Witnessing colossal failures of capitalism?

I'm not an econ guy but I know the basics and try to stay abreast of the news. I'm starting to think that we're witnessing some truly unique market failures with the subprime mortgage disaster, the gov't takeover of Fannie & Freddie, yesterday's bankruptcy declaration by Lehman Bros., BoA's buyout of Merill Lynch and what looks like impeding doom for AIG, the US's largest insurance company: http://money.cnn.com/2008/09/16/news...ion=2008091617

The very basic sense I get is that bets have been made by companies who don't 1) understand exactly what they're betting on, and 2) don't have the money to pay up if they lose the bet. This is obviously the case in the mortgage industry, but the AIG stuff I've been reading makes me think it's more widespread.

Thoughts? Links to good information?

I meant to make this thread myself but was waiting for someone else to do it.

If you want to know the cause of this, I think you need to listen to those that actually predicted it. IMO Economists of the Austrian school are the only ones that have done this. All other economists where basically clueless. Search for Peter Schiff on Youtube. He talked about the failures of these banks and institutions over 2 years ago. He also tries to stay away from economic mumbo jumbo and get you to actually understand the concepts behind everything.

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Originally Posted by 2_Thumbs_Up

I meant to make this thread myself but was waiting for someone else to do it.

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And I was hoping you would respond to it :)

No comments other than watch the Peter Schiff videos?

I will be commenting a lot in this thread. My personal opinion is I think this is really huge, probably bigger than the great depression.

But most definitely watch some peter schiff, especially his older videos so you can see he was actually talking about this way back. It's quite fascinating to see him get laughed at for predicting pretty much everything that's going on right now.

This link is probably a lot better than searching for him on youtube
http://www.europac.net/video.asp

It has all his news apperances in chronological order. If you go back to '06 you can see him get laughed at for predicting the subprime mess. That's what started all this.

can you please explain whats so good about austrian economics, people talk about it like its completely different / far superior

I'd like to point out that I also think the government bailouts are horrendous. Trillions of dollars in losses are basically being put on the taxpayers expense to bail out financial institutions (Fannie May and Freddie Mac had 5 trillion dollars in bad mortgage loans and toxic debt). The government doesn't have this money. They'll have to resort to taxation or (more likely) the printing press in order to cover this. I think that's very important to realize, the government can't remove the losses, it can only shuffle them around.

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Originally Posted by SaulPaul

can you please explain whats so good about austrian economics, people talk about it like its completely different / far superior

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Austrian economy is closely tied to libertarianism. It pretty much rejects all government interference in the market. The biggest differences with other economic schools are on monetary issues and banking. Austrian economists reject the central bank and government monopoly on currency. In fact, in austrian theory it's the central bank that's the primary cause of the crisis we're in.

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Originally Posted by 2_Thumbs_Up

I'd like to point out that I also think the government bailouts are horrendous. Trillions of dollars in losses are basically being put on the taxpayers expense to bail out financial institutions (Fannie May and Freddie Mac had 5 trillion dollars in bad mortgage loans and toxic debt).

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Agreed, tho' I think this situation was a little different. Usually I'm not a fan of bailouts at all... I think the Big 3 automakers should have been allowed to fail into restructuring/rebirth in the 80's, am very happy nobody offered to bailout victims of the 80's and 90's equity implosions even tho' billions evaporated, etc. I'm glad the Fed has (so far) been restrained in not bailing out Lehman, Merrill, AIG (altho' credit line to shore up liquidity has been extended...), Countrywide and I'm sure there will be others.

Freddie & Fannie were unique, as it really is an issue of liquidity -- they're an entrenched part of the housing market at this point, and to remove them from play through liquidation would be catastrophic. We're not so much paying for the immediate sins in these bailouts, we're paying for the (usual) ineptitude of government that allowed these organizations to straddle the free-market and nationalization, resulting in (as usual) the most perverse inefficiency possible -- where profits flowed to shareholders and risk was absorbed by the state. The end result was inevitable... but the problem wasn't the facility they provided as much as the usual ineptitude, short-sightedness and self-serving tendencies of their federal patrons.

Capitalism is darwinally brutal but resilient, and the only method that has proven a consistent ability to expand and contract dynamically and efficiently over the long term. The less we f-k with it the better, and I hope the government is very careful in where and how it interjects itself in its noble (and sometimes not so...) attempts to minimize the pain.

http://www.youtube.com/watch?v=6G3Qefbt0n4

this series looks like a pretty good summation of his stuff from 06. its fucking interesting, and scary

Maybe this is the wrong thread, but can I ask who's dumbass idea it was to lend 100's of thousands of dollars to people who only earned minimum wage? Why are people(the banks) so stupid? It's almost as if these lending agencies put all of there eggs in one basket and in one big swoop, things turn to shit.

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Originally Posted by Trashcona

Maybe this is the wrong thread, but can I ask who's dumbass idea it was to lend 100's of thousands of dollars to people who only earned minimum wage? Why are people(the banks) so stupid? It's almost as if these lending agencies put all of there eggs in one basket and in one big swoop, things turn to shit.

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Mortgage brokers made these loans because they could immediately sell them to bigger companies who could then package them together and sell them to someone else as a high-yielding security without disclosing the level of risk. To me this is a perfect example of a need for gov't regulation, but I may be missing something.

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Originally Posted by Trashcona

Maybe this is the wrong thread, but can I ask who's dumbass idea it was to lend 100's of thousands of dollars to people who only earned minimum wage? Why are people(the banks) so stupid? It's almost as if these lending agencies put all of there eggs in one basket and in one big swoop, things turn to shit.

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A bit of an exaggeration... but your point is valid...

And the reason why is because they were (in many cases) guaranteed by the government through Fannie and Freddie. So the bank could 1) write the loan with minimal oversight, 2) have it federally guaranteed and therefore 3) package it and sell it as investment grade paper so they could 4) rinse and repeat. This is the sh!t that happens when you don't think government programs all the way through.... :shock:

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Originally Posted by sarbox68

And the reason why is because they were (in many cases) guaranteed by the government through Fannie and Freddie. So the bank could 1) write the loan with minimal oversight, 2) have it federally guaranteed and therefore 3) package it and sell it as investment grade paper so they could 4) rinse and repeat. This is the sh!t that happens when you don't think government programs all the way through.... :shock:

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I'm pretty sure that the subprime mess is as much or more Wall Street's fault than it is Fannie & Freddie's (if you separate F&F from Wall St.). Investment banks bought up bad loans, repackaged them, solicited AAA ratings from the Wall St. ratings agencies (Standard & Poor's etc.) and sold them to unsuspecting investors. Sure, the way Fannie & Freddie were let loose in the late 60's was a HUGE mistake, and they bought some of these bad loans, but they're in no way responsible for the entire mortgage crisis.

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Originally Posted by sarbox68

Agreed, tho' I think this situation was a little different. Usually I'm not a fan of bailouts at all... I think the Big 3 automakers should have been allowed to fail into restructuring/rebirth in the 80's, am very happy nobody offered to bailout victims of the 80's and 90's equity implosions even tho' billions evaporated, etc. I'm glad the Fed has (so far) been restrained in not bailing out Lehman, Merrill, AIG (altho' credit line to shore up liquidity has been extended...), Countrywide and I'm sure there will be others.

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But the housing market can't be saved. The problem is that people overpaid for houses, not that the prises are coming back down to reasonable levels. Once the bubble pops, there is nothing the government can to do keep the prices from falling. It's like trying to inflate a popped baloon. The best thing to do is to allow house prices to reach market level as fast as possible to shorten the pain.

Also, don't mistake this bailout for helping the homeowners. Short term they may have to move without it, but once they turn over the key to the bank, they are completely debt-free. So long term it's the banks that has to take the big hit. Since there is more homes than ever before no one will be homeless. People will be able to find a place to rent until prices are so low so they can rebuy the houses they handed over to the bank. Ultimately, this bailout is not for the little guy. This is socialism for the rich.

http://money.cnn.com/2008/09/16/news...ex.htm?cnn=yes

feds just took over AIG for 85 billion


can't really wrap my head around everything that's going on quite yet. for those that can (at least somewhat), please keep the discussion going so I'm semi-informed


p.s. I go to some of the so-called "conspiracy" websites and they've been talking doom-and-gloom like this for a long time now, like this could be as bad or worse than the Great Depression. it's crazy how a lot of the things I've been reading about are now coming true by the day/week.

In short people like to gambool, even multi-billion dollar companies.

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Originally Posted by zook

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Originally Posted by sarbox68

And the reason why is because they were (in many cases) guaranteed by the government through Fannie and Freddie. So the bank could 1) write the loan with minimal oversight, 2) have it federally guaranteed and therefore 3) package it and sell it as investment grade paper so they could 4) rinse and repeat. This is the sh!t that happens when you don't think government programs all the way through.... :shock:

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I'm pretty sure that the subprime mess is as much or more Wall Street's fault than it is Fannie & Freddie's (if you separate F&F from Wall St.). Investment banks bought up bad loans, repackaged them, solicited AAA ratings from the Wall St. ratings agencies (Standard & Poor's etc.) and sold them to unsuspecting investors. Sure, the way Fannie & Freddie were let loose in the late 60's was a HUGE mistake, and they bought some of these bad loans, but they're in no way responsible for the entire mortgage crisis.

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The subprime mess is more the fault of the federal reserve than anyone else. The federal reserve indirectly sets the interest rates in the entire economy. Interest rates is the price of money. But how should they know what the right price ought to be. This is just as impossible as having the government setting the price of milk or the price of cars, except the consequences are much more severe. When they set interest rates to low, there seem to be an abundance of money in the economyand people are able to get loans way to easy.

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Originally Posted by 2_Thumbs_Up

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Originally Posted by sarbox68

Agreed, tho' I think this situation was a little different. Usually I'm not a fan of bailouts at all... I think the Big 3 automakers should have been allowed to fail into restructuring/rebirth in the 80's, am very happy nobody offered to bailout victims of the 80's and 90's equity implosions even tho' billions evaporated, etc. I'm glad the Fed has (so far) been restrained in not bailing out Lehman, Merrill, AIG (altho' credit line to shore up liquidity has been extended...), Countrywide and I'm sure there will be others.

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But the housing market can't be saved. The problem is that people overpaid for houses, not that the prises are coming back down to reasonable levels. Once the bubble pops, there is nothing the government can to do keep the prices from falling. It's like trying to inflate a popped baloon. The best thing to do is to allow house prices to reach market level as fast as possible to shorten the pain.

Also, don't mistake this bailout for helping the homeowners. Short term they may have to move, but once they turn over the key to the bank, they are completely debt-free. So long term it's the banks that has to take the big hit. Since there is more homes than ever before no one will be homeless. People will be able to find a place to rent until prices are so low so they can rebuy the houses they handed over to the bank. Ultimately, this bailout is not for the little guy. This is socialism for the rich.

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once the banks start taking the big hits you'll see banks fail...once banks start failing you'll see a run on the banks, and once that happens........

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Originally Posted by UG

once the banks start taking the big hits you'll see banks fail...once banks start failing you'll see a run on the banks, and once that happens........

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If the government keeps this pace up you'll see a run on the dollar, and once that happens...

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Originally Posted by 2_Thumbs_Up

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Originally Posted by sarbox68

Agreed, tho' I think this situation was a little different. Usually I'm not a fan of bailouts at all... I think the Big 3 automakers should have been allowed to fail into restructuring/rebirth in the 80's, am very happy nobody offered to bailout victims of the 80's and 90's equity implosions even tho' billions evaporated, etc. I'm glad the Fed has (so far) been restrained in not bailing out Lehman, Merrill, AIG (altho' credit line to shore up liquidity has been extended...), Countrywide and I'm sure there will be others.

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But the housing market can't be saved. The problem is that people overpaid for houses, not that the prises are coming back down to reasonable levels. Once the bubble pops, there is nothing the government can to do keep the prices from falling. It's like trying to inflate a popped baloon. The best thing to do is to allow house prices to reach market level as fast as possible to shorten the pain.

Also, don't mistake this bailout for helping the homeowners. Short term they may have to move without it, but once they turn over the key to the bank, they are completely debt-free. So long term it's the banks that has to take the big hit. Since there is more homes than ever before no one will be homeless. People will be able to find a place to rent until prices are so low so they can rebuy the houses they handed over to the bank. Ultimately, this bailout is not for the little guy. This is socialism for the rich.

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This is a fascinating discussion... a couple of thoughts...

I don't see anything in the Fannie/Freddie deal that's a bailout for homeowners. And I'm adamantly against the various legislation that's being floated that would provide such. Housing values should be allowed to float based on market demand - pure and simple. That's the assumed risk you take on when you make a buying decision, and the government should not assume the role of playing short-stop.

I will correct you on the walk away and be debt free comment. That's a state by state issue. States where homeowners can truly just walk away from a first mortgage and be debt free are in the minority (i.e. California) And even in those cases, they are still legally liable for any loans beyond the original purchase money loans. So all these idiots that sucked out equity in the form of 2nd & 3rd mortgages cannot be saved by simply walking away. They are still liable for those loans... can still be sued for their outstanding value if they default, and if the bank forgives the loan, are liable for the state and federal taxes on the forgiven amount as if it were income. Full bankruptcy is a way out of the loan (not the tax debt if already forgiven...), but Chapter 7 is much harder to file these days, and most will be bounced in to Chapter 13 with a repayment plan.

And that's the states that allow a mortgage holder to walk away unscathed from a 1st... most will take the home in default, sell at foreclosure and then still be able to legally pursue the borrower for the deficiency between what was owed and what they got at the fire sale.

Housing needs to come back into balance... and it will, if the market is just left alone. There has to be a certain amount of liquidity as the credit markets for mortgages do not operate fully distinct from the credit market in general. Liquidity is endemic, and one facet (mortgages) cannot be permitted to completely close down other credit facilities (i.e. small business, commercial, etc.) However, at the end of the day, people still gotta live somewhere -- although there prolly aren't enough people right now to fill overbuilt, less desirable areas that have real demographic issues like Vegas, Florida, Phoenix, central California etc. However, where location rules (ie. where I am in West LA...), rents that stayed stagnant for 4 years while everyone was buying have been climbing dramatically... the beauty of demand pull inflation. Nature sure does love balance...

Oh, and I don't, nor will I ever, subscribe to the Jeremiah perspective. I'm old enough to have lived through the 70s stagflation / gas crisis, the 80s real estate and market crashes, the 90s equity bubble implosion and the 00s crisis in investor confidence. Yes, this is different, as is every unique challenge faced by the global economy. There will be pain involved, but I got no question this too will pass, and will be on to our next episode of rational exuberance... thus is the inherent beauty of the pursuit of a (mostly... or at least in general principal if not perfect application) free market economy.

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Originally Posted by UG

p.s. I go to some of the so-called "conspiracy" websites and they've been talking doom-and-gloom like this for a long time now, like this could be as bad or worse than the Great Depression. it's crazy how a lot of the things I've been reading about are now coming true by the day/week.

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They've been talking this off and on since I started paying attention (1976 anybody...?) It's just we didn't have the Internets... so they had to do it on UHF (please... tell me I'm not the only one what used to watch UHF... Wally George anybody???... fuck I feel old...), the radio, and in person.

Same shit, different data...

I find these discussions confusing, fascinating, worrying and a whole bunch of other emotions all at the same time. Unfortunately I have very little knowledge and as such, nothing to add. I look forward to reading more in this thread though.

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Originally Posted by zook

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Originally Posted by Trashcona

Maybe this is the wrong thread, but can I ask who's dumbass idea it was to lend 100's of thousands of dollars to people who only earned minimum wage? Why are people(the banks) so stupid? It's almost as if these lending agencies put all of there eggs in one basket and in one big swoop, things turn to shit.

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Mortgage brokers made these loans because they could immediately sell them to bigger companies who could then package them together and sell them to someone else as a high-yielding security without disclosing the level of risk. To me this is a perfect example of a need for gov't regulation, but I may be missing something.

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this sounds absurd, and wholly likely.
i read something about 'ninja loans' (lolwtf?) where banks (or someone) loaned money to people with no assets, income even addresses) and is it this that has been passed on in these?
then i guess that because people cant pay these debts eventually after the economic downturn its just money written off as bad debt?
Or od i need to rewatch the vids :)

Also, while ive little knowledge, and was abroad, it seemed clear to me that once rumours of AIG having problems became sort of public, Lehman were never going to get bailed out as they were a zillion times less important than AIG is. Correct assumption?

Meh, swongs.

I have food on my plate and am living in a warm stable house, I'm not too bothered.

I do feel genuinely sorry for the people who were lent money by companies who assumed that the relative prosperity would continue indefinitely though.

So how do we prevent this kind of thing from happening again? We can't. It won't.

Basically:

- Don't borrow money
- Don't borrow money
- If you have to borrow, try not to secure it against essential assets
- Don't guarantee for anyone
- Put some money into commodities if you have it
- Attempt to acquire legal streams of income outside your local system (well done for doing that FTR)
- Realise that in The Great Economic Swong Of 2031, all this will just be a comparison point

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Originally Posted by SaulPaul

http://www.youtube.com/watch?v=6G3Qefbt0n4

this series looks like a pretty good summation of his stuff from 06. its fucking interesting, and scary

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schiff is a smart smart man.

and this brings me to the thing I most hate: these videos have like 15000 page views in two months.

cansei de ser sexi: music is my hot, hot sex had 80 million views before being pulled down after being on youtube for like 6 months.

Anyone have any decent links to objective or at least balanced sites talking about all this? I don't know nearly as much about this as I should.

This spike is interesting.

http://www.kitco.com/images/live/gold.gif

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Originally Posted by 2_Thumbs_Up

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Originally Posted by UG

once the banks start taking the big hits you'll see banks fail...once banks start failing you'll see a run on the banks, and once that happens........

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If the government keeps this pace up you'll see a run on the dollar, and once that happens...

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I'm pretty uninformed in all this.. doesn't help being up in Canada either.

But does this mean I should take my poker money out of USD??

keep up the talks, interesting stuff.

Here's an article from today by a guy who obv believes in gov't regulation of markets:

http://www.cnn.com/2008/POLITICS/09/...sis/index.html

Funny that he blames the Fed for the current mess but doesn't suggest doing anything to change it!

Don't get all Chicken Little on us. The sky is not falling.
Here is an article from a source I like, Chief Economist for First Trust.

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Originally Posted by Brian Wesbury & Robert Stein

Gales of Punitive Destruction

There is not enough room on page one of the nation’s
newspapers for all of today’s news. Any of today’s stories –
a Lehman bankruptcy, a sale of Merrill Lynch, AIG capital
needs, plummeting oil prices, or new Fed lending facilities –
could be above-the-fold headline news. The US is moving
through its deepest set of financial market difficulties since
the 1980s and 1990s, during the banking and S&L crisis.
The key thing to remember here is that the emphasis
belongs on the word financial. These financial market
problems are not a result of widespread economic weakness,
otherwise known as a recession. In fact, real GDP has
grown 2.2% in the past year and accelerated to a 3.3%
annualized growth rate in the second quarter.
The economy is not taking down investment banks;
lousy lending standards and the excessive use of leverage are
taking down investment banks. And just like the problems
of the 1980s and 1990s, the roots of the problem reach back
to a period of absurdly low interest rates. When the Fed cut
interest rates to 1% in 2003, balance sheet math involving
leverage-based strategies turned so lucrative that many
financial market players could not help themselves. Wall
Street based its business model on leveraging up the most
leveraged asset on Main Street – housing.
This double set of leverage has blown up because the
housing market became overbuilt and housing prices stopped
rising. When the Fed pushes interest rates below their
“natural” level, mal-investment always occurs. Mark-tomarket
accounting exaggerated this process by letting firms
mark-up assets above true fundamental value on the way up,
but has now turned to force firms to mark-down assets, to
below true fundamental economic value.
The good news is that this financial earthquake is
unlikely to turn into an economic earthquake. The bad loans
made earlier this decade did not create a widespread
economic boom; and the realization of how bad some of
these loans are will not create an economic bust. The nonhousing
economy, which is roughly 95% of total US
economic activity, has been remarkably stable. In the three
years ending March 2005, non-housing real GDP grew at a
2.7% annualized rate. In the three years since then, nonhousing
real GDP has grown at a 3.2% average annual rate.
This is not that hard to understand. Think about a bad
loan made to a home buyer. Clearly that allows the
borrower to spend more than they have earned. But every
dollar of this cash comes from someone else, who has to
spend less than they earn. Even when the money comes
from abroad, that means fewer dollars available to foreigners
to buy our exports. Is it any wonder that the trade deficit
was booming when capital was readily available for
mortgage loans on easy terms and now the trade deficit is
falling rapidly when mortgage credit has slowed?
Remember: lending and credit expansion, by itself, is not
the equivalent of printing money; it simply shifts the pocket
in which the money is located. Credit contractions come and
go, but only credit contractions caused by government policy
mistakes lead to widespread recession. This is why the
current financial market problems are unlikely to spread.
There have been no major increases in tax rates, no
sudden lurches into trade protectionism, and no prolonged
period of tight monetary policy, where the federal funds rate
is persistently above the trend in nominal GDP growth. In
fact, tax rates are still relatively low and the Fed is holding
interest rates at extremely accommodative levels.
It is difficult to gauge when financial market upheaval
will finally come to an end. However, as long as
policymakers steer clear of tax hikes, tight money, and
protectionism, the economy should remain resilient.

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Couldn't have said it better, so I stole it.

As for AIG they have plenty of core insurance businesses that are profitable, but they cannot just shift money from the insurance surplus side to the parent company that is too heavily leveraged in the sub-prime mortgage debacle. The parent company may fail and that would be a shame, but that is/was capitalism(until the government stepped in). But many parts of that company would be sold off and still likely will be to pay debts incurred by losses due to sub-prime exposure & write-downs.

brit banks merging too now.

Thanks for posting that Silly String. But he doesn't mention that the US housing market likely still has a long way to fall and the repercussions on consumer spending and GDP could be serious. But it's always nice to hear more moderate viewpoints :)

I wholeheartedly disagree. I do not think the housing market has much further to fall except in prime real estate areas(Beachfront, high demand areas like Orange County). As long as the economy continues to be growing, albeit slowly, and the liquidity of loans are still available(Fed is making sure of that) the housing bubble will never pop. Deflate slowly? Sure. Or more likely IMO stagnate for multiple years, thereby crippling the new construction house industry. The glut of new housing built on easy credit in the 2000's will be worked through the system slowly. Once it is, most will have forgotten if our tax dollars ever were paid back by these F-ing bailouts. But things should return to normal and we can all bitch about the oil prices again.

Did you see the whole speech, Silly String?

http://www.youtube.com/watch?v=6G3Qefbt0n4

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Originally Posted by Silly String

I wholeheartedly disagree. I do not think the housing market has much further to fall except in prime real estate areas(Beachfront, high demand areas like Orange County). As long as the economy continues to be growing, albeit slowly, and the liquidity of loans are still available(Fed is making sure of that) the housing bubble will never pop. Deflate slowly? Sure. Or more likely IMO stagnate for multiple years, thereby crippling the new construction house industry. The glut of new housing built on easy credit in the 2000's will be worked through the system slowly. Once it is, most will have forgotten if our tax dollars ever were paid back by these F-ing bailouts. But things should return to normal and we can all bitch about the oil prices again.

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I agree that nothing's going to "pop" in the housing market b/c housing supply is inelastic. But I disagree that we've hit rock bottom, from the forecasts I've read, prices will just keep going down slowly (if you consider 10% a year slow). No way to know but to wait and see!

I think our country's about to start a long economic downward spiral, thanks in large part to massive Republican deficit spending in 20 out of the last 28 years.

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Originally Posted by Silly String

I wholeheartedly disagree. I do not think the housing market has much further to fall except in prime real estate areas(Beachfront, high demand areas like Orange County). As long as the economy continues to be growing, albeit slowly, and the liquidity of loans are still available(Fed is making sure of that) the housing bubble will never pop. Deflate slowly? Sure. Or more likely IMO stagnate for multiple years, thereby crippling the new construction house industry. The glut of new housing built on easy credit in the 2000's will be worked through the system slowly. Once it is, most will have forgotten if our tax dollars ever were paid back by these F-ing bailouts. But things should return to normal and we can all bitch about the oil prices again.

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Agreed. You have to break real estate numbers out locally, and even by neighborhood for them to have any value whatsoever. Anyone quoting national, regional (i.e. "Southern California") or even metro (i.e. "Los Angeles") is an idiot... 'cause those numbers are useless. Real estate has no inherent value... zero... unless you can grow sh!t on it. It's sale value is defined purely by supply and demand... which is why any house can sell at any time in any market if you price it right. And value is primarily all about location (colored by local demographics, economy, etc.)

Which is why you'll find the "collapse" in places people really didn't wanna live before we all took the blue pill and dove down the rabbit hole. No offense, but San Bernardino, Riverside, Redlands, Modesto, Temecula, Fontana... these were punchlines, not places people aspired to pay $400K for a spec house. Same is true with much of Florida, Vegas, Arizona, and the list goes on. There's nothing redeeming about these locations that provide inherent value -- and they only had value over the past couple of years because of the historically low interest rates and mythology of the universal right to homeownership. With that gone -- poof -- so has most of their value. Condos also are getting hammered, but they always shed value first and recover it last because your sole ownership stake is in four walls and a roof - the most depreciable (and vulnerable) element of the asset - and not in the land.

Places where you can't "build more" and that are desirable to live will still shed some value, but being in limited supply with a larger share of demand will prevent implosion and -- assuming single-family vs. condo or loft -- will recover faster. My estimate?... shed 15-25% as a correction and move sideways for 7-10 years. That's what happened (at least in So Cal) in these areas during the 80s real estate crash, and I don't see much evidence of this being much different. None of this is problematic for people who bought within their financial means, were smart in selecting financing (pref fixed... in which case they've locked in some fantastic deals...) and planned to take a long-term view.... so basically back to the old days of "How to Buy a House 101"....

http://images.bloomberg.com/r06/homepage/HP_INDU.png

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Originally Posted by Warpe

http://images.bloomberg.com/r06/homepage/HP_INDU.png

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Financial markets are like poker... short term ain't sh!t unless you're underrolled, and the long term is all that matters...

...'cept for markets that's at least a 5-7 year cycle (if not longer...)

...so the people here should be last ones to be bothered by volatility and variance ;)

I want to know where the Govt is going to keep getting these Billions and Billions of dollars?
Iraq War is gonna be close to 3TRILLION.
now add all these Bailouts.
The National Debt is at Record levels,in the 10 Trillion range I think.
Something has to break somewhere. I dont see the USA breaking up into a bunch of different Countries like Russia, but who the fuck knows?
I don't think the Machine can keep rolling like it has.

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Originally Posted by sarbox68

I will correct you on the walk away and be debt free comment. That's a state by state issue. States where homeowners can truly just walk away from a first mortgage and be debt free are in the minority (i.e. California) And even in those cases, they are still legally liable for any loans beyond the original purchase money loans. So all these idiots that sucked out equity in the form of 2nd & 3rd mortgages cannot be saved by simply walking away. They are still liable for those loans... can still be sued for their outstanding value if they default, and if the bank forgives the loan, are liable for the state and federal taxes on the forgiven amount as if it were income. Full bankruptcy is a way out of the loan (not the tax debt if already forgiven...), but Chapter 7 is much harder to file these days, and most will be bounced in to Chapter 13 with a repayment plan.

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I knew this was more or less the case for regular mortgage loans. Do you know if this is also the case for the subprime loans? I have never heard it when the subprime loans are mentioned but I have no definite source.

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Originally Posted by griffey24

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Originally Posted by 2_Thumbs_Up

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Originally Posted by UG

once the banks start taking the big hits you'll see banks fail...once banks start failing you'll see a run on the banks, and once that happens........

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If the government keeps this pace up you'll see a run on the dollar, and once that happens...

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I'm pretty uninformed in all this.. doesn't help being up in Canada either.

But does this mean I should take my poker money out of USD??

keep up the talks, interesting stuff.

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That's what I've done at least. I don't own a single dollar anymore.

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Originally Posted by Silly String

Don't get all Chicken Little on us. The sky is not falling.
Here is an article from a source I like, Chief Economist for First Trust.

Quote:

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Originally Posted by Brian Wesbury & Robert Stein

Gales of Punitive Destruction

There is not enough room on page one of the nation’s
newspapers for all of today’s news. Any of today’s stories –
a Lehman bankruptcy, a sale of Merrill Lynch, AIG capital
needs, plummeting oil prices, or new Fed lending facilities –
could be above-the-fold headline news. The US is moving
through its deepest set of financial market difficulties since
the 1980s and 1990s, during the banking and S&L crisis.
The key thing to remember here is that the emphasis
belongs on the word financial. These financial market
problems are not a result of widespread economic weakness,
otherwise known as a recession. In fact, real GDP has
grown 2.2% in the past year and accelerated to a 3.3%
annualized growth rate in the second quarter.
The economy is not taking down investment banks;
lousy lending standards and the excessive use of leverage are
taking down investment banks. And just like the problems
of the 1980s and 1990s, the roots of the problem reach back
to a period of absurdly low interest rates. When the Fed cut
interest rates to 1% in 2003, balance sheet math involving
leverage-based strategies turned so lucrative that many
financial market players could not help themselves. Wall
Street based its business model on leveraging up the most
leveraged asset on Main Street – housing.
This double set of leverage has blown up because the
housing market became overbuilt and housing prices stopped
rising. When the Fed pushes interest rates below their
“natural” level, mal-investment always occurs. Mark-tomarket
accounting exaggerated this process by letting firms
mark-up assets above true fundamental value on the way up,
but has now turned to force firms to mark-down assets, to
below true fundamental economic value.
The good news is that this financial earthquake is
unlikely to turn into an economic earthquake. The bad loans
made earlier this decade did not create a widespread
economic boom; and the realization of how bad some of
these loans are will not create an economic bust. The nonhousing
economy, which is roughly 95% of total US
economic activity, has been remarkably stable. In the three
years ending March 2005, non-housing real GDP grew at a
2.7% annualized rate. In the three years since then, nonhousing
real GDP has grown at a 3.2% average annual rate.
This is not that hard to understand. Think about a bad
loan made to a home buyer. Clearly that allows the
borrower to spend more than they have earned. But every
dollar of this cash comes from someone else, who has to
spend less than they earn. Even when the money comes
from abroad, that means fewer dollars available to foreigners
to buy our exports. Is it any wonder that the trade deficit
was booming when capital was readily available for
mortgage loans on easy terms and now the trade deficit is
falling rapidly when mortgage credit has slowed?
Remember: lending and credit expansion, by itself, is not
the equivalent of printing money; it simply shifts the pocket
in which the money is located. Credit contractions come and
go, but only credit contractions caused by government policy
mistakes lead to widespread recession. This is why the
current financial market problems are unlikely to spread.
There have been no major increases in tax rates, no
sudden lurches into trade protectionism, and no prolonged
period of tight monetary policy, where the federal funds rate
is persistently above the trend in nominal GDP growth. In
fact, tax rates are still relatively low and the Fed is holding
interest rates at extremely accommodative levels.
It is difficult to gauge when financial market upheaval
will finally come to an end. However, as long as
policymakers steer clear of tax hikes, tight money, and
protectionism, the economy should remain resilient.

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Couldn't have said it better, so I stole it.

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First a comment on the report he refers to that says the economy is still growing. When the government calculates growth they use a GDP deflator to account for inflation. In order to get the growth at 3.3% they need to count with an inflation rate of 1.2% annualized. That would be a ten year low. Does anyone really believe that inflation is at a ten year low right now? With a more reasonable adjustment for inflation the numbers would show the economy contracting. That also makes much more sense considering the news you hear from auto industries, airlines etc.

On his other points, he seem to get the cause of the problem right, mainly too low interest rates. But he seems to think you can just shrug off the losses. The current stimulus package and bailout bill already excedes 500 billion dollars (expect that to rise). The government doesn't have this money. They also can't just raise taxes with half a trillion so the only thing left is printing the money. The problem was caused by the creation of too much money, and the writer of that article seem to think that the solution is to simply create more.

Here are some of todays news that I found most interesting.

http://www.guardian.co.uk/business/feedarticle/7805691

http://biz.yahoo.com/ap/080917/econo...berg.html?.v=2

http://www.breitbart.com/article.php...show_article=1

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Originally Posted by 2_Thumbs_Up

I knew this was more or less the case for regular mortgage loans. Do you know if this is also the case for the subprime loans? I have never heard it when the subprime loans are mentioned but I have no definite source.

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Yeah, the underlying securitization of a Alt-A or other subprime mortgage is no different than any other kind. The only difference is the creditworthiness (or ability to document said creditworthiness...) of the borrowerer. All other rules apply.

Of course, you can make the case that people with Alt-As or worse don't have much in the way of assets, and you can't get blood from a turnip. However, I believe there's a sh!tload of poorly informed buyers (assuming if they suck out loud in their finances in general, they're prolly not doing much reading into the real obligations they're assuming...) who are literally going to sh!t a brick when they get the tax notice and/or the summons based on their deficiency judgment that they thought they'd just walked away from...

Also, this is going to play across the board for all investor/speculators. There is no deficiency protection for anything that is not a purchaser's single primary residence. You're not allowed to just flip the bank the bird and walk away from a speculative securitized bet. If you do, I sure hope you did a great job wrapping your ass in C-Corp or LLC status or the bank (or their assuming creditors after they're rolled into bankruptcy...) will come knocking. And if they don't find you, they'll just write off the loan and let the IRS chase your ass down for the tax bill. (And I don't know about Sweden, but the IRS is pretty damn good at chasing asses.... ;) )

Couple of other random thoughts...

http://www.nytimes.com/2008/09/17/op...hp&oref=slogin

Friedman isn't the only one making this suggestion. I think ressurecting some form of the Resolution Trust Corporation concept (used to fix the Savings & Loan crash... coincidentally touted then by some as the beginning of the end for the American financial system...) is a good option for ensuring a measured and rational liquidation of all this bad paper. There are other possibilities as well...

One last thing... to the comment about "printing money" and the implications... There is a little more to it than that in this case. The classic economic risk of loose monetary policy is inflation -- and that's effectively exactly what we got with low interest/easy access mortgages that bloated the credit supply and thereby caused house price inflation (which, funny enough, nobody was bitching about when they were shoving money in their shorts hand over fist... :roll:) What we've effectively got with these defaults is equivalent to the evaporation of market cap. Asset A was worth $1M... someone bought it for $950K... now it's worth $400K. You've just effectively removed $600K from the (loosely defined) money supply. The governments guarantee of bridge loans is not increasing the money supply at all in terms of the total net value of liquid assets in the economy -- they're effectively covering a loss. This shouldn't have any impact on inflation. Yes, the govt effectively purchases a portfolio that prima fascia is not worth what they paid for it (government get a bad deal...? ... u forget we are the land of the $170 military toilet seat :shock: )... but the idea is that the net impact on the economy is less through this transfer than if left to natural chaotic creative destruction.

The big question becomes what the government is able to do to recover value from that asset. They did a good job in many ways with the RTC during the S&L years, so there is a precedent. Let's see how well they do this time...

Oh... and national debt is really only relevant as it reflects a % of GDP... just as $5K in credit card debt is completely different implications depending on whether you're talking about it residing on the balance sheet of a minimum wage earning college student or a 7-figure investment banker.

Quote:

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Originally Posted by mrhappy333

I dont see the USA breaking up into a bunch of different Countries like Russia, but who the fuck knows?
I don't think the Machine can keep rolling like it has.

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If this happens I want the new Republic of California to enforce an absolute embargo on all Ralph Macchio movies, re-runs of The View and any interviews involving Fred Durst, Gary Coleman and LiLo.

... and if this sounds like some totally random sh!t... well, I don't have to answer to nobody in my own g-dd@mn country! :shock:

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Originally Posted by 2_Thumbs_Up

http://biz.yahoo.com/ap/080917/economy_bloomberg.html?.v=2

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THIS is the shit that worries me!

Quote:

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Originally Posted by sarbox68

One last thing... to the comment about "printing money" and the implications... There is a little more to it than that in this case. The classic economic risk of loose monetary policy is inflation -- and that's effectively exactly what we got with low interest/easy access mortgages that bloated the credit supply and thereby caused house price inflation (which, funny enough, nobody was bitching about when they were shoving money in their shorts hand over fist... :roll:) What we've effectively got with these defaults is equivalent to the evaporation of market cap. Asset A was worth $1M... someone bought it for $950K... now it's worth $400K. You've just effectively removed $600K from the (loosely defined) money supply. The governments guarantee of bridge loans is not increasing the money supply at all in terms of the total net value of liquid assets in the economy -- they're effectively covering a loss. This shouldn't have any impact on inflation. Yes, the govt effectively purchases a portfolio that prima fascia is not worth what they paid for it (government get a bad deal...? ... u forget we are the land of the $170 military toilet seat :shock: )... but the idea is that the net impact on the economy is less through this transfer than if left to natural chaotic creative destruction.

The big question becomes what the government is able to do to recover value from that asset. They did a good job in many ways with the RTC during the S&L years, so there is a precedent. Let's see how well they do this time...

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It's an incredibly bad deal for the government. It undermines the value of US treasuries and increases the chance that other nations may refuse to take on US debt.

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Originally Posted by zook

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Originally Posted by 2_Thumbs_Up

http://biz.yahoo.com/ap/080917/economy_bloomberg.html?.v=2

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THIS is the shit that worries me!

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http://www.bloomberg.com/apps/news?p...Qb_.0&refer=us

this is a sweet thread that deserves more than 2 spades

A lot of banks seem to be merging together right now. Bank of America bought up Merrill lynch. Now Morgan Stanley seem to be merging with Wachovia. An interesting theory regarding this is that the banks know they are going to fail and they are trying to get as big as possible so the government will feel compelled to bail them out. It's worth thinking about.

Morgan Stanley and Wachovia merge:
http://www.bloomberg.com/apps/news?p...8no&refer=home

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Originally Posted by zook

this is a sweet thread that deserves more than 2 spades

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Rated.

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Originally Posted by 2_Thumbs_Up

It's an incredibly bad deal for the government. It undermines the value of US treasuries and increases the chance that other nations may refuse to take on US debt.

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Agreed. But it's considered the lesser of two evils. And without another currency strong enough to replace the dollar as a global peg, I think it's really unlikely we'll see as much impact as some think. There just isn't much else to fill the void. The Euro zone has it's own problems, and a pure shift to commodities (bring back the gold standard anyone?) is just not going to happen as those assets tend to exist in abundance in the least stable parts of the world. That's what I think is fundamentally different this time than 70s, 80s, etc. The pain will be felt globally, but will also be distributed globally as sh!t is much more intertwined than ever before.

Quote:

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Originally Posted by 2_Thumbs_Up

A lot of banks seem to be merging together right now. Bank of America bought up Merrill lynch. Now Morgan Stanley seem to be merging with Wachovia. An interesting theory regarding this is that the banks know they are going to fail and they are trying to get as big as possible so the government will feel compelled to bail them out. It's worth thinking about.

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Also an interesting POV... and you may be right for some... altho' I think the govt has proven with Lehman that there's no guarantee, regardless of size. I think the next one we'll see is Washington Mutual... they're a thrift with pretty extensive mortgage exposure BUT, they also have a perfectly viable (and valuable) retail banking operation that makes them a long-term asset and are incredibly undervalued right now on that and pure asset book value alone. I'm betting they get picked up by Wells Fargo for pennies on the $, with minimal disruption to account holders.

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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Originally Posted by mrhappy333

TRILLIONS

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good point.


say you owe some people some money. you don't have money right now, else you would not owe them. now assume you have a wonderful machine that can make money for you. you would put this machine to work overtime in rder to gererate money for you, so that you can pay off your debt.

now, what gives money value? it used to be the amount of gold you had in your reserves backing your money. now, if the amount of gold has not increased while the amount of money you have has increased, it means your value of money has gone down, right? but people keep trusting your money, since you used to have a good amount of gold backing it. they don't know that you have been working your great money printer.

now, you keep pumping cash out, since you like your machine and therefore keep making debts. eventually, people will not accept your money anymore because they will find out there is nothing backing it anymore.

and then all the shit has hit the fan.

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Originally Posted by Irisheyes

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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I have emailed poker stars several times, begging, pleading, for a change of currency

also, I'd recommend you getting "stocks for dummies" (i'm not shitting you, its a great getting started book) and focusing on like the AMEX. with some luck, you can run that up to quite 'get set for life' money


and also, look into bullions or other commodities

It seems like the problem is that the banks took gigantic gambles knowing they'd be bailed out if they failed. It's a win win for them.

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Originally Posted by IowaSkinsFan

It seems like the problem is that the banks took gigantic gambles knowing they'd be bailed out if they failed. It's a win win for them.

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... and there's the huge flaw in any kind of government intervention ... the subsidy of risk... and why free markets, though destructive, are the most resilient and effective.

That all being said, I'm not sure the global economy is interested in this much of a painful correction, which is why the US govt and others will step in to mitigate... we just all hope they do it thoughtfully... :shock:

http://online.wsj.com/article/SB122169431617549947.html

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Originally Posted by Irisheyes

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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Alexos told me that he buys gold to balance his USD poker money b/c they're negatively correlated so it acts as a hedge. He studied finance but it makes sense to me. Plus gold could be a good investment these days.

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Originally Posted by Warpe

http://online.wsj.com/article/SB122169431617549947.html

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This is great. Here's a good editorial:

http://www.nytimes.com/2008/09/18/op...18wilmott.html

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Originally Posted by zook

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Originally Posted by Irisheyes

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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Alexos told me that he buys gold to balance his USD poker money b/c they're negatively correlated so it acts as a hedge. He studied finance but it makes sense to me. Plus gold could be a good investment these days.

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I have more than half my money in gold so it better be good.

Quote:

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Originally Posted by IowaSkinsFan

It seems like the problem is that the banks took gigantic gambles knowing they'd be bailed out if they failed. It's a win win for them.

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Not only did they take gigantic risks, but the risktaking was subsidized and promoted by the low interest rates of the federal reserve. The problem also lies in that the credit market and money itself is intertwined. This is not just a credit crisis. The value of the dollar (and other currencies) is at stake as well.

This is why governments shouldn't be involved in the currency at all. It should be up to the marketplace to decide what people want to use as money. Last time the market chose, it chose gold and silver, and that held up for a couple of thousand years. The fiat currencies of today have only existed for approximately 40 years. And it's only with central banks that we have seen massive problems such as depressions and hyperinflation.

Here is a documentary that presents the austrian view of the banking system. The presentation is quite boring but the subject is very interesting imo.

Money Banking and the Federal Reserve:
http://video.google.com/videoplay?do...10540567002553

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Originally Posted by zook

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Originally Posted by Irisheyes

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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Alexos told me that he buys gold to balance his USD poker money b/c they're negatively correlated so it acts as a hedge. He studied finance but it makes sense to me. Plus gold could be a good investment these days.

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Just be careful about trading one bubble for another...

http://i358.photobucket.com/albums/o...r1812/gold.jpg

three "golden words" that have proven out time and time again... diversify, diversify, diversify....

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Originally Posted by 2_Thumbs_Up

This link is probably a lot better than searching for him on youtube
http://www.europac.net/video.asp

If you go back to '06 you can see him get laughed at for predicting the subprime mess.

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http://www.europac.net/Schiff-Fox-12-16-06_lg.asp

commodities such as gold and silver are overvalued during recessions/economic instability and war. You could consider a short position, but it is difficult and risky though I did do it recently. Buying to hold is a terrible idea.

If you do buy silver or gold, make sure to get the physical item and not a contract to own silver. It can be oversold and you can lose the entire thing.

Can I get anyones opinion on investing in land? I'm looking for a safe haven and think that land would be a great resource to hold onto during these times.

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Originally Posted by 2_Thumbs_Up

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Originally Posted by zook

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Originally Posted by Irisheyes

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Originally Posted by 2_Thumbs_Up

That's what I've done at least. I don't own a single dollar anymore.

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So what would you recommend I do with my dollars then (about $35k)? I currently have 0 investments or investment strategies.

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Alexos told me that he buys gold to balance his USD poker money b/c they're negatively correlated so it acts as a hedge. He studied finance but it makes sense to me. Plus gold could be a good investment these days.

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I have more than half my money in gold so it better be good.

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Just some friendly advise, having more than 1/2 your money in any one investment is usually not a good idea. (I used to be a financial advisor, diversify :D )

http://money.cnn.com/2008/09/18/news...ion=2008091905

New wide-reaching bail out plan.

Also a little perspective to remember when someone says "could be like the great depression".

Dow lost about 90% of its value from peak to low.


Dow lost about 35% of its value in crash of '87


Dow lost about 35% again during the '01-'02 accounting/equity scandals.
Dow has lost less than 25% since October 07.

Not to say that it couldn't continue to drop, but unfortunately we wont know how bad it is until its done. Also I don't think it even comes close to compare to the great depression.

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Originally Posted by BankItDrew

Can I get anyones opinion on investing in land? I'm looking for a safe haven and think that land would be a great resource to hold onto during these times.

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Real estate is a good buy right now in Canada or the US. Land is a different story b/c its value down the road is dependent on what development takes place. Are you looking at one of those 'alternative' real estate syndication whatchmathingies? If so, proceed with great caution. Liquidity is an issue (your ability to sell it later).

I think the US gov't has it all figured now that they've suspended short selling of financial stocks :roll:

http://www.businessweek.com/ap/finan.../D939RL7O0.htm

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Originally Posted by zook

I think the US gov't has it all figured now that they've suspended short selling of financial stocks :roll:

http://www.businessweek.com/ap/finan.../D939RL7O0.htm

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Naw... but suspending the gambooling for a little time to alleviate one source of somewhat artificial downward pressure is not a bad thing. I don't have a real problem with them just cutting some noise from the system for a little bit while everyone works through the response...

Quote:

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Originally Posted by BankItDrew

Can I get anyones opinion on investing in land? I'm looking for a safe haven and think that land would be a great resource to hold onto during these times.

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Be really careful on this bro... "The Good Earth" aside... land is only as valuable for highest and best use. It also suffers from serious lack of liquidity, high transaction costs and zero portability. So if you're talking about undervalued commercial or residential property in established / high-demand neighborhoods that can be had at the right price... sure, good to diversify. If you're talking land where almost nobody lives or works now and may or may not ever live or work and you have no desire or ability to live or work there just 'cause it's land... not good, and usually borderline horrible as an investment.

I know more than a couple of people who've been sitting on acres in Wyoming, Montata, Arkansas, Florida, etc. for over 20 years 'cause land was the safe place for their money... Inflation & time value of money adjusted, they've done nothing but lose money - not that it matters, 'cause they can't get any of it out unless they can find someone to actually buy this cr@p from 'em...

I'm amazed that no one needs to take responsibility for this mess. The Govt. steps in and puts up 1trillion fucking dollars for a bailout. NO ONE is going to jail. I think all the people that were in charge of lending alot of stupid fucking people loans that they would not be able to repay should be going to jail. This is not going to happen.
I'm sure it would suck major balls, beyond anything I could imagine if all these companies went out of business, but maybe that would be a great wake up call to the whole World, that a consumable economy is destroying the Earth.

I actually thought this was going to be the bubble that blew up and things were going to change, but instead the Govt delayed this bubble(by there bailout), and I can only imagine how bad the next dissaster will be.

I wonder how long they are able to postpone it. I was thinking that they had bought themselves a few more months but this might go down even sooner.

http://www.nytimes.com/2008/09/20/wa...in&oref=slogin

http://www.lunarregistry.com/logos/registry_moon.gif

seems like a good way to diversify.

oh, and this ldo.

http://hiphopmusiq.com/wp-content/up...your_bonds.jpg

Bumping this thread b/c this article explains a lot:

http://www.nytimes.com/2008/10/03/business/03sec.html

Fucking lazy regulators. Fucking greedy investment banks. I can't believe we're bailing out these assholes.

got this in a n email yesterday. simple but explains alot.

http://docs.google.com/Present?docid...&skipauth=true

Quote:

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Originally Posted by zook

Bumping this thread b/c this article explains a lot:

http://www.nytimes.com/2008/10/03/business/03sec.html

Fucking lazy regulators. Fucking greedy investment banks. I can't believe we're bailing out these assholes.

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I can't believe people are now actually talking about letting people reduce their outstanding mortgage principal in bankruptcy court, etc. This kind of sh!t makes me nuts!! I don't remember any of Main Street whining when they were shoving handfuls of cash in their shorts by selling/taking equity loans on their house/condo for a 200% gain over 3 years. Now it's adjusting the other way, it's all "OMFG... we waz had!!!"

If the federal idiots that are considering options like bankruptcy principal adjustment etc., I can look forward to 1) having to pay down the full balance of the mortgage on my house ('cause I wasn't a f-in moron and bought something that I could afford with money I'd saved... and therefore will prolly not end up in bankruptcy...) and 2) paying higher taxes to bail out the ass-monkies that didn't, which will 3) further delay the normal market cycle adjustments to asset value that would progress much faster if they weren't artificially f-d with.

God-damn you gotta love the government.... this sh!t pisses me off!

I hate Glenn Beck but Peter Schiff's latest appearance on his show is awesome. He gets a former Federal Reserve president to "not disagree" that the US might end up with hyper-inflation like Zimbabwe.

http://www.europac.net/Schiff-CNN-10-14-08_lg_FLV.asp

You can skip to 2:30 for the guests and it gets good around 5:30 when the fed reserve president starts getting flustered.

Quote:

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Originally Posted by zook

I hate Glenn Beck but Peter Schiff's latest appearance on his show is awesome. He gets a former Federal Reserve president to "not disagree" that the US might end up with hyper-inflation like Zimbabwe.

http://www.europac.net/Schiff-CNN-10-14-08_lg_FLV.asp

You can skip to 2:30 for the guests and it gets good around 5:30 when the fed reserve president starts getting flustered.

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Yeah, good stuff.

I got some thoughts to add on your first post.

Quote:

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Originally Posted by zook

I'm not an econ guy but I know the basics and try to stay abreast of the news. I'm starting to think that we're witnessing some truly unique market failures with the subprime mortgage disaster, the gov't takeover of Fannie & Freddie, yesterday's bankruptcy declaration by Lehman Bros., BoA's buyout of Merill Lynch and what looks like impeding doom for AIG, the US's largest insurance company: http://money.cnn.com/2008/09/16/news...ion=2008091617

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I think this situation is a clear cut case of government failure, mainly because our entire monetary system is actually an invention of the government. Imo, the denationalization of money is probably the most important political issue, and most people have never even thought of it.

On regulation, the financial sector is probably the most regualated sector in the entire economy already. I think the statement that deregulation caused this is absurd. I'd like it if someone actually names one thing related to this crisis that isn't regulated. I don't think the problem is lack of regulation at all, but rather the kind of regulation. The market is self-regulating. Greed is supposed to be balanced with fear, but the government has taken away all the fear. By looking at what's happening now I think this point gets clearer. It's the market that tries to regulate the bad banks out of business. It's the government that rewards this bad behaviour.

Though I think there is one area where the government has failed to do what it's supposed to. One legitimate role of the government is to regulate fraud. I think the concept of fractional reserve banking is fraudulent and it should be outlawed. With that simple regulation this crisis would never have occured. But this has nothing to do with deregulation, because this regulation has never actually existed in the first place.

By the way:

http://www.guardian.co.uk/business/2...laries-banking

Quote:

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Originally Posted by 2_Thumbs_Up

I think this situation is a clear cut case of government failure, mainly because our entire monetary system is actually an invention of the government. Imo, the denationalization of money is probably the most important political issue, and most people have never even thought of it.

On regulation, the financial sector is probably the most regualated sector in the entire economy already. I think the statement that deregulation caused this is absurd. I'd like it if someone actually names one thing related to this crisis that isn't regulated. I don't think the problem is lack of regulation at all, but rather the kind of regulation. The market is self-regulating. Greed is supposed to be balanced with fear, but the government has taken away all the fear. By looking at what's happening now I think this point gets clearer. It's the market that tries to regulate the bad banks out of business. It's the government that rewards this bad behaviour.

Though I think there is one area where the government has failed to do what it's supposed to. One legitimate role of the government is to regulate fraud. I think the concept of fractional reserve banking is fraudulent and it should be outlawed. With that simple regulation this crisis would never have occured. But this has nothing to do with deregulation, because this regulation has never actually existed in the first place.

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One of the problems with unfettered capitalism is that people can rip each other off by selling them things that aren't worth what they claim, or don't do what they claim, or are unsafe. Caveat emptor clearly isn't sufficient when you're buying things like pharmaceuticals or even home mortgages. But I agree that gov't played a huge role in the subprime mortgage crisis, both overregulating (Greenspan's monetary policy) and underregulating (allowing banks to become ridiculously leveraged).

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Originally Posted by 2_Thumbs_Up

By the way:

http://www.guardian.co.uk/business/2...laries-banking

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LOL

But selling stuff that doesn't do what you claim is fraud, isn't it? And this crisis is proof that it's very possible in fettered capitalism as well. The difference is that those responsible get away with it. This should really have been handled the same way as the enron scandal was handled.

Allowing the government to regulate pharmaceuticals doesn't automatically make them any safer either. It's just a transfer of responsibility from the seller to the government. The seller no longer has to care what he sells as long as it's approved by the government. And the government seldom takes responsibility either so now there is no one to blame when something does go wrong. This also opens a pandoras box allowing for pharmaceutical special interests to influence the regulations to their benefit.

I also think people underestimate the ability of the market to set certain standards. Things such as licenses for different professions (doctors, teachers etc.) was originally an invention of the marketplace. People don't want surgery without proof that the surgeon knows what he's doing. I think we will be a lot better of if all regulatory businesses are competitive rather than monopolized.

I think the problem is that people are looking for the perfect regulations. In order for that to happen the regulators would have to be all-knowing and non-corruptable, which just isn't the case. Regulators are humans as well, and they regulate in their own self-interest, not in the best interest of society. The notion of good politics is an illusion. Once you allow government regulations it never stops. The beurocracy and corruption just keep on growing until you end up with a crisis like today.

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Originally Posted by 2_Thumbs_Up

But selling stuff that doesn't do what you claim is fraud, isn't it? And this crisis is proof that it's very possible in fettered capitalism as well. The difference is that those responsible get away with it. This should really have been handled the same way as the enron scandal was handled.

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Sure it's fraud and it's possible even with regulations in place, but not the right regulations. I agree that people and businesses need to be punished and thanks to market forces many will be. Unfortunately, thanks to the gov't, many won't be, or not to the full extent of their mistakes.

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Originally Posted by 2_Thumbs_Up

I also think people underestimate the ability of the market to set certain standards. Things such as licenses for different professions (doctors, teachers etc.) was originally an invention of the marketplace. People don't want surgery without proof that the surgeon knows what he's doing. I think we will be a lot better of if all regulatory businesses are competitive rather than monopolized.

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Aren't S&P, Moody's and other credit ratings agencies competitive? The ones that gave AAA ratings to junk mortgage vehicles and derivatives?

I think we'll have to agree to disagree about the power of the market to self-regulate and the supreme evil of gov't but I enjoy reading your opinions.

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Originally Posted by zook

Aren't S&P, Moody's and other credit ratings agencies competitive? The ones that gave AAA ratings to junk mortgage vehicles and derivatives?

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I don't think it's very competetive when they aren't allowed to fail. The fear of failing is what's supposed to keep them in check. I also don't see why there is any reason to believe the government would have handled the regulation/rating any better. I think the magnitude of mistakes and potential for corruption increase when you add the force of law.

But the thing I really wanted to bring about was our monetary system and fractional reserve banking. Because I think that's the underlying problem to a lot of issues today. This video explains fractional reserve banking very well and I suggest you take a look at it.

Money as debt (first 15 minutes or so):
http://www.youtube.com/watch?v=vVkFb26u9g8

Found another video I haven't seen before that is probably more accurate but less entertaining:
http://www.youtube.com/watch?v=LHraTPUbsgg

Take the videos for what they are worth though. They are on the conspiracy side of things and I disagree with a lot of the details, especially the proposed solution. But the explanation of fractional reserve banking is pretty accurate, and I think that is one of the bigger problems today.

I watched the first one and meh. Of course money is debt... it's a promise to provide goods or services. Banks and gov't can create money "out of thin air" because we continue to produce more goods and services every year. We're able to do this because we haven't tapped out the earth's natural resources yet, the working population is increasing and manufacturers and service providers continually improve efficiency. Eventually it will become a bigger problem when natural resources start running out but we're already starting to address that by developing renewable energy.

I agree that the US is too deep in debt and it will lead to higher inflation at some point, but I don't think fractional reserve banking is necessarily the problem. When people pay back their loans after they get paid for creating goods or providing services, that money the bank "created out of thin air" is now real and not an issue. Am I missing something?

Re: S&P, Moody's and the other credit ratings agencies... one, I'm not sure they have enough financial interest in providing accurate ratings that they would actually fail because of some bad ones. Do you know how they work, specifically? Two, I can't believe it was only a lack of moral hazard that caused them to rate those junk mortgages so highly. That was some incredible hubris if they knew how bad they were and just assumed the gov't would bail everybody out. I think it was more likely a combination of poor understanding and too much greed, both of which are market failures.

[off-topic]
The next super-power nation will offer something to the world that no other nation can provide. This has always been accomplished through developing technology, or creating new efficient ways of doing things.

One day, our main sources of energy that humans use, will become non existent because things like fossil fuels are a finite resource. I predict that the first nation to be able to harness the energy of the sun at a high rate of efficiency - will emerge as a very powerful one.

The human species must accomplish this feat eventually, if we wish to survive.

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Originally Posted by zook

I watched the first one and meh. Of course money is debt... it's a promise to provide goods or services. Banks and gov't can create money "out of thin air" because we continue to produce more goods and services every year. We're able to do this because we haven't tapped out the earth's natural resources yet, the working population is increasing and manufacturers and service providers continually improve efficiency. Eventually it will become a bigger problem when natural resources start running out but we're already starting to address that by developing renewable energy.

I agree that the US is too deep in debt and it will lead to higher inflation at some point, but I don't think fractional reserve banking is necessarily the problem. When people pay back their loans after they get paid for creating goods or providing services, that money the bank "created out of thin air" is now real and not an issue. Am I missing something?

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It wasn't so much the perpetual debt part that I wanted to highlight. That part is false as I understand it. It's that private banks create a lot more money than the government does. Most people don't realize this.

Fractional Reserve Banking:

Intuitively most people know that banks use fractional reserves. No one expects that banks keep all their money as reserves. But most haven't thought through what this actually means.

All banks keep a fraction of their money as reserves. The fraction is called Cash Reserve Ratio (CRR). The CRR varies in different countries and with different kind of loans. In my example the CRR will be 10% but many times it's much lower than that.

Lets take an example. In the example we assume there is only one bank, and that the money lent out always gets redeposited by someone else. The CRR is 10%.

Someone makes a deposit of $20.000 at the bank. This means that the bank is allowed to lend up to $18.000 of this money. Person A takes a loan of this sum and buys a car from Person B, who deposits this money at the bank again. There is no way for the bank to know that this is the same money that was deposited earlier. This means that the bank's assets now increase by $18.000 and can lend another 0.9 * $18.000 = $16.200 of this money. The cycle repeats itself and more and more money is created.

In the long run the above example will look something like this:

A. New Deposit at the bank
B. New Loan given by the bank (90% of new deposit)
C. Remaining reserves at the bank for each new loan (10% of new deposit)
D. Total Deposits

Nr A..........B..........C..........D
1 $20.000 $18.000 $2.000 $20.000
2 $18.000 $16.200 $1.800 $38.000
3 $16.200 $14.580 $1.620 $54.200
4 $14.580 $13.122 $1.458 $68.780
5 $13.122 $11.810 $1.312 $81.902
6 $11.810 $10.629 $1.181 $93.712
7 $10.629 $9.566 $1.063 $104.341
8 $9.566 $8.609 $957 $113.907
9 $8.609 $7.748 $861 $122.516
10 $7.748 $6.974 $774 $130.264
11 $6.974 $6.276 $698 $137.238
12 $6.276 $5.649 $627 $143.514

From the original deposit of only $20.000 there is now a total of $143.514 in existence. All of the above depositors are able to use their money at any time.

How much money is the bank able to create if the cycle continues? The answer is given by this equation:

X=Bank created money
D=Original deposit
C=CRR

X = D*(1-C)/C
X=$20.000*(1-0.1)/0.1 = $180.000

So, with a CRR of 10% banks are theoretically able to create $180.000 from an original deposit of only $20.000, assuming that someone deposits the money again after it's been lent out, which is the common thing to do when you recieve a bigger sum of money. Many times the money doesn't even leave the banking system (someone loans money, makes a bank transfer to someone else and the bank can lend from that deposit as well).

The question then is, has the bank in the above example created $180.000 of wealth? Of course not. All they have created is inflation. The purchasing power of the newly created money is taken from all the money already in existence. No one should have the ability to dilute the purchasing power of other people's money.

The austrian school of economics explains that fractional reserve banking is the reason for the business cycle (and a central bank exacerbates it). When banks expand credit the supply of savings increase and causes the price (interest rates) to go down. But the expansion of the money supply doesn't represent real savings, and thus a lot of investments unbacked by savings will take place. At some point this has to reveal itself and all the malinvestments that took place during the boom needs to be liquidated.

I appreciate the lesson. But with full reserve banking, and thus a stable money supply, wouldn't we have deflation as long as economies keep growing?

So it seems that fractional reserve banking is incredibly inflationary. But since the creation of the Federal Reserve, the US economy has grown at a rate above inflation and our standard-of-living has increased by a number of measures. So where are the effects?

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Originally Posted by zook

I appreciate the lesson. But with full reserve banking, and thus a stable money supply, wouldn't we have deflation as long as economies keep growing?

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Sure, but I think "deflation is bad" is a myth. I think that argument gained popularity after the great depression. The saying was that as long as the government could've avoided the deflation then we wouldn't have had the depression. But if you think it was the over-consumption of the twenties that caused the great depression then the argument is void. If over-consumption is the problem, then under-consumption is the solution. It obviously did cause some disturbances during the great depression but it was the sudden transition that was the problem. We actually had a general decrease in all prices for most of the 19th century and it didn't seem to cause too much harm then.

It also depends on how you define inflation/deflation. Austrians define it as an increase/decrease in the money supply, not an increase/decrease in prices. Inflation cause price increases but is not equivalent to it. I think that definition makes much more sense because the word "inflate" obviously refers to a volume of some sort. Prices just go up or down. The money supply expand or contract.

With that definition inflation is nothing more than a redistribution of wealth. Real wealth is unchanged by an increase in the money supply. The problem is that newly created money has to be spent into the economy from specific points. The early recievers of the newly created money will experience an increased purchasing power since the prices hasn't had time to adjust. The late recievers will experience a decreased purchasing power since prices will increase before they see any of the new money.

Who are the early recievers today:
Banks
Government
Borrowers (the more you can borrow the more you gain)

Who are the late recievers:
Savers
Low-income workers (especially if you are unable to borrow)

The inflation tax is increadibly regressive. I think most of the poverty in the developed world is because of our monetary system.

Intuitively, deflation seems bad b/c it reduces the incentive for investment and encourages hoarding. If your money's going to be worth more in a couple of weeks, why buy or invest in something today? Also intuitively, moderate inflation and low multiple fractional banking seem good. There has to be money available to borrow to encourage new businesses and innovation. It seems like there should be no problem with inflation that stays below the rate of economic growth. I'm not convinced that's what we've had recently though, because they gov't changed the measure of inflation to take out a bunch of stuff that should count. As for the idea that monetary supply growth rate = inflation, shouldn't it be monetary supply growth rate minus economic growth rate = inflation?

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Originally Posted by zook

Intuitively, deflation seems bad b/c it reduces the incentive for investment and encourages hoarding. If your money's going to be worth more in a couple of weeks, why buy or invest in something today? Also intuitively, moderate inflation and low multiple fractional banking seem good. There has to be money available to borrow to encourage new businesses and innovation. It seems like there should be no problem with inflation that stays below the rate of economic growth. I'm not convinced that's what we've had recently though, because they gov't changed the measure of inflation to take out a bunch of stuff that should count.

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I think banking should work in such a way that there is a clear distinction between demand deposits and time deposits. Banks serve mainly two purposes, safe-keeping of money and a meeting-place for borrowers and lenders. These two purposes can't be met at the same time. You can't safe-keep and invest your money simultaneously. If you want to safe-keep your money then you should expect to pay a small fee for the storage. If you want to lend it out to someone then you can't expect to withdraw it while it is borrowed. So banks would have two sources of income, storage fee and difference in interest rates between borrowing and lending.

On deflation:
The goal of an economy is to eliminate scarcity. With that in mind I think it's only natural to expect that prices fall as goods become less scarce.

Investment comes from savings. If you want to stimulate economic growth then you should stimulate saving, not consumption as the government tries to do. Hoarding as you said is just another word for saving.

The way it works is that savings by definition is future consumption. If I want a car and I can afford one today, then the only reason I wouldn't buy it, is if I think I can buy a car and something more in the future. A decreased demand of present consumption corresponds to an increased demand of future consumption. If I decide to not buy the car I will save the money, most likely I will do it at a bank. The supply of savings increase and entrepreneurs can borrow more. But since the demand for present consumption has decreased it won't be profitable for anyone to borrow the money to immediatly produce more consumption goods. Instead, the money will be used to produce the machinery that is neccessary to satisfy the increased future demand of consumption. The end result would be a more long term allocation of resources.

It's actually circular logic to say that decreasing prices prohibits economic growth. Lets assume we have an economy with no growth and no inflation. Prices will be completely constant. The ONLY way prices can actually fall is if the economy starts growing. It's the growth that causes prices to fall. The causality can't work both ways. The statement "economic growth causes price falls which prohibits economic growth" obviously isn't true. Growth can't prohibit growth.

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Originally Posted by zook

As for the idea that monetary supply growth rate = inflation, shouldn't it be monetary supply growth rate minus economic growth rate = inflation?

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Even if the money supply expands less than the rate of economic growth, it's still an expansion. Prices would fall moderately but since there is new money being created the early recievers will benifit on the cost of the late recievers just as before.

Good discussion you two, keep posting links, I'm learning a lot.

Here's one of the episodes of Free to Choose by Milton Friedman. Starting at 9:00 Friedman talks about how the Interstate Commerce Commission was set up to regulate the railroads but ended up making train travel worse. He says that consumer advocacy groups are the ones who are usually behind the creation of a new agency, but once that's done, they move on to the next cause and don't pay too much attention to how the agency actually develops. The only people with the motivation to give their undivided attention to the ICC were the railroad companies themselves. The ICC ended up being packed with company men, and of course they produced regulations that just made it hard for new competitors to enter the market.

I think a similar thing happened with the SEC. The big firms on Wall Street are the people with the greatest interest in what the SEC does so it was inevitable that SEC regulations would sometimes have more to do with what's best for Freddie Mac or whoever than what's best for the public.[/url]

2_Thumbs: I don't have the background in Keynesian economics that you do in Austrian economics, but as I said in my last post, it just seems intuitive that modest inflation would lead to more economic growth than modest deflation. The former encourages consumption and investment, the latter encourages savings. I'm not saying that deflation would prohibit growth (you're right, that would make no sense) just that it doesn't maximize growth.

And you haven't convinced me that there's anything wrong with an increase in monetary supply as long as the rate is below that of economic growth. Wealth is created when economies grow so there should be no problem expanding the monetary supply. Yes, bankers make more money, but they can offer depositors higher rates as well. This thread is my first exposure to the Austrian school, but I was glad to find a few of my ideas fleshed out in this article defending Fractional Reserve Banking, written by an economist of the Austrian school:

http://mises.org/journals/scholar/salin.pdf

mcat: That was a funny movie. I don't know how much influence the SEC had over the trading of mortgage-backed securities... do you? I think that clearly the investment banks that created and traded them deserve a large share of the blame. As do the ratings agencies that gave them AAA ratings. The question is whether the failures of these companies are an argument for more (and better) regulation or less?

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Originally Posted by zook

mcat: That was a funny movie. I don't know how much influence the SEC had over the trading of mortgage-backed securities... do you?

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Ok, I think this article from today's NYT answers the question for credit default swaps at least, with the answer being none.

http://www.nytimes.com/2008/10/19/opinion/19cox.html

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Originally Posted by zook

2_Thumbs: I don't have the background in Keynesian economics that you do in Austrian economics, but as I said in my last post, it just seems intuitive that modest inflation would lead to more economic growth than modest deflation. The former encourages consumption and investment, the latter encourages savings. I'm not saying that deflation would prohibit growth (you're right, that would make no sense) just that it doesn't maximize growth.

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This pdf is probably the most clear-cut explanation of the austrian view of economic growth I've seen (written by Peter Schiff's father actually, didn't realize that until now):

http://freedom-school.com/money/how-...nomy-grows.pdf

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Originally Posted by zook

And you haven't convinced me that there's anything wrong with an increase in monetary supply as long as the rate is below that of economic growth. Wealth is created when economies grow so there should be no problem expanding the monetary supply. Yes, bankers make more money, but they can offer depositors higher rates as well. This thread is my first exposure to the Austrian school, but I was glad to find a few of my ideas fleshed out in this article defending Fractional Reserve Banking, written by an economist of the Austrian school:

http://mises.org/journals/scholar/salin.pdf

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Yeah, fractional reserve banking is one of few subjects that are heavily debated even within the austrian school. The general consensus seem to be against it nowadays, but certainly not everyone though. I've followed and been involved in a lot of debates on the subject on a swedish forum. I don't really see a need for an expanding money supply and I also think one of the bigger benifits with full reserves would be that the banking system wouldn't be so horribly intertwined.

hmm looks like irwin schiff is one of those 'we dont hafta pay income tax' guys

does anybody have any examples of those guys actually winning in court?

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Originally Posted by wufwugy

hmm looks like irwin schiff is one of those 'we dont hafta pay income tax' guys

does anybody have any examples of those guys actually winning in court?

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He's in prison for tax evasion.

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Originally Posted by zook

mcat: That was a funny movie. I don't know how much influence the SEC had over the trading of mortgage-backed securities... do you? I think that clearly the investment banks that created and traded them deserve a large share of the blame. As do the ratings agencies that gave them AAA ratings. The question is whether the failures of these companies are an argument for more (and better) regulation or less?

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That's kind of my point. Some of the activities that took place may have been beyond the scope of the SEC, but most of them the SEC had the authority to regulate, but simply chose not to. Probably because they didn't want to step on the toes of the big investment banks.

For example, here's an article where an SEC official says the SEC allowed five of the biggest firms to bend the rules and leverage themselves more than other firms were allowed to do. Regardless of whether this particular allegation is true, I think it's natural for the biggest firms to find a way to game the system and hire expensive lobbyists and get regulatory agencies to do what the firms want, just like the railroad companies did in the Milton Friedman video. The irony in this case is that the investment firms were probably excited that they got the government to give them all an unfair advantage, but in fact they were just setting themselves up to go broke.

I just don't think it's realistic to say, well there needs to be "better" regulation that works the way zook wants it to, because zook isn't going to be there to oversee the SEC. Once this crisis blows over, we're all going to stop paying attention to the SEC for the most part, but you can be sure that Goldman Sachs and Fannie and Freddie will still be there with their lobbyists making sure the SEC does what they want.

By the way I'm not some conspiracy theorist who thinks investment banks are actually pulling the strings of the SEC, I'm sure the people who work for the SEC are for the most part public servants who genuinely want to do the right thing. But when the biggest banks and brokerages are spending huge amounts of money on lobbying the SEC then it's easy for those well-intentioned public servants to get bamboozled, as happened here.