Economics business.The Sub-prime Crisis. How bad is it?

[LaurieAG]

I saw a graph in the Australian newspaper yesterday that showed that new US non financial lending was negative.

 

There was an other article last week that described a company that had a revolving line of credit (Revolver) renewed after 6 years. The old terms were .2% above LIBOR (London Interbank Borrowing Rate, which is higher now than 6 years ago) for 6 billion dollars for 6 years. The new terms were for 5.3 billion over 1 year at a rate 2% above the current LIBOR.

 

I can understand why these new lending figures have gone negative

 

If the trillions pumped into the financial sector only just balances their current and future obligations with regards to their respective derivative monsters, surely these monsters must be removed now, while the true value of the financial sector is zero.

 

The only equitable solution is that these monsters should be banned and the current monster be banished to another planet for a long time.

[Michaelangelica]

I saw a graph in the Australian newspaper yesterday that showed that new US non financial lending was negative.

 

There was an other article last week that described a company that had a revolving line of credit (Revolver) renewed after 6 years. The old terms were .2% above LIBOR (London Interbank Borrowing Rate, which is higher now than 6 years ago) for 6 billion dollars for 6 years. The new terms were for 5.3 billion over 1 year at a rate 2% above the current LIBOR.

 

I can understand why these new lending figures have gone negative

 

If the trillions pumped into the financial sector only just balances their current and future obligations with regards to their respective derivative monsters, surely these monsters must be removed now, while the true value of the financial sector is zero.

 

The only equitable solution is that these monsters should be banned and the current monster be banished to another planet for a long time.

Yes agreed Unless the banks lend to BUSINESS at good even generous rates we are all in deep doo doo.

Here they are just worried about their bottom line. Stuff the economy/society/community. As long as the shareholders pay my bonus the world is rosy -Short-sighted bastards.

They (ALL Banks and Credit Unions) have been given a blank cheque by the government but don't see any need or responsibility now to pass on Reserve Bank's lowering of interest rates. That should help their profit forecasts. They are awash with cash, some starting to come in from OS as they are offering some of the best and certainly safest (due to Govt guarantee) rates in the world-- c. 5%

Meanwhile lending to business at 11-14%, even -19%(a common credit card rate), while making them jump though all sorts of expensive and time consuming hoops to get even that .Mostly they are not interested in running a mortgare on your factory just your home.

Lately they refused to administer small low interest government green loans for pensioners & the poor to "green" their homes- arrogant shites that they are. (The credit unions are coming to the party though)

Sort of makes you wish they had all gone broke and we socialised the lot of them

[LaurieAG]

So, if the global financial system isn't lending new money to business then existing business must be paying more for the money they need to continue running and they must pass on these costs to their consumers or reduce their profit margins. If they ruduce their profits the market will punish them so they must retain or increase their profits to stop their share prices falling.

 

Like the US Federal Reserve, the Australian Reserve, George Soros, Allan Greenspan and Rupert Murdoch, we all should be running around shouting that there is no problem and things are going to get better any time now, because we're the ones who are going to be paying for it.

 

It looks like we are all going to pay for it twice, at least, and that'll only keep the global economy sustainable with no real growth.

 

I hope this isn't the new mantra for the 21st century.

 

Autocrat king is just tyrannus rex

all hail thrall.

 

Elites who turn their peasants into serfs

all hail thrall.

 

Politicians ruled by economics at work

all hail thrall.

 

BTW, thrall is slavery.

[LaurieAG]

There was an interesting article in my local paper today. It was about Satyajit Das, risk consultant and author of "Traders, Guns and Money", he was one of the first people to warn about the global financial crisis (GFC).

 

What we are creating at the moment is one last round of drinks at the bar. We've been defying financial gravity for 20 years and it can't go on. At some point in time these new bubbles that we've created to get out of old bubbles will pop and then of course there are no more bubbles and we'll have a lot of flat beer. What we are seeing here is a very dangerous phenomenom where the financial markets have suddenly decided things are over and they are anticipating, effectively recovery, so they are actually boosting things like share prices, massively. They could well be in for a negative experience down the track. and of course next time that happens there will be no support because governments are essentially now at the limits of what they can do

 

Our newspapers revealed recently that the value of OVER THE COUNTER derivatives had dropped from 600+ trillion to around 592 trillion dollars due to the GFC. The US government has said that it's new regulation will be a clearing house for derivatives that are NOT TRADED OVER THE COUNTER. So conservatively we could be talking about 1500-2000 trillion worth of derivatives in total, but we'll probably never know.

 

'The plea of BeiBionn'

 

You can have your magic beans Jack

your children are hungry and we need the cow back.

 

The lack of just terms and equitable or fair pacts

expose all crooked beanstalks to concerted attacks.

 

Unless obsessive cycles are stopped in their tracks

our towns will again be as flat as tacks.

 

You have been too trusting Jack

your childrens futures remain black

while current problems compound through lack.

 

Struggle earnestly against the pack

repudiate rights to depreciatingly retract

as giants fortress lie ripe for sack.

 

For only fair shares of the golden goose Jack

will save beanstalks and giants from the axe.

[Michaelangelica]

Well you have just gotta keep smiling --and gardening! :hihi:

Government Motors.

[Boerseun]

I only just now saw the "You don't want to buy our shitty cars" pic that Michaelangelica put up.

 

And it really made me think.

 

I can understand the imperative from a social standpoint to bail companies like GM out, to preserve jobs in the short term.

 

But the bottom line is that they've been losing sales for years - regardless of the financial crisis.

 

The only way to make this sustainable in any conceivable way, is if GM starts manufacturing vehicles that people would actually buy. Else, they will just have to be bailed out again next year, and the year after that, ad infinitum.

 

How is it possible that manufacturers could be bailed out in the USA, that beacon of capitalism? If a company can't sustain itself based on sales, then market forces will inevitably remove that particular company from the equation, i.e. the company will disappear into the mist of history. Which makes me think - how many of these "bailouts" would have been necessary in any case, without the financial downturn? How many companies are now just jumping on the bailout bandwagon because they were crap to start with?

 

I think the whole concept stinks. There's no point in bailing out General Motors, if people still insist on buying Toyotas and Volkswagens.

[LaurieAG]

Hi Boerseun,

 

How is it possible that manufacturers could be bailed out in the USA, that beacon of capitalism? If a company can't sustain itself based on sales, then market forces will inevitably remove that particular company from the equation, i.e. the company will disappear into the mist of history. Which makes me think - how many of these "bailouts" would have been necessary in any case, without the financial downturn? How many companies are now just jumping on the bailout bandwagon because they were crap to start with?

 

Interesting point considering that 'saving' them interferes in the operation of the 'free market' in its purest form.

 

It almost seems that man made systems with uncontrolled expansion (i.e. non effective regulation) don't correct themselves when they go out of control and end up blowing up, even if they are interfered with manually (i.e. they still blow up only the damage is larger and more wider spread than would be expected 'naturally').

 

If the 'free market' system was put at risk by its own uncontrolledness then is it a viable system in either its uncontrolled or controlled states as both seem to blow up, naturally or with intervention, quite regularly?

 

Seriously, several things I'd really be interested in knowing is if the 'free market' is just another flawed human construct, is it really a 'natural' system because it shadows mainstream cosmological constructs, and accordingly, are mainstream cosmological constructs 'natural' systems or flawed human constructs based on the global financial system?

 

While Einstein may have pondered if 'god' gambled was he really a capitalist too?

 

I think not.

[Michaelangelica]

if people still insist on buying Toyotas and Volkswagens.

i'm not sure they are even doing that, are they?

Here the "Socialist" (in Yankee eyes) Labor Govenment has bailed out GM because of electoral backlash concerns. But they have insisted that GM smarten up its act-- get innovative and stop making gas guzzlers. I am not sure you can decree that sort of corporate transformation of culture. Maybe going broke would clear the decks for a truely innovative young firm. -- But where would they get finance these days?--- especially in Oz, not known for supporting its young entrepreneurs and innovative inventors.

 

Yes socialist USA is amusing, I find, considering Yanks are paranoid about socialism ( socialism = communism= the evil, devil incarnate).

 

Here is a "What went wrong?" speech

I am not sure about people not seeing this coming. How long ago was this thread started and it was not the first?

I will go back to amusing-if pointed- posts after this :hyper:

Reflections on the Global Financial Crisis

Address to the Sydney Institute

Tuesday 16 June 2009

David Gruen*

Executive Director

Macroeconomic Group

Australian Treasury

 

It is a pleasure to be here at the Sydney Institute talking about a topic that has consumed a good proportion of my waking hours, and a few of my non-waking hours, over the past eighteen months or so.

. . .

. . . I confess to being continually amazed, and shocked, by the still evolving global financial crisis. If this crisis hasn't changed at least some of your views about how the world works, then I reckon you haven't been paying attention – or, alternatively, your views are so tightly held as to be impervious to the arrival of new information.

 

The global financial crisis is a huge event and a huge topic, and with the limited time available, I will be selective in my comments.

 

Let me start with a sound bite, from January this year, from Alan Blinder, Princeton Economics Professor and former Deputy Chairman of the US Federal Reserve:

 

"Nobody thought this might happen. Things can go wrong. But the number of things that have gone wrong, and the ferocity with which they have gone wrong I think was beyond the imagination of almost everyone."2

 

That is a sentiment with which I agree. There were economists who warned about aspects of this crisis, and I am going to touch on some of them in my remarks today, but almost nobody thought that something as severe as this was remotely likely.

 

I don't intend to give a blow-by-blow account of the financial crisis, nor a detailed analysis of the reasons for the crisis. But I thought it would be helpful to provide a list of the factors or causes that I think made a material contribution to the crisis.

 

I have divided my list into those causes that were directly related to the US housing market – the proximate causes – and those that should be considered wider causes of the crisis.

 

I have been mindful to keep my lists as short as possible, but I have still ended up with thirteen items on one or other of my lists.

 

Let me start with five proximate causes.

 

First, global imbalances implied a huge flow of funds from developing countries (particularly in Asia) to developed countries (particularly the US).

 

Second, low global real interest rates contributed to strongly rising asset prices and, eventually, to house price bubbles in the US and several other countries. Global real interest rates were low both because of the global savings-investment balance (the 'global savings glut'), and because of expansionary monetary policy, particularly in the United States.

 

Third, there was incoherent financial regulation in the US mortgage market. There were at least four relevant regulators in the prime mortgage market and, in the subprime mortgage market, many of the largest lenders were not subject to any supervision by bank or thrift regulators.3

 

Fourth, there was long-term public sponsorship of home ownership for low-income households in the US, many of which ultimately could not afford to own homes.4

 

Fifth, there were serious flaws in the 'originate to distribute' model for mortgages. This model involved mortgages being bundled up and 'securitised' and, in the case of many financial instruments based on sub-prime mortgages, given inappropriate AAA credit ratings and then spread to the winds, via global capital markets. The consequence of a loss of integrity in the relationship between original borrowers and final investors was that eventually no-one was doing due diligence on borrowers' ultimate capacity to repay their loans. In theory, risk was supposed to be spread to those most able to bear it; as events turned out, it was instead spread to those least able to understand it.5

 

Let me turn now to the wider causes, of which I have three.

 

First, financial instruments became so complex that eventually literally no-one understood fully the nature of the instruments they were buying and selling.6

 

Second, there was a range of perverse incentives in financial markets – too much pay for short-term returns, and not enough downside for losses. Many individuals faced strong financial incentives to take risks with other people's money – risks that generated good returns most of the time, but with a small probability of disaster.7 When the disaster struck, it was a disaster for the other people whose money had been put at risk, for the financial firms that had put it at risk, and for the wider financial system.

 

Third, large banks and the financial system more generally, mainly in US, UK, and Europe, gradually became more highly leveraged (more loans for each dollar of bank assets).

 

This final cause is one of the most important, because it rendered the global financial system much more fragile than most people realised. And so it is worth spending a little time fleshing out in some detail why the financial system gradually became more highly leveraged.

 

This leads me to a third list, which enumerates the reasons why the financial system gradually became more highly leveraged. There are five items on this list.

 

First, the 1999 repeal of the US Glass-Steagall Act – which had been enacted in the teeth of the Great Depression in 1933 – allowed commercial banks to run large investment banking businesses.

 

Second, regulatory frameworks encouraged banks to shift loans 'off balance sheet' and encouraged growth in the 'shadow banking system', largely outside the regulatory net.

 

Third, times were good and it was therefore very profitable to become more highly leveraged.8

 

Fourth – and this is another implication of low global real interest rates combined with investors continuing expectation of high returns – financial firms were searching for innovative ways to generate higher returns, and more leverage was a natural way to achieve this.

 

But surely that meant that financial firms were taking huge risks to their own solvency? This leads to the final reason for the increased leverage, and therefore the crisis: a widespread failure of risk management. Banks thought they had a better understanding of financial risk than ever before, based on sophisticated mathematical models of risk and return. The banks' new risk-return models were indeed sophisticated, but as it turned out, they were also fatally flawed.9

 

As a result, as house price bubbles collapsed in the US, UK, and several other countries, the cascading of problems from one counterparty to another, and from one financial market to another, generated a shock well outside the experience of the banks' risk models and this, combined with their high degree of leverage, bankrupted large parts of the global financial system.

 

We are all now living

Reflections on the Global Financial Crisis - Address by David Gruen to the Sydney Institute

[Michaelangelica]

The Science of Economic Bubbles and Busts

The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money

By Gary Stix

 

 

* The worldwide financial meltdown has caused a new examination of why markets sometimes become overheated and then come crashing down.

* The dot-com blowup and the subsequent housing and credit crises highlight how psychological quirks sometimes trump rationality in investment decision making. Understanding these behaviors elucidates the genesis of booms and busts.

The Science of Economic Bubbles and Busts: Scientific American

[Michaelangelica]

I would be interestedin hearing aYank repose to this article

Thomas DiLorenzo

for The Daily Reckoning Australia

Never-Ending Government Lies About Markets

 

Thomas DiLorenzo

Thomas DiLorenzo is a professor of economics at Loyola College in Maryland, a senior faculty member of the Ludwig von Mises Institute, ...

Thomas DiLorenzo

[lemit]

I would be interestedin hearing aYank repose to this article

Thomas DiLorenzo

for The Daily Reckoning Australia

Never-Ending Government Lies About Markets

 

Thomas DiLorenzo

Thomas DiLorenzo is a professor of economics at Loyola College in Maryland, a senior faculty member of the Ludwig von Mises Institute, ...

Thomas DiLorenzo

 

I have to confess I couldn't get past DiLorenzo's first line:

 

The purpose of government is for those who run it to plunder those who do not.

 

That's an interesting interpretation of the social contract. It's not just a little overreaching, it kind of reaches back to the origins of all civilization and says they are all corrupt, every single one of them, and the fact that he is able to put anything in print is just a sign of how we've given up our individuality.

 

No, it's more than that. He's saying that the fact he exists is a denial of his premise and that he as the author of that line is therefore an idiot.

 

I've seen him on CSPAN. He makes a little more sense than that, although that's not difficult to imagine, but he doesn't make enough sense to be taken seriously.

 

But who cares? Anybody who has that as his thesis is still an idiot. The rest doesn't matter. If you are in a bookstore, pick up a book, and read that as a first line, you should put down the book and find somewhere to wash your hands.

 

--lemit

[Michaelangelica]

Es I did abit of reserch on him

Why Yank paranoia, Socialism = Communism propaganda in an Australian magazine?

Clearly the Feds. oversight of the Yank financial system is not working.

 

If the American Indians did not show the Pilgrims how to eat and grow corn they would have all died.

 

DiLorenzo and the Tobacco Industry

 

DiLorenzo served as a research fellow at the Independent Institute and the Capital Research Center, two public policy think tanks that have accepted tobacco industry funding.[2] In 1994 the Independent Institute accepted funds from R.J. Reynolds (RJR) specifically to fund anti-tobacco control research by DiLorenzo.[3]

DiLorenzo has co-authored books funded by tobacco companies with James T. Bennett of George Mason University. In 1995, Bennett and DiLorenzo billed RJR $100,000 [4] to produce a book a called Cancerscam: the diversion of federal cancer funds to politics, that attacked health charities for spending what the authors deemed a disproportionate amount of their income on political advocacy.

 

 

Thomas DiLorenzo

Economics professor, Loyola College

BALTIMORE, Md.

 

The earliest apologists for the lost Cause of the South, writing in the first years of the 20th century, described Abraham Lincoln as a good and even great man, sorely misled by evil advisers who pushed a harsh Reconstruction policy. No more.

 

Thanks to Thomas DiLorenzo and others of his ilk, the 16th president is now viewed in neo-Confederate circles as a paragon of wickedness, a man secretly intent on destroying states' rights and building a massive federal government.

 

"It was not to end slavery that Lincoln initiated an invasion of the South," DiLorenzo writes in his 2002 attack on Lincoln, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War. "A war was not necessary to free the slaves, but it was necessary to destroy the most significant check on the powers of the central government: the right of secession."

 

DiLorenzo is not a historian. With a doctorate from the Virginia Polytechnic Institute, he has been since 1992 an economics professor at Baltimore's Loyola College. And most of his work has not been about history, focusing instead on libertarian and antigovernment themes.

 

His 10 books include Official Lies: How Washington Misleads Us, and, with writer James T. Bennett, The Food and Drink Police: America's Nannies, Busybodies and Petty Tyrants (attacking organizations such as Mothers Against Drunk Driving) and Unhealthy Charities: Hazardous to Your Health and Wealth and Cancer Scam: Diversion of Federal Cancer Funds to Politics (both of which accuse nonprofits like the American Cancer Society of using public money to fund leftist "political machines").

 

DiLorenzo is also a senior faculty member of the Ludwig von Mises Institute, a hard-right libertarian foundation in Alabama, and teaches at the League of the South Institute for the Study of Southern Culture and History, a South Carolina school established by the League of the South to teach its unusual views of history (see also Little Men).

 

SPLCenter.org: The Ideologues

 

 

I've also learned from SourceWatch that earlier on, DiLorenzo had worked as an academic hatchet man for Big Tobacco. [2] &nbspWorking with Thomas T. Bennett he assisted in formulating a plan intended to undermine the work of the American Cancer Society, the American Lung Association and the American Heart Association, in conjunction with work being done by the Capital Research Center. &nbspI should also note that the CRC has launched similar baseless funding broadsides against “liberal” civil rights advocacy organizations like the Southern Poverty Law Center [3] and it became embroiled in its own controversy over its funding while launching attacks on health advocacy groups. [4] CRC receives the bulk of its funding from the Sarah Scaife Foundation, controlled by the right wing money bag, Richard Mellon Scaife

Vermont Secession: Thomas J. DiLorenzo - <em>SVR</em> Advisory Board Member

 

This guy is dangerous nut case.

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Another question for a Yank

 

How come USA States can't go into budget deficit?

Who made up that silly rule?

Obama (still not in spell check) is never going to create enough jobs on his own while 50+ States have to cut back services.

What happens to Unemployment Benefits?

This must be casing a lot of problems and hardship??

Can't Big Arnie ''buck the system"? He has the fifth largest economy in the world doesn't he?

What would happen if a State did budget for a deficit? Who would you shoot?

[Zythryn]

Personally, I think that the federal government should not be allowed to deficit spend either.

Our countries spending is so out of whack it isn't funny.

Putting off the pain of our overspending is simply going to make it worse down the line.

[lemit]

The economists who taught me economics, on restaurant napkins they carefully tucked into their pockets because the napkins represented intellectual property, would have said that there are times when the economy must be restored at the expense of theory.

 

Regardless of our general ideas of what represents economic health, we must occasionally do whatever we must do to preserve an economy that we can thereafter theorize and argue about.

 

--lemit

[Lumber Joe]

Well, it made other problems reveal.

[LaurieAG]

Hi Lumber Joe,

 

Well, it made other problems reveal.

 

I have a feeling that some of the nastier problems have not been fully revealed but they will be revealed within the next 2 months.

 

There's just been too much cheerleading from those who should know better and too much concensus from those with vested interests (along with too many US banks on deathwatch and commercial property tanking just to name a couple).

 

All the current situation shows is that the higher echelons of the investment world don't occupy the same world (or have the same set of rules) that the rest of us do, real business included. It's either tax them because they give so little back, regulate them effectively and remove all loopholes or abolish them so that everybody else can have a level playing field.

[LaurieAG]

There is a historical precedence for our current global financial problems, Tacitus in his 'Annals' provides details about ancient roman Emperor Tiberius.

 

Money lending is an ancient problem in Rome, and a frequent cause of disharmony and disorder. Even in an earlier, less corrupt society steps had been taken against it. At first, interest had been determined arbitrarily by the rich, but then the twelve tablets had fixed the maximum at 10 percent. Next, a tribunes law had halved the rate. Finally loans on compound interest were forbidden completely. Fraudulence, attacked by repeated legislation, was ingeniously revived after each successive counter-measure

....

Eighteen months were allowed in which all private finances had to be brought in line with the law. The result was a shortage of money. For all debts were called in simultaneously, and the numerous convictions and sales of confiscated property had concentrated currency in the treasury and its imperially controlled branches. To meet this situation the senate had instructed that creditors should invest two-thirds of their capital in Italy, and debtors immediately pay the same proportion of their debts. However, creditors demanded payment in full, and debtors were morally bound to respond. The first results were importunate appeals to money-lenders. Next, the praetors court responded with activity. The decree requiring land purchases and sales, envisaged as relief, had the opposite effect since when the capitalists received payment they hoarded it, to buy land at their convenience. These extensive transactions reduced prices. But large scale debtors found it difficult to sell; so many of them were ejected from their properties, and lost not only their estates but their rank and reputation. Then Tiberius came to the rescue. He distributed 100 million sesterces among specially established banks, for interest free three-year state loans, against security of double the value of landed property. Credit was thus restored; and gradually private lenders, too, reappeared.

 

Then came along Emperors Caligula, Claudius and finally Nero.