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

[questor]

There have been a number of laws passed to encourage home ownership for the poor. I gave a link earlier about redlining. The Acorn group was in this endeavor along with a local groups across the country. My own county has numerous programs including demanding that builders of new residential complexes set aside a percentage of their units for low cost housing. This forces a mixture of buyers which does not always enhance the resale value

of the units.

[Donk]

p.s. This pyramidal house-of-cards accounted for most of the "growth" in our economy; hence the phenomenon of a "jobless recovery."

I've always been amazed by pundits who call the financial markets "wealth creators". If they lend the same dollar to five different people they aren't creating wealth, just the illusion of wealth.

 

The only way to create wealth is to take raw materials and make a saleable product. Farms, factories, builders all do this. You could also include writers, programmers, designers, actors, musicians... bankers are enablers for all this, that's all.

[questor]

A good article on wealth:

 

''Lets compare the life of an average American in 1900 and today. On every dimension you can think of, we all are orders of magnitude wealthier today (by wealth, I mean the term broadly. I mean not just cash, like Scrooge McDuck's big vault, but also lifespan, healthiness, leisure time, quality of life, etc).

 

Life expectancy has increase from 47 to 77 years

Infant mortality rates have fallen from one in ten to one in 150.

Average income - in real dollars - has risen from $4,748 to $32,444

In 1900, the average person started their working life at 13, worked 10 hours a day, six days a week with no real vacation right up to the day they died in their mid-forties. Today, the average person works 8 hours a day for five days a week and gets 2-3 weeks of vacation. They work from the age of 18, and sometimes start work as late as 25, and typically take at least 10 years of retirement before they die.

 

But what about the poor? Well, the poor are certainly wealthier today than the poor were in 1900. But in many ways, the poor are wealthier even than the "robber barons" of the 19th century: Just check out this comparison! Today, even people below the poverty line have a good chance to live past 70. 99% of those below the poverty line in the US have electricity, running water, flush toilets, and a refrigerator. 95% have a TV, 88% have a phone, 71% have a car, and 70% have air conditioning. Cornelius Vanderbilt had none of these, and his children only got running water and electricity later in life.

 

To anticipate the zero-summer's response, I presume they would argue that the US somehow did this by "exploiting" other countries. Its hard to imagine the mechanism for this, especially since the US did not have a colonial empire like France or Britain, and in fact the US net gave away more wealth to other nations in the last century (in the form of outright grants as well as money and lives spent in their defense) than every other nation on earth combined.'' Link: http://www.coyoteblog.com/coyote_blog/2007/04/wealth_creation.htm

 

This wealth is created by capitalism, not socialism or any other restrictive system.

[freeztar]

I must admit, I do not quite understand how the repeal of the Glass-Steagall act contributed to the current credit crisis - could somebody explain it please? How did the increased competition lead to this?

 

You come up to me and say, hey freezy, I need to borrow $20 for this horse race tomorrow. I say ok and give you $20 and an IOU (with some interest). The next day, youlose all $20 and come back to me for another $20. I say fine, and give you the $20 and another IOU (with more interest). This continues for a few days and then you come to me and I refuse to give you any more loans. I'm starting to wander if you're ever going to be able to pay me back. So I come up with a clever idea and say, hey dave, tell you what, you owe me $80 with 10% interest. If you can get your buddies to lend you the $80, I'll cut your interest to 5%. So you go and borrow money from four friends ($20 each with only 5% interest) and you pay me off.

 

Now, imagine that you and me and your friends are all one person. :hyper:

 

Sorry, that was a terrible analogy and was meant more for humor.

 

This is better. Before the GSA got taken off the books, banks were involved with savings and loans. If you went to get a loan, they would judge your worthiness and give you a loan that would make them a fair amount of money (as long as you payed). This system worked quite well, but it wasn't enough. The banks were looking to their peers (the investment banks on Wall Street) and noticed that they were really making big gains, but were lacking the big capital that the savings and loan banks had. So, the banking industry lobbied for deregulation. They wanted to join forces and *really* start making money. This was largely seen as a good thing as it was supposed to really help the economy grow. Loans were easier for everyone to secure because banks were making more money than ever. A certain malaise and greed led the banks to start taking on more high-risks investments (such as sub-prime loans) to make even more money. They started merging traditionally savings and loan companies with investment banking and started creating very clever ways (which I'm not too knowledgeable about) to combine their investment assets into new assets. Also, the idea of accurate accounting became blurred and speculation was high. When it was exposed that several financial powerhouses were suddenly reporting huge and completely unexpected losses, people got nervous and started pulling their capital out of these speculation investments. Then, the banks were left with way less capital than they were previously promoting. More withdrawals equalled less confidence and so on until the banks were drained or sold (or more recently, bought by the US gov't). So now, we have this spiraling situation of positive feedback loops that threatens a new Depression.

 

Hopefully that helps. Btw, if anyone has additional info or corrections to the above, that is certainly welcome.

[Essay]

To anticipate the zero-summer's response, I presume they would argue that the US somehow did this by "exploiting" other countries. Its hard to imagine the mechanism for this, especially since the US did not have a colonial empire like France or Britain, and in fact the US net gave away more wealth to other nations in the last century (in the form of outright grants as well as money and lives spent in their defense) than every other nation on earth combined.''

...and yet it's still a smaller percentage than many other countries that give....

===

 

You're saying the financial empire that we have imposed around the globe, through various means, is not colonial in nature? ...and exploitative!

 

But as to my response about your post on the benefits of wealth....

 

I would attribute most of those advances to science, not capitalism.

 

p.s. ~see my p.s.'s on the previous page~ perhaps.

[freeztar]

A good article on wealth: Link: http://www.coyoteblog.com/coyote_blog/2007/04/wealth_creation.htm

 

Besides the fact that the link does not work and the blog post contains several dubious statistics, this is not relevant to this thread questor.

[pgrmdave]

Thanks for the explanation Freeztar! So, as far as I can tell, what happened was that the guys with the collateral who had played it safe teamed up with the guys without the collateral who played for big money and then we had a situation where the 'safe' guys were playing it risky while still assuming it was all safe, right?

 

And a bit of googling brought up this link:

Coyote Blog: Physics, Wealth Creation, and Zero Sum Economics

 

I believe that's where questor took his data from. It looks to have links in it, but many of them are to other blogs of his. One of them is to the heritage foundation, which might be worth checking out.

[Cedars]

This system worked quite well, but it wasn't enough. The banks were looking to their peers (the investment banks on Wall Street) and noticed that they were really making big gains, but were lacking the big capital that the savings and loan banks had. So, the banking industry lobbied for deregulation. They wanted to join forces and *really* start making money. This was largely seen as a good thing as it was supposed to really help the economy grow. Loans were easier for everyone to secure because banks were making more money than ever. A certain malaise and greed led the banks to start taking on more high-risks investments (such as sub-prime loans) to make even more money. They started merging traditionally savings and loan companies with investment banking and started creating very clever ways (which I'm not too knowledgeable about) to combine their investment assets into new assets. Also, the idea of accurate accounting became blurred and speculation was high. When it was exposed that several financial powerhouses were suddenly reporting huge and completely unexpected losses, people got nervous and started pulling their capital out of these speculation investments. Then, the banks were left with way less capital than they were previously promoting. More withdrawals equalled less confidence and so on until the banks were drained or sold (or more recently, bought by the US gov't). So now, we have this spiraling situation of positive feedback loops that threatens a new Depression.

 

Hopefully that helps. Btw, if anyone has additional info or corrections to the above, that is certainly welcome.

There are so many people in bed (so to speak) with each other on these failed mortgages it may be nearly impossible to unravel the extent of the fraud and manipulation, real estate powerhouses, mortgage companies that were offshoots of the bigger investment corps, and all protected by and from each others accounting by labeling them separate corps for tax purposes.

 

Original mortgage, May 1997: $54,500

Terms: 30-year fixed-rate mortgage at 6.75 percent

Closing costs: $2,346

Principal and interest payment: $389

 

Refinance, November 2004: $64,231

Terms: 30-year adjustable-rate mortgage at 6.38 percent for the first two years

Closing costs: $3,990 including a $1,682 origination fee

Cash back: $10,505

Principal and interest payment: $401

 

Refinance, December 2005: $85,200

 

Terms: 30-year "pick-a-payment" negative amortizing adjustable-rate mortgage that started at 6.51 percent

Closing costs: Approximately $4,000, including a $2,054 yield-spread premium and an unusually high $700 title insurance payment

Cash back: $12,036

Interest-only payment: $332

 

Refinance, October 2007: $112,000

Interest rate: 30-year fixed-rate mortgage at 7.625

Closing costs: $7,502

Cash back: $5,903

Principal and interest payment: $793

 

The above is from an article in the startribune about a developmentally disabled couple who are now losing their home and how the phone calls encouraging them to refinance over and over put them into a position that they lost their homes. The full article is an interesting read on how predatory some of these loans really were.

 

Original source here:

http://www.startribune.com/business/29844484.html?page=1&c=y

If it does not load the article name is Foreclosure: 'They were preyed upon'

 

There are other articles out there from other parts of the country similar to this, and even more fraudulent. Heres an snippet from an opinion piece that touches on some of the manipulations:

 

"The Washington Post noted in 2005: "Hispanics, the nation's fastest-growing major ethnic or racial group, have been courted aggressively by real-estate agents, mortgage brokers and programs for first-time buyers that offer help with closing costs."

 

ILLEGAL ALIENS & THE MORTGAGE MESS - New York Post

 

I am not a fan of M. Malkin, but this doesnt mean there isnt a point being made from the bigger picture.

 

Nor am I saying all illegals took part in illegal home purchasing with the intent to fraud, but you cannot tell me these illegals were at any more advantage when dealing with slick real estate agents in bed with mortgage brokers who were bundling these packages to sell to wall street investors than the people from the star-tribune article which as far as I understand it, shows the people who were supposed to represent the best interests of the buyers did not do their jobs, as well as the people in the investment houses did not protect the interests of their investors. It was all about the commission they made by getting someone else to sign on the dotted line, with the assurances from the people above them these issues would be solved further up the ladder (so it seems). And now it seems the top rung on this particular ladder is the US government with the failed (to this point) bail out.

[freeztar]

Thanks for the explanation Freeztar! So, as far as I can tell, what happened was that the guys with the collateral who had played it safe teamed up with the guys without the collateral who played for big money and then we had a situation where the 'safe' guys were playing it risky while still assuming it was all safe, right?

 

Pretty much, yet it's debatable whether certain parties were "assuming it was all safe" vs. knowing it wasn't and looking to capitalize on it while the getting was good.

 

And a bit of googling brought up this link:

Coyote Blog: Physics, Wealth Creation, and Zero Sum Economics

 

I believe that's where questor took his data from. It looks to have links in it, but many of them are to other blogs of his. One of them is to the heritage foundation, which might be worth checking out.

 

I'll check out the link, though I still think the quote taken from it was OT.

The Heritage Foundation is certainly worth checking out, but again, is beyond the scope of this thread (unless someone wants to tie the two together :hihi:).

[freeztar]

There are so many people in bed (so to speak) with each other on these failed mortgages it may be nearly impossible to unravel the extent of the fraud and manipulation, real estate powerhouses, mortgage companies that were offshoots of the bigger investment corps, and all protected by and from each others accounting by labeling them separate corps for tax purposes.

 

Indeed. Very good points and thanks for mentioning them.

The obfuscation of accountability and/or ability to track what is going where certainly did not help an already bad idea.

 

Original mortgage, May 1997: $54,500

Terms: 30-year fixed-rate mortgage at 6.75 percent

Closing costs: $2,346

Principal and interest payment: $389

 

Refinance, November 2004: $64,231

Terms: 30-year adjustable-rate mortgage at 6.38 percent for the first two years

Closing costs: $3,990 including a $1,682 origination fee

Cash back: $10,505

Principal and interest payment: $401

 

Refinance, December 2005: $85,200

 

Terms: 30-year "pick-a-payment" negative amortizing adjustable-rate mortgage that started at 6.51 percent

Closing costs: Approximately $4,000, including a $2,054 yield-spread premium and an unusually high $700 title insurance payment

Cash back: $12,036

Interest-only payment: $332

 

Refinance, October 2007: $112,000

Interest rate: 30-year fixed-rate mortgage at 7.625

Closing costs: $7,502

Cash back: $5,903

Principal and interest payment: $793

 

The above is from an article in the startribune about a developmentally disabled couple who are now losing their home and how the phone calls encouraging them to refinance over and over put them into a position that they lost their homes. The full article is an interesting read on how predatory some of these loans really were.

 

I know some people in the same situation. They are the same people I know with the most amount of credit card debt. I feel bad for them, but the only solution for them is to *get out of debt* yet a majority of them seem to use more debt to pay their debts (sound familiar).

 

There are other articles out there from other parts of the country similar to this, and even more fraudulent. Heres an snippet from an opinion piece that touches on some of the manipulations:

 

"The Washington Post noted in 2005: "Hispanics, the nation's fastest-growing major ethnic or racial group, have been courted aggressively by real-estate agents, mortgage brokers and programs for first-time buyers that offer help with closing costs."

 

ILLEGAL ALIENS & THE MORTGAGE MESS - New York Post

 

I am not a fan of M. Malkin, but this doesnt mean there isnt a point being made from the bigger picture.

 

Nor am I saying all illegals took part in illegal home purchasing with the intent to fraud, but you cannot tell me these illegals were at any more advantage when dealing with slick real estate agents in bed with mortgage brokers who were bundling these packages to sell to wall street investors than the people from the star-tribune article which as far as I understand it, shows the people who were supposed to represent the best interests of the buyers did not do their jobs, as well as the people in the investment houses did not protect the interests of their investors. It was all about the commission they made by getting someone else to sign on the dotted line, with the assurances from the people above them these issues would be solved further up the ladder (so it seems). And now it seems the top rung on this particular ladder is the US government with the failed (to this point) bail out.

 

To paraphrase Stephen Colbert:

Since the US gov't holds $85Mil investment in AIG through taxpayer dollars, does that mean that all 300Mil citizens get to sit in on the Board meeting? :hihi:

 

It's interesting times no doubt.

 

I still hope some sort of "injection plan" manifests. Look what happened on Wall Street today! Ouch...

 

The Dow Jones Industrial Average posted its biggest-ever one day point decline Monday, falling 777.68 points, the equivalent of a 7 percent one-day loss, after the House of Representatives rejected a Bush Administration backed rescue plan for the nation’s struggling financial institutions.

 

The S&P 500 lost 106.59 points, its biggest decline since October, 1987. The Nasdaq Composite Index plunged 199.61 points, a nine percent one day drop.

 

Nearly $1.1 trillion in market value was wiped out from U.S. equities Monday, according to Bloomberg data.

 

The House voted 228 to 225 against a measure that would’ve given the Treasury Department access to $700 billion to buy bad debt from financial firms. The defeat was not expected on Wall Street.

Dow Jones posts record decline as rescue is rejected - New Mexico Business Weekly:

[questor]

Now that we have observed a major financial crash and a wipe-out of millions of dollars of personal wealth, what have we learned from the debacle? Remember, a similar wipe-out occurred in 2000-2001? One thing I learned is to be debt-free. Another is to get out when the prices surge too high in any market. Another is not to trust the government to use wisdom. There are many more lessons. Want to share?

[Moontanman]

Now that we have observed a major financial crash and a wipe-out of millions of dollars of personal wealth, what have we learned from the debacle? Remember, a similar wipe-out occurred in 2000-2001? One thing I learned is to be debt-free. Another is to get out when the prices surge too high in any market. Another is not to trust the government to use wisdom. There are many more lessons. Want to share?

 

There is one area we can agree on Questor, I have been debt free other than house and car payments since the late 90's, of now of course I am free of those debts as well. Time to capitalize on the hard times of others now I guess.

[pgrmdave]

I'm lucky in that I'm a student who will graduate in about a year with no debt. No student loans, nothing to pay back. I commute to school (thus saving on room and board) and my parents help pay for my car and insurance. I pay for gas, books, and whatever else I can by working part-time. Hopefully this crash puts me in a better position than my peers. In a booming economy, it makes sense to leverage heavily and go into debt to fund future profits, but in a busting economy, hopefully it means that I can keep my head above water while others are weighted down by thousands of dollars of student debt (and just wait, this is a time bomb that NOBODY has really talked about yet - what happens to our colleges and universities when former students start defaulting on their loans in similar numbers as people defaulting on their mortgages.)

[Zythryn]

Lessons learned?

As you said, a very important one is being debt free going into an economy like this.

Another is the importance of diversification and dividends.

While portfolio may decrease in overall size, it is quite possible to have an increase in income from that portfolio.

Don't trust politicians is one I learned long before this downturn in the economy;)

And this has just reinforced my belief that businesses have far stronger rights than they should have and we need to get the influence of business out of government.

[freeztar]

(and just wait, this is a time bomb that NOBODY has really talked about yet - what happens to our colleges and universities when former students start defaulting on their loans in similar numbers as people defaulting on their mortgages.)

 

Nothing directly. I'm unaware of any school that has its own loan program. Most student loans are either provided by the government or private entities (eg banks). The school is getting paid regardless. The losers in this case are the fed gov't and private lenders. But...it's really hard to default on your student loan. You basically have to become permanently disabled (fed loan) or declare bankruptcy (private loan). Even with bankruptcy, it is difficult.

 

Also, student loans typically are set at low interest rates with low payment minimums.

 

The bigger fear, imho, is that credit lines will freeze and students will find it more difficult to secure the money (via loans/credit) necessary to attend school. :singer:

[freeztar]

Another is the importance of diversification and dividends.

While portfolio may decrease in overall size, it is quite possible to have an increase in income from that portfolio.

 

I agree (in the longterm).

And this has just reinforced my belief that businesses have far stronger rights than they should have and we need to get the influence of business out of government.

 

It works both ways. Business is only in Gov't because the Gov't is in Business. For example, oil companies would not be spending millions of dollars lobbying Gov't if it wasn't for the fact that Gov't passed laws restricting their ability to make more profit (ANWAR, off-shore drilling, etc.). If Gov't was left out of business, then business would have no interest in being in Gov't (well, perhaps personal political reasons of those people in the businesses, but not the business interests themselves).

 

I think it's important we have a balance between the two. Business needs regulation for environmental reasons, as well as to avoid catastrophies such as what we are experiencing right now. Yet, business also needs the freedom to conduct its business in a profitable manner. If the scale tips too far to either side, then we will be in trouble, imho.

[Thunderbird]

Friends,

 

Everyone said the bill would pass. The masters of the universe were already making celebratory dinner reservations at Manhattan's finest restaurants. Personal shoppers in Dallas and Atlanta were dispatched to do the early Christmas gifting. Mad Men of Chicago and Miami were popping corks and toasting each other long before the morning latte run.

 

But what they didn't know was that hundreds of thousands of Americans woke up yesterday morning and decided it was time for revolt. The politicians never saw it coming. Millions of phone calls and emails hit Congress so hard it was as if Marshall Dillon, Elliot Ness and Dog the Bounty Hunter had descended on D.C. to stop the looting and arrest the thieves.

 

The Corporate Crime of the Century was halted by a vote of 228 to 205. It was rare and historic; no one could remember a time when a bill supported by the president and the leadership of both parties went down in defeat. That just never happens.

 

A lot of people are wondering why the right wing of the Republican Party joined with the left wing of the Democratic Party in voting down the thievery. Forty percent of Democrats and two-thirds of Republicans voted against the bill.

 

Here's what happened:

 

The presidential race may still be close in the polls, but the Congressional races are pointing toward a landslide for the Democrats. Few dispute the prediction that the Republicans are in for a whoopin' on November 4th. Up to 30 Republican House seats could be lost in what would be a stunning repudiation of their agenda.

 

The Republican reps are so scared of losing their seats, when this "financial crisis" reared its head two weeks ago, they realized they had just been handed their one and only chance to separate themselves from Bush before the election, while doing something that would make them look like they were on the side of "the people."

 

Watching C-Span yesterday morning was one of the best comedy shows I'd seen in ages. There they were, one Republican after another who had backed the war and sunk the country into record debt, who had voted to kill every regulation that would have kept Wall Street in check -- there they were, now crying foul and standing up for the little guy! One after another, they stood at the microphone on the House floor and threw Bush under the bus, under the train (even though they had voted to kill off our nation's trains, too), heck, they would've thrown him under the rising waters of the Lower Ninth Ward if they could've conjured up another hurricane. You know how your dog acts when sprayed by a skunk? He howls and runs around trying to shake it off, rubbing and rolling himself on every piece of your carpet, trying to get rid of the stench. That's what it looked like on the Republican side of the aisle yesterday, and it was a sight to behold.

 

The 95 brave Dems who broke with Barney Frank and Chris Dodd were the real heroes, just like those few who stood up and voted against the war in October of 2002. Watch the remarks from yesterday of Reps. Marcy Kaptur, Sheila Jackson Lee, and Dennis Kucinich. They spoke the truth.

 

The Dems who voted for the giveaway did so mostly because they were scared by the threats of Wall Street, that if the rich didn't get their handout, the market would go nuts and then it's bye-bye stock-based pension and retirement funds.

 

And guess what? That's exactly what Wall Street did! The largest, single-day drop in the Dow in the history of the New York Stock exchange. The news anchors last night screamed it out: Americans just lost 1.2 trillion dollars in the stock market!! It's a financial Pearl Harbor! The sky is falling! Bird flu! Killer Bees!

 

Of course, sane people know that nobody "lost" anything yesterday, that stocks go up and down and this too shall pass because the rich will now buy low, hold, then sell off, then buy low again.

 

But for now, Wall Street and its propaganda arm (the networks and media it owns) will continue to try and scare the bejesus out of you. It will be harder to get a loan. Some people will lose their jobs. A weak nation of wimps won't last long under this torture. Or will we? Is this our line in the sand?

 

Here's my guess: The Democratic leadership in the House secretly hoped all along that this lousy bill would go down. With Bush's proposals shredded, the Dems knew they could then write their own bill that favors the average American, not the upper 10% who were hoping for another kegger of gold.

 

So the ball is in the Democrats' hands. The gun from Wall Street remains at their head. Before they make their next move, let me tell you what the media kept silent about while this bill was being debated:

 

1. The bailout bill had NO enforcement provisions for the so-called oversight group that was going to monitor Wall Street's spending of the $700 billion;

 

2. It had NO penalties, fines or imprisonment for any executive who might steal any of the people's money;

 

3. It did NOTHING to force banks and lenders to rewrite people's mortgages to avoid foreclosures -- this bill would not have stopped ONE foreclosure!;

 

4. It had NO teeth anywhere in the entire piece of legislation, using words like "suggested" when referring to the government being paid back for the bailout;

 

5. Over 200 economists wrote to Congress and said this bill might actually WORSEN the "financial crisis" and cause even MORE of a meltdown.

 

Put a fork in this slab of pork. It's over. Now it is time for our side to state very clearly the laws WE want passed. I will send you my proposals later today. We've bought ourselves less than 72 hours.

 

Yours,

Michael Moore

[email protected]

MichaelMoore.com