Greenspan: Once in a century financial crisis

[August1991]

The fact remains - loans were made that never should have been made. Securities were packaged and "rated" that never should have been packaged together and/or never have been rated as triple "A."

Rather than get into a name-calling dispute msj, I'll look for common ground.

Here, I agree with you. There's no doubt that people made deals that were, in hindsight, unwise. Well, let's be honest, that happens often in life. Almost every divorced person would agree that they would have done things differently if they had known then what they know now.

You (and others) seem to blame the government for this state of affairs. They blame the government either because it regulates too much, not enough or not correctly.

In all honesty, do you think the government can do anything to help people stay married and avoid divorce? IMHO, the complexities of a marriage are well-beyond any bureaucrat to understand. So, I'm inclined to think the government should stay clear of the marriage market because anything it does will eventually lead in all likelihood to fewer marriages or more bad marriages. With that said, imagine a situation where people stop getting married (or shacking up) altogether. If the President decides to get married to restore confidence, then who am I to oppose her?

If my comparison of marriage and banking regulations seems contrived, here's a fun read that compares (not incorrectly) the current crisis with Tickle Me Elmo.

Commentary: How we got into this money mess

At bottom, after all these "asset backed paper losses", will Americans still want to get up in the morning and go to work, and will Americans still want to get married?

Edited September 19, 2008 by August1991

[msj]

Yeah, why don't you have a good yuck you arrogant bastard. You are so full of yourself why don't you explain how it can be that economists are disagreeing with you on how to solve this thing. I know, I know, because the ones that disagree with you are all wrong, eh?

Sure, economists will always disagree with each other. Normally they will put forth good arguments supported by facts (historical and/or statistical/mathematical).

I'm not disagreeing with Rogoff as I'm disagreeing with August's choice of a link which is what is so laughable.

[msj]

While I'm at it:

It is one thing to diagnose this crisis as being somehow related to integrating spreadsheets and email into business.

It's quite another thing to deny the real economy:

weekly unemployment claims

[msj]

Rather than get into a name-calling dispute msj, I'll look for common ground.

Here, I agree with you. There's no doubt that people made deals that were, in hindsight, unwise. Well, let's be honest, that happens often in life. Almost every divorced person would agree that they would have done things differently if they had known then what they know now.

You (and others) seem to blame the government for this state of affairs. They blame the government either because it regulates too much, not enough or not correctly.

In all honesty, do you think the government can do anything to help people stay married and avoid divorce? IMHO, the complexities of a marriage are well-beyond any bureaucrat to understand. So, I'm inclined to think the government should stay clear of the marriage market because anything it does will eventually lead in all likelihood to fewer marriages or more bad marriages. With that said, imagine a situation where people stop getting married (or shacking up) altogether. If the President decides to get married to restore confidence, then who am I to oppose her?

If my comparison of marriage and banking regulations seems contrived, here's a fun read that compares (not incorrectly) the current crisis with Tickle Me Elmo.

Commentary: How we got into this money mess

At bottom, after all these "asset backed paper losses", will Americans still want to get up in the morning and go to work, and will Americans still want to get married?

August, my problem with you is that you always deny the importance of events which are important.

Sure, people will recover from this.

Many, however, won't.

Others will go through financial pain for years before recovery.

Just because one day most of us will wake up and be okay does not justify the ineptness of the decisions made by the current and recent past administrations and Fed.

I see little point in discussing this with anyone who cannot comprehend how deleveraging can have a very real impact on the real economy.

I also see little point in discussing an issue with someone who will admit that he knows so little about what is going on and yet spend so much time railing against trying to do something to ensure that it does not happen again.

[August1991]

August, my problem with you is that you always deny the importance of events which are important.

Sure, people will recover from this.

Many, however, won't.

Others will go through financial pain for years before recovery.

Just because one day most of us will wake up and be okay does not justify the ineptness of the decisions made by the current and recent past administrations and Fed.

I see little point in discussing this with anyone who cannot comprehend how deleveraging can have a very real impact on the real economy.

I also see little point in discussing an issue with someone who will admit that he knows so little about what is going on and yet spend so much time railing against trying to do something to ensure that it does not happen again.

Well, my problem with you msj is that you see the trees but not the forest.

I don't know how much your portfolio has fallen in the past week, but mine has taken a serious hit. My only condoleance is that I lost less than others, and less than I could have. So, I'm not ignoring losses.

OTOH, thinking of the forest here, the main question is whether the US economy (and Canadian economy) can continue to produce wealth. If people get up in the morning and go to work, do a good job and their employer happily pays them for their effort because it creates value for others, then I say the world is a better place. We can have the ambulances, food, teachers and music that make life better.

I'm not worried about the rise or fall of secondary financial markets unless prices in these markets affect how people behave in their daily life. Ben Bernanke has no doubt been very much concerned with this question over the past few months and days. msj, you note how this market change will affect people. Well, Lehman Bros employed some 25,000 people. These 25,000 are now unemployed. So far, this is the real world effect of this "crisis".

In strict monetary terms, which is worse to me? If my portfolio loses value or if I lose my job? The question to ask is whether people will change their behaviour in the real world because of what they learn from changes in financial markets.

Unemployed employees of Lehman Bros are certain to change their behaviour - until they find a new job. msj, has this market reversal changed your behaviour in daily life? My portfolio may be down but I still do my grocery shopping the same way.

---

Ineptness of the Fed or the SEC? msj, you're back to this idea that the government can improve marriages.

If the government regulated better the marriage market, would society have happier and better marriages? Would government regulation of marriages reduce the divorce rate?

Edited September 19, 2008 by August1991

[msj]

OTOH, thinking of the forest here, the main question is whether the US economy (and Canadian economy) can continue to produce wealth. If people get up in the morning and go to work, do a good job and their employer happily pays them for their effort because it creates value for others, then I say the world is a better place. We can have the ambulances, food, teachers and music that make life better.

Sure, Canada is fine.

In the US, aka "the land of socialized losses and privatized gains" there is no doubt that the extra several hundreds of billions of dollars added to the national debt will lead to higher debt costs which will leave less money for teachers and ambulances.

I'm not worried about the rise or fall of secondary financial markets unless prices in these markets affect how people behave in their daily life. Ben Bernanke has no doubt been very much concerned with this question over the past few months and days. msj, you note how this market change will affect people. Well, Lehman Bros employed some 25,000 people. These 25,000 are now unemployed. So far, this is the real world effect of this "crisis".

In strict monetary terms, which is worse to me? If my portfolio loses value or if I lose my job? The question to ask is whether people will change their behaviour in the real world because of what they learn from changes in financial markets.

Unemployed employees of Lehman Bros are certain to change their behaviour - until they find a new job. msj, has this market reversal changed your behaviour in daily life? My portfolio may be down but I still do my grocery shopping the same way.

---

Ineptness of the Fed or the SEC? msj, you're back to this idea that the government can improve marriages.

If the government regulated better the marriage market, would society have happier and better marriages? Would government regulation of marriages reduce the divorce rate?

This is what is so laughable - you don't think that the government socializing losses doesn't make FDR look like a dwarf?

How many Americans voted to own an insurance company?

How many Americans voted to allow the Federal Reserve to hold hundreds of billions of dollars of worthless debt on its balance sheet (as it swaps US treasuries for crap to support the credit market)?

If it is important enough to be bought by the taxpayer then it is important enough to be regulated properly by the government.

It is deregulation that has failed American taxpayers and hopefully they will wake up and finally do something about it.

As for how my investments are doing - not relevant to the discussion.

That is truly an example of not seeing the forest for the trees when one starts talking about their personal portfolio.

[msj]

As to the real economy, two interesting articles:

1) Recession watch has been updated and shows that the US economy is not as rosy as some here think.

2) As to the effects from the financial crisis on the "real" economy - an estimate was attempted back in March. I would love to see this updated over the next few months.

[bush_cheney2004]

As to the real economy, two interesting articles:

1) Recession watch has been updated and shows that the US economy is not as rosy as some here think.

2) As to the effects from the financial crisis on the "real" economy - an estimate was attempted back in March. I would love to see this updated over the next few months.

Still trying to land a true blue recession eh? Well, while you have been gazing stateside, the Eurozone has taken a real turn for the worse. So what's their excuse?

[sharkman]

So it seems the US government is going to ride in and save the day...for the bankers. The people can go pound sand. The people who can't handle their sub-prime mortgages are going to go bankrupt, and the banks who let them sign for money they so obviously couldn't afford get bailed out. Wow.

I know in the end the banking system must survive or we would be in a new dark age, but what a price for the people to pay. As it is, house prices won't recover for many years, and by the sound of it, banks will overcorrect the other way, making money too hard to borrow.

[msj]

Still trying to land a true blue recession eh? Well, while you have been gazing stateside, the Eurozone has taken a real turn for the worse. So what's their excuse?

Don't know about Euroland although the UK seems to be suffering from something similar to the US as they already nationalized (or socialized) a bank last year.

I never bought the "decoupling" argument so I would think that Euroland is going down due to the US going down (among other factors).

But back to the US: it's funny that Bush is going out on a "W" recession.

[Oleg Bach]

Don't know about Euroland although the UK seems to be suffering from something similar to the US as they already nationalized (or socialized) a bank last year.

I never bought the "decoupling" argument so I would think that Euroland is going down due to the US going down (among other factors).

But back to the US: it's funny that Bush is going out on a "W" recession.

Boy if what you are saying is correct then the life span of National Socialism ruled by a dark and responsible elite has a short shelf life..Just as they were getting into the swing of things the house of cards seems to be on the verge of coming down. I would say that this is due to the natural running out of time. The men who put this whole thing together are simply aging and reaching the end with no heirs properly trained to continue- They may have simply run out of time and life. That is distressing that the managers internationally were so power orientated that they failed to appoint and train their own replacements. It's a dilema.

[msj]

Here's an argument for the link between what is happening on Wall St. and how it affects main street:

Why Paulson and Bernanke are only Partly Correct, and Why Main Street Needs More Direct Help

It’s no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. According to the Bureau of Labor Statistics, the official rate of unemployment in California last month was 7.7 percent. That’s up from 5.5 percent a year ago. In Florida, unemployment has climbed to 6.5 percent, from 4.1 percent a year ago. No surprise that bad debts are mounting fastest in California and Florida – and elsewhere around the country where jobs are evaporating fastest.

Note that these are just the official rates. Some 600,000 fewer jobs are listed on the nation’s payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours.

[bush_cheney2004]

Don't know about Euroland although the UK seems to be suffering from something similar to the US as they already nationalized (or socialized) a bank last year.

I never bought the "decoupling" argument so I would think that Euroland is going down due to the US going down (among other factors).

But back to the US: it's funny that Bush is going out on a "W" recession.

But of course....everything happens because of the "US going down"....what a pity that these other poor souls are doomed.

"W" came in on a recession too.

[msj]

"W" came in on a recession too.

Yes, it's too bad that the Bush recovery was so weak.

[bush_cheney2004]

Yes, it's too bad that the Bush recovery was so weak.

Don't worry...we'll try to squeeze in a recession or two just to keep you happy. Just think...it might become "Obama's" weak recovery!

[msj]

Don't worry...we'll try to squeeze in a recession or two just to keep you happy. Just think...it might become "Obama's" weak recovery!

It should go down as easy Al's disgrace.

[August1991]

The reality is that a person buys a house for $400,000 with a 100% loan. Pays about 24 months of interest which is about $48,000. Pays property taxes etc.... then has the house foreclosed upon.

Now that person is likely unable to buy another house for many more years (assuming mortgages become regulated properly again) due to a poor credit score. The person is out the interest payments and moving costs etc...

msj, you focus on the person who bought the house and couldn't pay for it. I'm more concerned about the 9 others on the street who own their house (have no mortgage) but see a falling house price.

It is not foreclosures, as such, that are a problem. It is how other people perceive falling house prices.

If you believe that you have savings worth $1 million and then you discover that it's only $600,000, you change your behaviour. If you are a boomer close to retirement, you really change your behaviour.

For every 1 person who lost their house through foreclosure, there were some 90 or more others who fretted about falling asset values.

2) Oil going down generally is a good thing. If it is going down due to demand destruction then no, it is not a problem.

If it is going down because of a panicky market then yes, it is a problem.

So, if the price of oil goes up, that's good?

The price of oil; is now over $100 per barrel. Can I use that as a proxy for confidence in the US economy?

Frankly, I think oil at $140 is overpriced. It didn't fall to $100 because of a collapse in demand; it fell because it was overpriced.

The key, however, is whether or not we continue on with negative real interest rates (whereby the Fed keeps the rate at 2% while printing so much "bail out" money as to cause inflation to stay at current levels or go higher) or if we end up with deflation thanks to the de-leveraging going on (whereby the Fed lowers interest rates further to deal with deflation coming from the low to negative growth in broad money supply due de-leveraging).

I agree that this is the main macro problem in any bail out. It may provoke inflation or inflationary expectations.

As for real estate - you can try and focus the blame on any asset class you want - it still comes back to an irresponsible Fed and Congress who put regulations in place at the wrong time and wrong place.

Smart regulation is what was/is needed and the Fed/US Government/US accounting standards continue to deal with this in a piecemeal and opaque fashion.

The fact remains - loans were made that never should have been made. Securities were packaged and "rated" that never should have been packaged together and/or never have been rated as triple "A."

msj, you blame politicians and civil servants for incompetence. Do you expect "smart" regulations from government bureaucrats?

Think about what you are saying. You argue that government bureaucrats and politicians have failed in their duty to regulate and then you argue for... mor egovernment regulation!

Ronald Reagan's basic argument was that government bureaucrats are incompetent and we shouldn't trust them.

IOW, we have to find a way to avoid or mitigate these kinds of financial crises without relying on more government regulators.

To put it bluntly, this is partly the fundamental problem the Fed is now facing.

----

As to your point about real estate, it is in a class of its own because the most expensive purchase of most Americans is a house. A house is typically the largest asset, including pensions, of an American. The US financial system is largely designed so that a young couple with little wealth can obtain and use a valuable asset, a house.

So, a problem in the real estate market is bound to have severe repercussions in financial markets. Generalized, sustained falling housing prices pose a problem.

Sales of new homes in the United States plunged 11.5 percent in August to an annualized pace of 460,000 units, the lowest rate since 1991 when the U.S. experienced a recession, according to government report released in Washington Thursday. The median price of a new home dropped 6.2 percent from a year earlier to $221,900, the lowest since September, 2004.

BNN

----

msj, I enjoy reading your posts and I realize that, for the past year or so that you have been on this forum, you have been predicting imminent doom. Perhaps you now have the self-satisfied smile of someone whose predictions come true. I hope you don't. (For myself, I sincerely hope the US gets through this crisis of trust. I think it will.)

You seem to take great pleasure in proving that you are right.

I am more intrigued about occasions when I am wrong.

[August1991]

It should go down as easy Al's disgrace.

Money is the ultimate symbol and perhaps we should let Hollywood manage its image.

You blame Greenspan, but I would blame Bernanke.

Take a look at the two in their prime: Alan Greenspan and Ben Bernanke.

Now frankly, which one is an average Joe going to trust.

Now, I think Bernanke was an atrocious choice for Fed Chairman. He's like Dion. However intelligent he is, whatever he says, it doesn't get through. Greenspan would have gone before Congress, given a speech and everyone would have had confidence. Even Arthur Burns could have done it with a few puffs on his pipe. Bernanke doesn't have it.

msj, our financial system relies on trust. We are facing a crisis of confidence. In real terms, there is nothing wrong.

[msj]

Money is the ultimate symbol and perhaps we should let Hollywood manage its image.

You blame Greenspan, but I would blame Bernanke.

Take a look at the two in their prime: Alan Greenspan and Ben Bernanke.

Now frankly, which one is an average Joe going to trust.

Now, I think Bernanke was an atrocious choice for Fed Chairman. He's like Dion. However intelligent he is, whatever he says, it doesn't get through. Greenspan would have gone before Congress, given a speech and everyone would have had confidence. Even Arthur Burns could have done it with a few puffs on his pipe. Bernanke doesn't have it.

msj, our financial system relies on trust. We are facing a crisis of confidence. In real terms, there is nothing wrong.

This crisis' roots go back decades.

It didn't just start in 2006 when Bernanke took over.

If the crisis did not have any real terms then the banks wouldn't have already written of hundreds of billions of dollars with another trillion or so to go and Bear Stearns and Lehman Brothers (among some regional banks you have likely never heard of) would still be around.

Bad debts are created under many conditions in which cash flow, or lack thereof, play a higher role than trust (although with the NINJA loans that the deregulated banks were handing out I suppose trust does play a role - I suppose the banks trusted that the people receiving the money would be able to pay it back regardless of job loss, overextended finances, or other uncertain circumstances).

I have already posted enough links in other threads for which you have been a part showing how Greenspan has played a large role in the current mess.

He was in a position to regulate and/or get Congress to act prior to the credit bubble meltdown which started in Aug/ 2007.

As for dealing with the current crisis: Bernanke is doing surprisingly well considering the mess that he was left (which is not to say that he isn't screwing it up - but given the administration he is dealing with he is doing okay [and who is going to trust the Bush administration/Republicans after the lies that led to the trillion dollar never ending war?]).

[msj]

msj, you focus on the person who bought the house and couldn't pay for it. I'm more concerned about the 9 others on the street who own their house (have no mortgage) but see a falling house price.

It is not foreclosures, as such, that are a problem. It is how other people perceive falling house prices.

If you believe that you have savings worth $1 million and then you discover that it's only $600,000, you change your behaviour. If you are a boomer close to retirement, you really change your behaviour.

For every 1 person who lost their house through foreclosure, there were some 90 or more others who fretted about falling asset values.

So, if the price of oil goes up, that's good?

The price of oil; is now over $100 per barrel. Can I use that as a proxy for confidence in the US economy?

Frankly, I think oil at $140 is overpriced. It didn't fall to $100 because of a collapse in demand; it fell because it was overpriced.

I agree that this is the main macro problem in any bail out. It may provoke inflation or inflationary expectations.

msj, you blame politicians and civil servants for incompetence. Do you expect "smart" regulations from government bureaucrats?

Think about what you are saying. You argue that government bureaucrats and politicians have failed in their duty to regulate and then you argue for... mor egovernment regulation!

Ronald Reagan's basic argument was that government bureaucrats are incompetent and we shouldn't trust them.

IOW, we have to find a way to avoid or mitigate these kinds of financial crises without relying on more government regulators.

To put it bluntly, this is partly the fundamental problem the Fed is now facing.

----

As to your point about real estate, it is in a class of its own because the most expensive purchase of most Americans is a house. A house is typically the largest asset, including pensions, of an American. The US financial system is largely designed so that a young couple with little wealth can obtain and use a valuable asset, a house.

So, a problem in the real estate market is bound to have severe repercussions in financial markets. Generalized, sustained falling housing prices pose a problem.

BNN

----

msj, I enjoy reading your posts and I realize that, for the past year or so that you have been on this forum, you have been predicting imminent doom. Perhaps you now have the self-satisfied smile of someone whose predictions come true. I hope you don't. (For myself, I sincerely hope the US gets through this crisis of trust. I think it will.)

You seem to take great pleasure in proving that you are right.

I am more intrigued about occasions when I am wrong.

The rule of thumb is that the stock market leads to 4 cents of more spending due to a wealth effect whereas real estate is 11 cents for every $1 in increased (perceived) wealth.

It has a real effect on the economy which is what I have been saying all along.

I have not, however, been predicting imminent doom. Yes, the credit crisis (which is the real problem leading to falling house prices) is big.

Bigger then even I imagined (although not bigger than some of the economists I read could have imagined).

I have gone on record about the US having a modest recession although it looks like I am wrong on that - it is definitely mild and likely to be moderately large.

When the US gets through this then I hope they can start facing their challenges intelligently (which they are definitely not doing right now with the rushed bail out package).

It is also laughable to laud deregulation when it leads to the government becoming more socialistic than the alternative of simply having smart regulation prevent such crises in the first place.

Edited September 26, 2008 by msj

[August1991]

This crisis' roots go back decades.

Decades?

If someone died last year, in 2007, they had a good life. I reckon that if the economy made their life good, we have lost nothing.

I truly do not understand how anyone alive today can borrow from the future - unless we mean environmental destruction. (If we all died today, never paid our debts and defaulted, could we rip-off "the future"?) IOW, using common sense, how can "The Present" borrow from "The Future"? We can only borrow from people alive today. IMV, the only way to borrow from the future, or pass a debt to future generations, is to leave them a world with fewer natural resources, or leave them a more polluted world.

Collectively, people alive today cannot leave a paper debt to future generations, nor can governments pass paper debts to future generations. As powerful as governments appear to be, they do not have the power of time travel.

---

msj, you present a typical Lutheran Protestant litany. You describe extravagant greed and claim that it leads inevitably to a Fall and Poverty. You sound like a WASP preacher in the 1930s. "It is unbridled greed and the Seven Sins that have lead us to this terrible position."

Sorry, you're wrong. Keynes, for one, showed otherwise. Adam Smith too. In this situation, greed is not the problem.

Edited September 26, 2008 by August1991

[msj]

Decades?

If someone died last year, in 2007, they had a good life. I reckon that if the economy made their life good, we have lost nothing.

I truly do not understand how anyone alive today can borrow from the future - unless we mean environmental destruction. (If we all died today, never paid our debts and defaulted, could we rip-off "the future"?) IOW, using common sense, how can "The Present" borrow from "The Future"? We can only borrow from people alive today. IMV, the only way to borrow from the future, or pass a debt to future generations, is to leave them a world with fewer natural resources, or leave them a more polluted world.

Collectively, people alive today cannot leave a paper debt to future generations, nor can governments pass paper debts to future generations. As powerful as governments appear to be, they do not have the power of time travel.

---

msj, you present a typical Lutheran Protestant litany. You describe extravagant greed and claim that it leads inevitably to a Fall and Poverty. You sound like a WASP preacher in the 1930s. "It is unbridled greed and the Seven Sins that have lead us to this terrible position."

Sorry, you're wrong. Keynes, for one, showed otherwise. Adam Smith too. In this situation, greed is not the problem.

I see no point in continuing this discussion.

You continue to misrepresent my viewpoint as "doom and gloom" while ignoring the various links I have used to support my argument which are all based in sound economics.

The problem is not greed. The problem is deregulation which led to ridiculous loans (NINJA loans in particular) amongst other areas of deregulation (derivatives market, SEC, Federal Reserve and banking) which are too numerous to document in full here (hence my links in various threads).

If you would be bothered to try to read some of these links you might discover that when it gets down to details it does make sense to put in certain regulations (and to remove other regulations in some cases) in order to prevent the socialization of the financial system (which is closer to Marx than Smith).

[August1991]

The problem is not greed. The problem is deregulation which led to ridiculous loans (NINJA loans in particular) amongst other areas of deregulation (derivatives market, SEC, Federal Reserve and banking) which are too numerous to document in full here (hence my links in various threads).

If you would be bothered to try to read some of these links you might discover that when it gets down to details it does make sense to put in certain regulations (and to remove other regulations in some cases) in order to prevent the socialization of the financial system (which is closer to Marx than Smith).

Yet, the Right's viewpoint is that Regulation was the very cause of this problem.

Why did private banks engage in NINJA loans? (For those who don't know, NINJA = no income, no job, no asset. I loathe supposed insider information, secret codes or people who pretend to know more than others. Yet I sometimes engage in this myself.)

msj, many would argue that NINJA loans occurred precisley because FANNIE MAE and FREDDIE MAC offered State guarantees. (FANNIE MAE and FREDDIE MAC were US government guarantees of private mortgages.) IOW, msj, you want even more State involvement in markets after State involvement did not work.

msj, you are a typical socialist: "The plan didn't work because we did it wrong. We have to hire more people, change things in the future, involve the State more and get the plan right." The world has been down this road in Nazi Germany and Soviet Russia. Most plans will fail and any plan that requires more resources is certain to fail. The State cannot offer security or stability. Between Smith, Keynes and Stalin, we must find a suitable mix.

----

I will stay with my original idea. This is a crisis in the US financial system (caused by a collapse in US house prices) and not in the American ability to create wealth. As long as ordinary Americans get up in the morning and go to work, the world will be a better place.

Ultimately, it is a question of trust. Most of us (including you msj) measure wealth by mere numbers on a computer screen. Mere computer numbers? I don't mean to denigrate their significance. If I owe $5000 to a close friend, it is a weight that hangs over me whether the debt is on a screen or not. (Margaret Atwood has written a book about debt and IMV, she has forgotten this basic fact.)

IMV, the world is a richer place when debt exists. First, debt means two people trust one another. Second, debt often (but not always) leads to the creation of value.

Edited September 28, 2008 by August1991

[msj]

Yet, the Right's viewpoint is that Regulation was the very cause of this problem.

Why did private banks engage in NINJA loans? (For those who don't know, NINJA = no income, no job, no asset. I loathe supposed insider information, secret codes or people who pretend to know more than others. Yet I sometimes engage in this myself.)

msj, many would argue that NINJA loans occurred precisley because FANNIE MAE and FREDDIE MAC offered State guarantees. (FANNIE MAE and FREDDIE MAC were US government guarantees of private mortgages.) IOW, msj, you want even more State involvement in markets after State involvement did not work.

msj, you are a typical socialist: "The plan didn't work because we did it wrong. We have to hire more people, change things in the future, involve the State more and get the plan right." The world has been down this road in Nazi Germany and Soviet Russia. Most plans will fail and any plan that requires more resources is certain to fail. The State cannot offer security or stability. Between Smith, Keynes and Stalin, we must find a suitable mix.

----

I will stay with my original idea. This is a crisis in the US financial system (caused by a collapse in US house prices) and not in the American ability to create wealth. As long as ordinary Americans get up in the morning and go to work, the world will be a better place.

Ultimately, it is a question of trust. Most of us (including you msj) measure wealth by mere numbers on a computer screen. Mere computer numbers? I don't mean to denigrate their significance. If I owe $5000 to a close friend, it is a weight that hangs over me whether the debt is on a screen or not. (Margaret Atwood has written a book about debt and IMV, she has forgotten this basic fact.)

IMV, the world is a richer place when debt exists. First, debt means two people trust one another. Second, debt often (but not always) leads to the creation of value.

1) Yes, now I'm some kind of elitist because I use the term "Ninja loans" for which I have provided a definition in previous postings and have (wrongly, apparently) assumed that people would be intelligent enough to remember it or to look it up.

2) The kind of regulation I want involves preventing NINJA loans, cracking down on fraudulent house appraisals (go do a google search on the FBI investigations into this) amongst other reforms that would be too tiresome to list in detail on a forum such as this.

3) House prices are a symptom, not a cause.

If my house price goes down while I still have the cash flow available to pay the mortgage then the house price is not relevant.

If, OTOH, the loan resets at a higher payment putting stress on my cash flow so that I can no longer keep current on the payments then the house prices starts to become relevant.

4) Of course debt is important to creating wealth - I am a business owner who uses debt for this very reason.

Debt, however, is not some kind of monolithic entity. There is good debt and bad debt - quality is an issue. Quantity of debt can also be an issue.

Mix too much poor quality debt and you end up with a crisis where trust turns to fear.

What you fail to understand is that while trust and hope are important to the running of an economy, their foil - fear - can come up seemingly out of nowhere and bite us all in the butt.

This is a part of human nature for which you seem to have very little appreciation.

I picked up my copy of Mackay's "Extraordinary Popular Delusions and the Madness of Crowds" last night and highly recommend it to anyone to grasp this reality of human nature.

5) Don't try to tell me how I measure wealth - you know nothing about how I truly measure wealth which is irrelevant to the discussion at hand.

6) Have you read Margaret Atwood's book yet or are you basing your opinion on it based on what was printed in the Globe and Mail? I will reserve judgment on it until I can get my hands on it (from the library though - I'm not a fan of Atwood).

7) Having the state step in a buy 80% stakes in companies (AIG), giving huge subsidized loans to companies (Ford/GM) and buying distressed debt at prices that the financiers fancy is closer to Fascism than the alternative of preventing such crises in the first place (which would mean expecting banks to do things like expect downpayments, create clear loan contracts that are understandable to people, not base loans on fictitious home appraisals, not base loans on fictitious reported income, etc - maybe I will have to revisit Mein Kampf and the Communist Manifesto and see to what extent Hitler/Marx wrote about such regulation ).

Reasonable regulation is already the norm in the US and other capitalist countries. It is only a matter of how smart that regulation is and the extent to which it is enforced.

Now, I really don't want to get into comparing the US to Nazi Germany or the USSR because I really do think that equating proper regulation in a capitalist society to Fascism or Communism is a very poor argumentative method and is a complete waste of time.

[msj]

Well, things aren't looking too good in the stock markets.

But let's look at how financial meltdowns have an impact on the "real world:"

How Bad Will the Downturn Be? Stylized Facts