only two years since 1934 have had no bank failures: 2005 and 2006. If the 1999 overturning of the Depression-era Glass-Steagall regulations is such a problem, why were the eight years to follow among the healthiest in U.S. banking history?

These problems are almost all linked to the troubles in the housing market. Once again, blaming deregulation is at odds with some important facts.

It is true that a number of the tools utilized by mortgage companies (ARM anyone?) contributed to the problem. More important, though, is the role played by institutions such as Freddie Mac and Fannie Mae. They were created by the government to intentionally distort the housing and mortgage markets. Simply browse over to their websites and take a look at the supplied mission statement: To provide “affordability to the housing market.”

Government planners were not content to allow the voluntary market forces to run unmolested. In a truly free market, supply and demand would determine the price levels. The demand for houses would be determined by people’s wealth and income. So when bureaucrats demand “affordable” mortgages to allow the poor in America to take part in the American Dream of homeownership, a distortion occurs. Demand increases artificially, supply increases artificially, and price increases artificially.

In sum, nothing in the current housing and banking troubles indicates some sort of systematic failure of capitalism that can be laid at the feet of deregulation. Yet we are still continually bombarded by any bit of bad news to declare the death of capitalism, all the while ignoring the ways in which our larger-than-ever government has intervened in the market, producing the very problems they try to blame on the free market.

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post #26 of 71 (permalink) Old 12-08-2008, 01:47 AM
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lonestar im young with you, 23...you sparked a mild rant from me:

i have dont have any hard numbers to compare this to the Great Depression, but it seems to me that there is going to be food the table. from what i know of the GD, times were tougher than what we have now...

Even as tough as times are....is this really that bad?
No, you are very correct in recognizing the progress of America and our current elevation in the world. Sure, we’ve been slipping and are in a recession but that is the normal process of the business cycle. (I will say that this recession would be supremely less severe if it weren’t for the continual meddling of Washington.)

Let’s take a look at a few numbers:

- In 1933, unemployment peaked at 25%. We’re currently sitting at 6.7%.

- During the GD, 20 to 25% of income was spent on food. Today people spend roughly 10%.

- People in the United States are nearly eight times wealthier now than they were in the 1930s.

- There were 9,000 bank failures during the Great Depression. Nearly 3,000 failed during the savings and loan crisis of the late 1980s and early '90s. And, despite the highly visible failures of some large banks this year, only 117 out of 7,203 U.S. banks are now at risk and less than 1 percent of bank assets are held at those troubled banks.

But all is not roses and puppies either.

Our current national debt is totaling somewhere in the range of $10.6 trillion using cash basis accounting. (By using the GAP standard, and federally required, accrual basis accounting the debt is more in the area of $150 trillion.) We’re running a half trillion dollar budget deficit this year. And roughly $7.7 trillion has been promised for the current bailout mania.

The M3 (money supply) has not been published by the Feds for so many years for a reason. They realize that the entire economy would tank if people truly realized how depreciated the dollar really is. It doesn’t take a genius to understand that printing more money from thin air reduces the value of the money already possessed. Just look at Post-WWII Germany’s hyperinflation if you need a reminder.

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post #27 of 71 (permalink) Old 12-08-2008, 04:16 AM
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How about:

Camelot + Capitalism + Public Greed + Shifting to a Service Economy + Globalization + Political Greed + Public Ignorance + Middle Eastern Oil Price Hijinx + Sub-prime Crimes ---> Plummeting Consumer Confidence = National Economic Collapse ---> Global Economic Collapse.



Just a quick summary, and entirely just my opinon.

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post #28 of 71 (permalink) Old 12-08-2008, 05:23 AM
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Ahh… Excessive deregulation. I love that excuse.

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Originally Posted by Vipersix View Post
Yes, there has been some deregulation of the financial markets in the last couple of decades, but much of that deregulation has actually produced incredible benefits for the American public. Aside from the customer-service gains that have come from the legalization of interstate banking and the ability of banks to offer a variety of products under one roof, the expanded range of investments that banks can take on enables them to diversify and lower their exposure to risk. .
Ignore History at your own risk.

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Investments with little chance of actually losing any profit (the FDIC should ring a bell) simply encourages excessive risk.
That was the reason for the barrier between commercial and investment banks. They didn't want Banks gambling with customer's deposits.

In this case in 1999, they removed the regulations that kept the two seperated but left the system of insurance in place.

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Yes, a number of banks have had problems in the last year, but the number of bank failures since the 1999 deregulation has been exceptionally low. Between 1999 and 2007 only 40 U.S. banks failed. Compare that number to the same nine-year periods starting in 1969, 1979, and 1989. Only two years since 1934 have had no bank failures: 2005 and 2006.

If the 1999 overturning of the Depression-era Glass-Steagall regulations is such a problem, why were the eight years to follow among the healthiest in U.S. banking history?
It's called a bubble and here-said bubble happend to be in debt. During a bubble, an amatuer off the street can play and win.

If you want to ignore the size of the Banks that have failed and that about 8 trillion dollars have been given away so far.

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These problems are almost all linked to the troubles in the housing market. Once again, blaming deregulation is at odds with some important facts.
No it's not. Without deregulation this NEVER would have happened.

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It is true that a number of the tools utilized by mortgage companies (ARM anyone?) contributed to the problem. More important, though, is the role played by institutions such as Freddie Mac and Fannie Mae. They were created by the government to intentionally distort the housing and mortgage markets. Simply browse over to their websites and take a look at the supplied mission statement: To provide “affordability to the housing market.”
They have been around and have been doing the same thing successfully and without trouble since before you were born.

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Government planners were not content to allow the voluntary market forces to run unmolested. In a truly free market, supply and demand would determine the price levels. The demand for houses would be determined by people’s wealth and income. So when bureaucrats demand “affordable” mortgages to allow the poor in America to take part in the American Dream of homeownership, a distortion occurs. Demand increases artificially, supply increases artificially, and price increases artificially.
The Financial industries usurped the past role of Fannie and Fr.....actually forget this.

QUESTION: What was AIG's Role in this whole mess?

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In sum, nothing in the current housing and banking troubles indicates some sort of systematic failure of capitalism that can be laid at the feet of deregulation. Yet we are still continually bombarded by any bit of bad news to declare the death of capitalism, all the while ignoring the ways in which our larger-than-ever government has intervened in the market, producing the very problems they try to blame on the free market.
There have to be rules governing banking just like there is anything else in order to prevent malfeasance.

Unless you don't think having basic laws to govern society is necessary either?

The government's role is only becomes negative when it bends to industry hacks. They go from being a regulator to being a conspirator that is more dangerous than the original criminals it tries to control. Think corrupt cop.

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post #29 of 71 (permalink) Old 12-08-2008, 06:19 AM
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Many people are placing blame on greedy capitalists. Greedy bankers, real-estate brokers, speculators, you name it. If this is the case, why are all of these people suddenly greedier in the mid-'00s than at other times? This is simply an emotional excuse to the underlying factors.

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There have to be rules governing banking just like there is anything else in order to prevent malfeasance.

Unless you don't think having basic laws to govern society is necessary either?
As far as I'm concerned, there are basically two distinct methods of discouraging companies from engaging in reckless investment and "malfeasance." One is to let them do whatever they want (subject to prohibitions on outright fraud and theft) and let them go bankrupt if they screw up. The other is to hold their hands every step of the way, bailing them out of trouble, and second-guessing every decision they make.

There is all the difference in the world between having "basic laws to govern society" and regulating an industry every step of the way. You are obviously blaming deregulation. But you must realize, deregulation has been only partial and therefore rigged. Remember the S&Ls? They were deregulated too, but not all the way. Restrictions were removed from the kind of investments they could make, but deposit insurance guaranteed that the taxpayers would cover the losses. That’s not real deregulation, that’s corporatist favor-granting by another name.

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QUESTION: What was AIG's Role in this whole mess?
AIG made the same mistakes as did Countrywide and numerous others. These companies were coaxed into making poor investments and allow lax lending criteria by the cheap money being pushed out by the Fed. These guys stretched the rules a bit in order to allow certain candidates to be eligible for loans they otherwise would not be able to qualify for. These loans were backed by the worthless institutions FHA, Freddie Mac, and Fannie Mae.

Toss in the federal pressure to loosen underwriting standards in the name of avoiding discriminatory lending. The strengthening of various programs such as the Community Reinvestment Act. The bundled pools of mortgages being issued as collateral for debt (i.e. CDOs)...

Free market my ass.

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post #30 of 71 (permalink) Old 12-08-2008, 06:33 AM
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I would highly recommend a book called The Experience of Free Banking. A bit dry maybe, but a good read with lots of historical accounts and data.

I'd also recommend subscribing to The Freeman, a periodical published by The Foundation for Economic Education (FEE) and Regulation which is published by the Cato Institute.

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