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

[Zythryn]

While I agree that limited resources need to be taken into account, I disagree that everything economists say have no value.

At one time, I am sure we were running out of peat to burn. Behold, coal does the same thing, only better!

Technology has a way of making problems of limited resources go away. That is no gaurentee that we will replace oil before it is used up, but the possibility is there and we are working towards that goal.

[nutronjon]

While I agree that limited resources need to be taken into account, I disagree that everything economists say have no value.

At one time, I am sure we were running out of peat to burn. Behold, coal does the same thing, only better!

Technology has a way of making problems of limited resources go away. That is no gaurentee that we will replace oil before it is used up, but the possibility is there and we are working towards that goal.

 

Okay, and why not replace the gold in ground that made California rich, and replace the silver in the ground that made areas of Neveda rich. It would be very nice to have high quality iron ore, and the nickle and copper mines we once had. I play Sim City and wherever there is a water shortage, a water pump can be put anywhere and the problem is resolved. If unemployment is high, put in industry. There is no more relationship to this industry and resources than there is to water pumps and water.

 

An industrial economy depends as much on the mining as what is done with the minerals we take from the ground. Mining provides jobs and wealth to the community. Land values increase and businesses move in and everyone is happy, until the mines are exhausted. Then people don't have jobs, their homes loose value, and businesses leave town, and the problem gets worse. In some cases, the town becomes a ghost town. Occassional someone steps in and makes the ghost town a fun tourist attaction, but it never again supports the population that once enjoyed the wealth taken from the ground.

 

I didn't say, what the economist says has no value. I said it is detached from reality and it is. I didn't realize this until getting into discussions like this.

 

How much revenue does Texas get from oil? How is this money spent? How much does Texas rely on this revenue? If Texas can't produce a lot of oil, what happens to the revenue? What has happened to state expenses in the last 50 years? How does Texas meet those expenses without the revenue from oil? How well does anyone understand what resources have to do with economies? Which economist is explaining this? Economic theory based on the hope of finding an oil substitute is not economic theory based on reality, because that future is not today's reality. However, we can figure the short falls in revenue and spiraling problems when a resource is exhausted, and we aren't even thinking of this.

 

How about what exponnential growth does to a cities economy? All our cities rely on growth, and the value of housing doubling every 10 years, but the cost of that growth is not figured into our plans. Yipee, our town has 5,000 new people and we expect another 5,000 over the next five years. Small problem, the city's water supply provides enough water for 6,000 people and then the city has to do what? and don't forget the water treatment plant, can it handle the growth? What of the school system, police force, fire department, and where is that new industry going to go? We need to build multi-family housing because there isn't enough land for single unite homes for everyone, and none of this new multi-family housing will be affordable to minimum wage workers, because the cost of the land, and building materials is greater than the housing low income people can afford. Don't worry though, all citizens can have great high paying jobs, and the minimum wage jobs can be done by the immigrants, we don't need to provide schools and medical care and housing for them, do we? That would be socialist wouldn't it? Where is this in city planning and economic theory?

[Michaelangelica]

Anyone heard of this. It is news to me.

 

Hundreds swept up in mortgage fraud arrest

 

19-Jun-2008

 

The U.S. Justice Department says more than 400 real estate brokers have been arrested since March, including dozens over the last two days, in a crackdown on mortgage fraud that has contributed to America's housing crisis. (June 19) © 2008 The Associated Press

Andy World - Hundreds swept up in mortgage fraud arrest

 

I agree economic models are poor predictive tools and often do not value things that should have a value, eg housework, child raising, volunteer work, home caring/nursing

[Michaelangelica]

The same thing is happening in Oz now

The Federal Reserve's response is to put UP interest rates thus causing similar problems to the USA

Are our economic models broken? When two diametrically opposed Government responses cause the same result?

 

Struggling with the mortgage? Get out now

 

By staff writers July 01, 2008 08:33am

 

 

* Families battling with mortgages must "get out now"

* Rising rates, petrol prices erode today's tax cuts

* Home lending growth plunges

 

HOMEOWNERS already struggling with mortgage repayments need to cut their losses and sell up before it is too late, an industry insider has warned.

 

Those homeowners feeling the pinch from rising interest rates and living costs need to put their house on the market now because things are about to get much worse, Wizard Home Loans founder Mark Bouris said.

 

He said inflation pressure and rates rises had made the repayments calculations people made when entering into a home loan only a few years ago were now not worth the paper they were written on - and urged homeowners to "get their heads out of the sand" and realise the trouble around the corner.

 

And anyone hoping today's tax cuts would ease their pain has more bad news coming, with reports that inflation has already eaten up more from family budgets than the Government is giving back

Struggling with the mortgage? Get out now | NEWS.com.au

[Tormod]

It's the same story over here in Norway. Interest rates go up, pessimism in the real estate market, funds tumble and the stock exchange struggles.

[LaurieAG]

Last week the total lost so far was around $410 billion and the total loss is expected to be between 1 and 1.3 trillion dollars over the next year and a half or so.

 

The funny thing is that I tried to google the article (it was in a couple of different newspapers) but all I can find now is articles about the (very recent) resignation of the bank boss who gave out the figures in the original article.

 

So, in 1997 the US FED encouraged US banks to take over $10 billion of LTCM's positions so as not to destabilise the financial markets. If the ex bank boss is right (and the IMF?) then we're only one third of the way through and the total loss will be 100 times 10 years ago or so.

 

I'm not a betting man but I would wager that, unless some real serious will to regulate the global derivatives market materialises, we won't have to worry about the stability of the global financial system in another 10 years or so.

[Michaelangelica]

I have just left this question for a while because I thought the question had been answered

But it hasn't.

 

I swear, I had NO idea when I started this thread how bad this was going to be.

Still the dominoes keep falling!

Lehman Brothers subprime fallout to hit Victoria hard | theage.com.au

Subprime pain sweeps the world | theage.com.au

Subprime pain sweeps the world

 

Even my dopey local council looks like loosing $10-20 million.

 

How did al this happen?

 

The first to the publishers with a book explaining how it happened it gets a free house!( or two, or three, or 100, pick a number)

 

How good were sub prime salesmen/women?

They have to have been the best the world has ever seen!!

It is extraordinary !!

(I am trying to search the language for a bigger word than EXTRAORDINARY)

 

Certainly I would like to hire all sub-prime salesmen to help me in a new sales business I am starting

Please apply to BOX. . .

or send PM ??!!

[Michaelangelica]

Great new business opportunity with free steak knives, for Hypography members ( not spam)

 

 

Any hpographs interested?

 

We hire, or bail out, all the guys and girls previously selling sub pime mortgages.

We then lock them in a room until they have thought of something equally as good to sell as sub-prime to make lots and lots and lots and lots of money

(restricted food and water but no Guantanamo Bay techniques needed).

These are THE SUPER SALESMEN Of the 21ST century and we need to conserve and grow this talent pool of geniuses.

 

 

My old next door, dinky, dumb, local council has just lost about 70 million.

(About 200,000 people- do the sums!!)

You ask them to fill a pothole in the road and they have no money. But they did have money to invest in sub-prime!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

An we earlier report said they had lost ONLY $20 million

Ratepayers safe from sub-prime hit: councils - ABC News (Australian Broadcasting Corporation)

 

And Yanks think Australians are full of bullshit!

 

But it is a great time to be a lawyer for the next 10-20 years+!

Councils to mount legal action over extensive subprime losses

I]* Stuart Kelly

* December 22, 2007[/i]

*

 

LEHMAN Brothers Holdings, the largest US underwriter of mortgage-backed bonds, faces legal action by Australian local councils after the value of their subprime-related investments dropped as much as 86 per cent.

 

Wingecarribee Shire Council, in the Southern Highlands, is suing Lehman for "deceptive and misleading conduct" in selling $3 million of subprime-linked collateralised debt obligations, the council's managing director, Mike Hyde, said yesterday.

http://business.smh.com.au/business/councils-to-mount-legal-action-over-extensive-subprime-losses-20071221-1ij6.html

 

Ratepayers safe from sub-prime hit: councils

 

Posted Thu Apr 3, 2008 11:14am AEDT

 

* Map: Gosford 2250

 

Gosford City Council, on the New South Wales central coast, says ratepayers will not be affected by millions of dollars in possible investment losses stemming from the sub-prime mortgage crisis.

Sure, and what I want from Santa this year is Fort Knox; all the gold in Victoria; and Terry Prattchet's royalties for a year.

[Zythryn]

My old next door, dinky, dumb, local council has just lost about 70 million.

(About 200,000 people- do the sums!!)

 

How much did they have, total, to invest? Did they invest ALL of it in Lehman??

The 'sub-prime' salesment weren't all that great. People got greedy on all sorts of levels.

Home owners would be told they can buy a million dollar house and would only have to pay $300 a month for the first 2 years and then they could get a new mortgage at a better long term rate (works great when property values only go up, not so well when they go down).

The mortgage brokers would make money every time they sold a mortgage of any type, no matter if it is a good loan or bad.

The banks would buy groups of mortgages without looking at them to see if they were good of bad loans.

 

If you sell something that targets greed you will be able to sell a whole bunch of it. But these things tend to fall apart rather dramitically.

[pgrmdave]

So, with the collapse of Bear Stearns, Fannie Mae, Freddie Mac, Countrywide, Lehman Brothers, AIG, the sale of Merrill Lynch, and the potential for these collapses to carry over into other companies, possibly even larger ones, how long before the masses feel the full blow?

[Buffy]

...how long before the masses feel the full blow?

That depends on your definition of "the full blow" is! This week alone was painful enough for most folks, and there are predictions that the total government bailout will be $1-2 TRILLION....

 

Oh and wonder how we got in this mess? Well, in spite of Sarah Palin's charge that its FDR's fault, and Lawrence Kudlow's allegation that it was poor families and bleeding-heart guilty liberal consciences at the banks, take a read to this article on the practices at the major sub-prime vendors and the idiots who bought the loans they set up:

 

Since it’s just us business reporters here—just us chickens—let me illustrate what I mean with a quiz. Match the allegation with the institution. Answers are at the end of the piece.

 

Allegation

 

1. Handed out copies of the movie Boiler Room as a training tape

 

2. Partnered to sell its “PayOption Arms” with a brokerage owned by a five-time felon, whose convictions included gun-related charges

 

3. Forbade loan officers to check borrower income on certain loans

 

4. Ran an “art department” in its Tampa office, where documents were altered.

 

5. Settled allegations of institutionalized marketing deception that covered two million customers

 

6. Developed “FastQual,” a program designed to approve borrowers in twelve seconds

 

7. Incentivized brokers and loan officers through “yield spread premiums” and other compensation schemes to put borrowers into more expensive loans

 

8. Tapped two kegs of beer at weekly staff meetings

 

Institution

 

A. Citigroup

 

B. Countrywide

 

C. Ameriquest

 

D. IndyMac

 

E. Merit Financial

 

F. New Century

 

G. All of the above

 

This is not a take-home exam. If you don’t get more than two of seven, I think we have work to do.

...

From 2004, Countrywide led the market in rolling out new “products” that were basically bureaucratic ways of approving a loan to anybody. The complaint said Countrywide threatened to fire underwriters for (my emphasis) “attempting to verify a borrower’s ability to pay.”

 

As the bank said in ads aimed at brokers:

 

More ways to say yes! Qualify more of your borrowers with Expanded Criteria programs from Countrywide®, American’s Wholesale Lender®. Countrywide offers some of the most flexible documentation guidelines in the industry.

 

Remember, this was not some fringe player. It was the firm that around 2004 was the nation’s largest home-mortgage originator. The market leader.

 

The complaint has plenty of examples of people blown out of homes they already owned by Countrywide products. A sixty-four-year-old widow with payments of $300 a month on a thirty-year, fixed-rate loan is put in a “3/27 interest-only loan with a fixed rate for only the first three years of the loan.” Never mind what it is; she couldn’t afford the $800 payments before the rate adjusted, Illinois says.

 

Perhaps she was irresponsible, as David Brooks would have it, or mad as a hatter. But Countrywide itself admitted to regulators in 2007, the complaint says, that 60 percent of borrowers in subprime hybrid arms “would not have qualified at the fully indexed rate”—that is, when the rate went up, as it inevitably did...

 

I realize that borrowers who signed the notes can never be fully let off the hook; no one knows what went on in the room at each closing—although the reporting of the last several years certainly yielded plenty of examples of loans made to stroke victims, the retarded, the elderly, the illiterate, and people who don’t speak English. A fine piece in April of this year by The Indypendent, a New York alternative paper, for instance, describes how an eighty-six-year-old Brooklyn man diagnosed with dementia decided it was a good idea to refinance his 5.95 percent, thirty-year, fixed-rate loan with an option ARM, an instrument that BusinessWeek described as “the riskiest and most complicated home loan product ever created.”

 

But more broadly, it pays to remember that the borrower is the amateur in this equation, someone who might execute a mortgage twice in a lifetime. A lender will do it a hundred times before lunch.

...

So, that’s what we know: the lending industry used marketing deception—including boiler-room tactics—on a mass scale against a class of financially vulnerable borrowers (which subprime borrowers are, by definition) and other middle-class financial amateurs already laboring with stagnating incomes and rising costs for health care, education, and, of course, housing.

 

Yet to be explored fully is the extent of Wall Street’s role, the size of the transfer of wealth between classes—from millions of civilians to thousands of professionals—that resulted, and the social and economic consequences of it all.

 

(h/t tristero at digby's Hullabaloo for the excerpt above)

 

I am not a crook, :)

Buffy

[Michaelangelica]

The trillion $ ++? bailout

What if. . .

 

Instead of giving the money to the criminals and clowns who devised this system and hoisted it on the world. . . shaking the foundations of our economic system. .

 

we. . .gave the money to all the stressed mortgage holders to pay off their mortgages completely.

Home ownership in USA soars and the money Then goes/gets back to bail out the corporate crooks?

 

Only a minor diversion of the money flow surely . . .but what a difference that would make.

[Buffy]

Aw it gets worse...For those of you who are confused, this is the actual "proposal to solve the problem:"

Here is the current draft for the latest plan. It's elegantly simple. The three key provisions: (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled "assets") [sec. 6]; (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [sec. 10]; and (3) best of all: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency" [sec. 8].

You should all read Glenn Greenwald's takedown on the plan. Its scary.

 

Best summed up by dday at Digby's Hullabaloo who sez:

 

Man is a credulous animal, and must believe something; in the absence of good grounds for belief, he will be satisfied with bad ones, :phones:

Buffy

[Michaelangelica]

Bloody cartoon is spot on. The bastards give criminals a bad name.

 

What is this Buffy?:- from your link- (so now the government gets to foreclose on the poor mugs with mortgages?)

the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act,

I guess it goes to where the money is coming from

Where is that, Fort Knox?

[Buffy]

I guess it goes to where the money is coming from...Where is that, Fort Knox?

Naw, since Bush and McCain won't ever raise taxes, we're obviously going to go hat in hand to the Chinese for yet another loan....

 

...and who's gonna pay for that? Well, that's our *kids* problem, we won't have to worry about it.

 

Well, as Uncle Dick says, as long as Republicans are in power, "deficits don't matter..."

 

And the Flying Fickle Finger of Fate goes to, :phones:

Buffy

[Michaelangelica]

This is spot on- a great article -your Salon link. I will send it on.

Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

 

What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse?

We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses.

 

Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

More amazingly, they're free to walk away without having to disgorge their gains; at worst, they're just "forced" to walk away without any further stake in the gamble.

How can these bailouts not at least be categorically conditioned on the disgorgement of ill-gotten gains from those who are responsible? The mere fact that shareholders might lose their stake going forward doesn't resolve that concern; why should those who so fantastically profited from these schemes they couldn't support walk away with their gains?

This is "redistribution of wealth" and "government takeover of industry" on the grandest scale imaginable -- the buzzphrases that have been thrown around for decades to represent all that is evil and bad in the world.

That's all this is; it's not an "investment" by the Government in any real sense but just a magical transfer of losses away from those who are responsible for these losses to those who aren't.

I wish betting on hoses was as foolproof as this system.

 

So my original question "How bad is it?" is still not answered it's just:- "Worse than last time you looked"

PS

I read recently a very brief clip about USA gold reserves falling. So googled and came up with this about Fannie may et al

 

US Government to secure mortgage market with gold reserves

Lee Jones - 19-Sep-2008

The U.S. Treasury Department has promised “hundreds of billions” to save the US markets using its own gold reserves.

President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.

 

When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.

 

The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.

 

The plan will involve Fannie Mae and Freddie Mac increasing their purchases of mortgage assets. The Government will also expand its own purchase programme for mortgage backed assets, which was announced recently, to help increase the availability of capital for more mortgages.

http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=173208

[freeztar]

This is spot on- a great article -your Salon link. I will send it on.

 

Spot on? How so?

 

I don't think you understand the exact nature of what's going on with the US companies (or other countries for that matter) that are failing.

 

There's no single place where you can point a finger with this. Everyone is to blame....from the lendee that decided to get a mortgage for a $300,000 house with $30,000/yr income, to the lender that approved it, to the whole system that allowed it. It's not an easy fix, and it's far from over.

 

Perhaps it's about time to let banks be banks and market companies be market companies. :confused: