An Austrian economic perspective.

[Pliny]

Well, on doing some research I have found some interesting things.

This:

The creation of CDOs

is a flow chart of the creation of CDOs. This is essentially how paper on Wall street is created.

You'll note that what is missing is what is prior to the creation of CDOs and that is mortgages, credit and coroporate loans. Someone made those loans and extended the credit. It is indeed credit. MBSs(mortgage backed securities) were created in a similar manner.

This Wiki article on the crisis is quite informative and gives all the left wing reasons and their solutions to the problem.

The weakness in dre's argument is that the same left wing economists he likes to cite that didn't predict the crisis then, now know precisely why it occurred. The fact is they don't because they have the same inability of being able to differeniate between debt and money.

I beleive in dre's world that once a mortgage is created it is now money and cannot be created out of nothing but is 100% backed by money. In other words a mortgage is lent out of real savings from, I guess, investors that have their money in banks and investment accounts. These new mortgages don't add a single penny to the money supply because they are money. They are not credit at all.

In truth they are credit and they are now added to and included as part of the money supply, even though they are - debt. The crash means that "debt" must be written off or, in other words, taken out of the "money" supply and now appears as a negative on the balance sheets instead of a positive.

As to Fannie and Freddie owning only a small portion of the mortgage market - in 2006 they held $5 trillion dollars of it. Not an insignificant amount and definitely not only 20% of the market.

The article above cites easy credit and policies of the government as contributors to the problem but, in my view, underplays their role. They provided the fuel for the fire. Wall street just took the debt assessed the risks, packaged them up and sold them.

[WIP]

Bank failures and bank runs were the problems the central bank was supposed to resolve. Why did they happen? Fractional reserve banking basically. Banks issuing more notes than what they had on deposit in receipts. The central bank, in the interests of banks, wished to continue fractional reserve banking and regulate it, Banks just being warehouses for depositors just weren't profitable enough. Fractional reserve banking allowed for the creation of "money" on paper and with added economic tools of Keynesian theory, such as setting of interest rates the economy fell under control of the central banks.

Was the big problem fractional reserve banking? Or the repeal of the Glass-Steagall Act, which would have kept all of the phony money schemes in the derivatives markets from inflating and then destroying the home mortgage market if it was still in place. Other deregulation bullshit allowed Countrywide and some other mortgagers to create interest-only payment plans, and escalator mortgages, and others I forget at them moment, that never should have been legal in the first place. Funny how many market bubbles and busts there have been since 1980, when the big push to deregulation began...compared to post-war to 1980, when financial markets were more closely constrained from acting recklessly and irrationally.

About six hundred banks in the US failed since 2008, and what do you mean by a complete failure? We, in Canada have a small cartel of banks that are seemingly too big to fail. The economy in Canada will have to completely fail before a bank in Canada goes down. By completely fail I mean a complete collapse and rejection of the Canadian fiat currency by the populace.

Were you, by any chance one of those who was calling for deregulation of Canadian banking? So that Canadian banks could end up in the same mess as the U.S. banks!

[Michael Hardner]

Savings held in bank accounts are insured by the federal government up to $250,000 ($100,000 prior to 2008). People with more money lying around than that should have spent the time to conduct the proper research and hedge their bets by investing in a variety of investments, using multiple banks, etc.

I think what we're debating is that the government shouldn't be involved.

So $249K in savings... poof... sorry do your homework next time.

[Pliny]

Ok, so bank failures are a good thing, as it's an unregulated market correcting itself. People losing their life savings deserve their loss for being foolish enough to deposit money in a bank whose lending practices they didn't thoroughly review before engaging with them. Is that it ?

[\quote]

Bank failures are necessary to weed out poorly run businesses. Banks have not and will not correct their practices or policies to prevent failures and bank runs because they will lose the main source of profit, which is extending credit. They instead adopted a means to meet their shortcomings with several "solutions" a central bank, control of the money supply and government insurance of depositors.

Of course, the predictable exigency after adoption of these solutions required even more regulation over the economy to be truly effective. The economy had to go to a fiat currency and completely untie the hands of government and the banks. Governments, in order to govern effectively needed a source of money and bankers did also to prevent bank runs and failures.

Banks today fail for the same reasons they did in the 19th century. They over-extended their credit.

So the solution turned out to be not a solution. And we have the FDIC.

By completely fail I mean a complete collapse and rejection of the Canadian fiat currency by the populace.

And that would indeed be the final free market victory.

What free market? There is no free market - it would be a failure of the current fiscal structure out of which a free market may be able to rise.

[Michael Hardner]

Banks today fail for the same reasons they did in the 19th century. They over-extended their credit.

So the solution turned out to be not a solution. And we have the FDIC.

Did the system not create a more stable banking system, until deregulation allowed the banks to come close to failing ? And the bailout, that's just re-regulation or maybe a second guess at deregulation isn't it ?

[Pliny]

Was the big problem fractional reserve banking? Or the repeal of the Glass-Steagall Act, which would have kept all of the phony money schemes in the derivatives markets from inflating and then destroying the home mortgage market if it was still in place. Other deregulation bullshit allowed Countrywide and some other mortgagers to create interest-only payment plans, and escalator mortgages, and others I forget at them moment, that never should have been legal in the first place. Funny how many market bubbles and busts there have been since 1980, when the big push to deregulation began...compared to post-war to 1980, when financial markets were more closely constrained from acting recklessly and irrationally.

The problems in banking we had in the 19th century, creating problems in the economy then, are the same problems in the eocnomy we have today. The banking industry and government are still blaming free enterprise. It is banking policies and practices that have remained consistent over the time period. The financial market responds.

If I recall right Carter was President before 1980 and there was quite a recession then. There was quite an economic crisis in 1972 as well when the gold window slammed shut.

The derivatives market is basically a repackaging of debt sold on the market. The debt stems from those willing to loan money and without it there would be no debt to repackage. One has to look at how much debt is created in lending, how much new money is created on the interest of that debt and compare it to how much is asset backed as opposed to created out of thin air.

Were you, by any chance one of those who was calling for deregulation of Canadian banking? So that Canadian banks could end up in the same mess as the U.S. banks!

Our economy didn't escape any mess. Banks, your favourite corporations, - did indeed escape the mess.

They did lower interest rates, encouraging borrowing, but they didn't get into subprime mortgages as they did in the States with irrational exuberance. Some of their mutual fund investment portfolios suffered - meaning RRSPs and other investors, like pension funds, in the mutual fund market lost money.

The infusion of cash from economic stimulus packages have brought some gains to the market over the past few years but expect inflation and further necessary corrections to take their toll on real value in the future.

Edited March 26, 2011 by Pliny

[dre]

I beleive in dre's world that once a mortgage is created it is now money and cannot be created out of nothing but is 100% backed by money. In other words a mortgage is lent out of real savings from, I guess, investors that have their money in banks and investment accounts. These new mortgages don't add a single penny to the money supply because they are money. They are not credit at all.

We arent talking about "dres world". We are talking about the world we all live in. You can spout this horseshit until the cows come home but at the end of the day the vast majority of subprime mortgages were funded by investment banks, not through the fractional reserve system, and not by the fed.

70 TRILLION dollars was dumped into the housing market in this manner, no matter how hard you try to cover your ears and scream LA LA LA LA.

The weakness in dre's argument is that the same left wing economists he likes to cite that didn't predict the crisis then, now know precisely why it occurred. The fact is they don't because they have the same inability of being able to differeniate between debt and money.

Nobody has any problem differentiating between debt and money. This is just another simplistic and false platitude on your part. We KNOW where the money came from. Thats not even being questioned by anyone on earth thats even taken a cursory look at what happened. Your whole "left wing economists" refrain is really just the typical retreat by someone whos position is not supported by reality.

if the glut of cash in the market came from either fed expansion, or the fractional reserve multiplier you would easy be able to demonstrate that. But you cant, because it didnt. Commercial banks were actually INCREASING reserves during the runup to the crisis, and only ONE of the big subprime players accepted FDIC insured deposits. The rest of them sold stocks and bonds to INVESTORS, through INVESTMENT BANKS, and lent the money out rufus the stunt-bum to buy a half million dollar house, and then bought CDS's to offset the risk.

[dre]

Our economy didn't escape any mess. Banks, your favourite corporations, - did indeed escape the mess.

They did lower interest rates, encouraging borrowing, but they didn't get into subprime mortgages as they did in the States with irrational exuberance. Some of their mutual fund investment portfolios suffered - meaning RRSPs and other investors, like pension funds, in the mutual fund market lost money.

The infusion of cash from economic stimulus packages have brought some gains to the market over the past few years but expect inflation and further necessary corrections to take their toll on real value in the future.

Our economy didn't escape any mess. Banks, your favourite corporations, - did indeed escape the mess.

They did lower interest rates, encouraging borrowing, but they didn't get into subprime mortgages as they did in the States with irrational exuberance. Some of their mutual fund investment portfolios suffered - meaning RRSPs and other investors, like pension funds, in the mutual fund market lost money.

Dude... the big subprime lenders in the US were not commercial banks for god sakes. Look at the list! The vast majority of the big subprime players didnt even accept deposits from anybody They took money from private investors, and lent it out.

As to Fannie and Freddie owning only a small portion of the mortgage market - in 2006 they held $5 trillion dollars of it. Not an insignificant amount and definitely not only 20% of the market.

23% actually. Now stack that 5 trillion dollars up against the SEVENTY trillion in funds that global investors dumped on the market by buying derivatives, and the 60 trilllion CDS market.

Edited March 26, 2011 by dre

[Pliny]

Did the system not create a more stable banking system, until deregulation allowed the banks to come close to failing ? And the bailout, that's just re-regulation or maybe a second guess at deregulation isn't it ?

A more stable banking system, yes but look over the last century and you will see it hasn't created a more stable economy - which was it's promise.

[Bonam]

I think what we're debating is that the government shouldn't be involved.

So $249K in savings... poof... sorry do your homework next time.

The government providing insurance on deposits and the government bailing out failing banks are two different things. Additionally, investments can certainly poof that way, and people who invest in them know that. If bank accounts were not insured, then people would know that they face some level of risk placing their money in them as well, and would (or at least should) take that into account.

[Michael Hardner]

The government providing insurance on deposits and the government bailing out failing banks are two different things.

I know that.

Additionally, investments can certainly poof that way, and people who invest in them know that. If bank accounts were not insured, then people would know that they face some level of risk placing their money in them as well, and would (or at least should) take that into account.

What if they're insured by a company that has also gone bankrupt ?

The owners of the corporation can walk away from the bankruptcy but not those who lost their livlihoods.

[Michael Hardner]

A more stable banking system, yes but look over the last century and you will see it hasn't created a more stable economy - which was it's promise.

You're saying that regulation here is a benefit in the specific case but not overall. Your intellectual honesty is typical of the true libertarians here, and I do appreciate that.

Next question - how does one measure stability of the economy ?

[Pliny]

Dude... the big subprime lenders in the US were not commercial banks for god sakes. Look at the list! The vast majority of the big subprime players didnt even accept deposits from anybody They took money from private investors, and lent it out.

I did look at the list and I see HSBC, Citibank, Chase and a few other commercial banks.

Countrywide Financial Group was primarily an investment bank.

Anyway, the primary mortgage market is where mortgages are originated. An investment bank or mortgage

broker will tailor his mortgages to meet the requirements of primary mortgage market lenders, banks and other financial institutions, the primary mortgage lenders securitize the loan, this is where the mortgage backed securities (MBS) are created and sold to investors or the secondary mortgage lenders. Securitize means the assets of a bank or primary mortgage originator are bundled together in a "security". When those securities are sold to the giant mortgage pool of investors they are most often repackaged and divided into risk categories.

It is unclear how much or what portion, if any, of the "assets" of the primary mortgage market is a result of fractional reserve banking. More research on this would be necessary.

Anyway, This link

explains the subprime mortgage debacle and I would like to highlight a few points.

during 2001, the Federal Reserve began cutting rates dramatically, and the fed funds rate arrived at 1% in 2003, which in central banking parlance is essentially zero. The goal of a low federal funds rate is to expand the money supply and encourage borrowing, which should spur spending and investing. The idea that spending was "patriotic" was widely propagated and everyone - from the White House down to the local parent-teacher association - encouraged us to buy, buy, buy.

Borrowing is what expands the money supply essentially. Credit.

Low interest rate borrowing couldn't help but find the real estate market and the boom was on.

This is my primary point. That the fuel for the borrowing was provided by the Federal Reserve.

Secondly, the easy credit policies of mortgage buyers like Fannie and Freddie further encouraged borrowing. If you could sell your mortgages, and mortgage companies did create them to meet the easy requirements of Fannie and Freddie, the risk was mitigated.

As I mentioned, what portion of "assets" bundled into securities from banks that come out of fractional reserve policy is unclear but borrowing money and putting it into the economy will initially create a boom.

I think the Fed not putting the brakes on spending by increasing the interest rate, for reasons of promoting homeownership - government policy of the day, contributed to the dilemma and then Wall Street packaging up and re-selling these securities further exacerbated the situation until, housing prices could be pushed no more and the market couldn't be sustained.

I liked the article I posted but once again I feel not enough emphasis is placed on the initial spark of a boom and the monetary, fiscal and social policies that encourage a boom that affects not just a sector of the economy but the macro-economy. Everybody gets in on the action but like any Ponzi scheme the first in make the money and the last in wind up broke.

23% actually. Now stack that 5 trillion dollars up against the SEVENTY trillion in funds that global investors dumped on the market by buying derivatives, and the 60 trilllion CDS market.

Fanny and Freddie had 23% of the mortgage market, I don't know where you got that percentage but it is almost a quarter of the whole market. A quarter, 5 trillion, is not insignificant and I think the percentage is probably higher but have to check that. The list of subprime mortgage lenders you listed only created a trillion dollars of subprime mortgages.

In all fairness, I will cede that investors do supply, out of the large mortgage pool of investors after mortgages have been securitized, the funds for purchasing the securities.

One has to ask why some of the MBSs created were of no value. It means that some of the mortgages that were written were very risky. And actually mortgages were being created at over the property value level withthe idea in mind that rising property values would meet the difference in a few years.

That is a mortgage had an LTV(Loan to Value) ratio of 125%. If housing prices increased 14%/yr. then the value of the LTV ratio would be at less than 100% in a few years and the homeowner vould start building equity. How sane is that? Pretty risky!

[Pliny]

You're saying that regulation here is a benefit in the specific case but not overall. Your intellectual honesty is typical of the true libertarians here, and I do appreciate that.

I hope you aren't being sarcastic there. But, yes of course it is a benefit to a special interest. Is it beneficial to the commmon good. It hasn't proven to be. We have had more and larger wars, and a boom bust economy ever since.

Next question - how does one measure stability of the economy ?

It is probably safe to say that in a free market some sector, portion, industry, or business in an economy is in turmoil at any given time. This is what the central bank concept attempts to mitigate (along with ensuring banks make a profit and are less subject to bank runs) and bring some sort of relief to economic turmoil and poor entrepreneurial skills and to stabilize wages and prices for a more equitable distribution of misery.

The central bank theory along with government economic policy is to keep the macro-economy more or less

on an even keel by controlling the money supply, the interest rate and maintaining a policy of low inflation. The macro-economy, a national governments ultimate concern, is considered unstable when prices and wages are increasing too fast or decreasing in any respect.

[dre]

Borrowing is what expands the money supply essentially. Credit.

Borrowing may or may not expand the money supply. Expansion happens through Fed then is multiplied by the fractional reserve system. But what happened here was that already existing money (70 trillion dollars worth of funds from global investors) moved from abroad into the US housing market. This was not monetary expansion but it has the same effect, and this phenomenon is is key to understanding bubbles.

Anyway, the primary mortgage market is where mortgages are originated. An investment bank or mortgage

broker will tailor his mortgages to meet the requirements of primary mortgage market lenders, banks and other financial institutions, the primary mortgage lenders securitize the loan, this is where the mortgage backed securities (MBS) are created and sold to investors or the secondary mortgage lenders. Securitize means the assets of a bank or primary mortgage originator are bundled together in a "security". When those securities are sold to the giant mortgage pool of investors they are most often repackaged and divided into risk categories.

Those companies on the subprime top 25 list were not mortgage brokers, they were investment trusts, thrifts, and pure mortgage companies. They origionated theyre own loans with money from investors. Only one of them was a true FDIC bank.

In fact skirting government regulation is the reason why most of these companies were created. Commercial banks that accept FDIC deposits would not even have been allowed to make most of these loans.

It is unclear how much or what portion, if any, of the "assets" of the primary mortgage market is a result of fractional reserve banking. More research on this would be necessary.

Not really... I posted data on this already.

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

This link

Youre link says the same thing Iv been saying to you for a few pages right now.

Investment Banks, and the Asset-Backed Security

If the housing market had only been dealt a decent hand - say, one with low interest rates and rising demand - any problems would have been fairly contained. Unfortunately, it was dealt a fantastic hand, thanks to new financial products being spun on Wall Street. These new products ended up being spread far and wide and were included in pension funds, hedge funds and international governments.

And, as we're now learning, many of these products ended up being worth absolutely nothing.

Your linke says word for word what Iv been trying to tell you. Low interest rates and rising demand would have created a bubble but it would have been much smaller, and much more contained, if the derivatives and cds market had not allowed that RAGING RIVER of foriegn cash to enter the game.

One has to ask why some of the MBSs created were of no value. It means that some of the mortgages that were written were very risky.

Iv already explained this to you in depth. These securities are totally unregulated products, and the only thing that mattered to investment banks is whether they could sell them to investors. They are simply a vehicle that an investor can use to "place a bet". So the real question is "why did investors buy them". Theres three main reasons...

1. THE CDS allowed institutions to tranfer risk out of their loan portfolios which cause credit ratings agencies to attach more favorable ratings. This instrument is basically brand new, invented by Morgan Stanley in the 1990's, and during the runup to the meltdown the CDS market grew from about 10 Trillion dollars to about 60 Trillion.

2. FAILURE BY CREDIT RATINGS AGENCIES. You know how S&P or Moodys get paid? They get paid by the exact same investment banks that are selling the securities that S&P and Moodys are supposed to rate. Can you say Holy fuckin shit?.

3. The bundling of bad loans into securities that also had good loans.

These securities are made up of a number of different layers called "tranches". These tranches make up the capitalization/liability of the security. The "senior" tranches are secured and are normally rated AAA, AA, or A. A junior tranch is unsecured and might be rated BBB. These instruments are INTENTIONALLY complex for the SPECIFIC PURPOSE of making it hard for an investor to really understand what they are buying.

Investors had to rely almost completely on S&P and Moodys to evaluate these securities, and those companies were in on the scam.

Credit rating agencies are now under scrutiny for giving investment-grade, "money safe" ratings to securitization transactions (CDOs and MBSs) based on subprime mortgage loans. These high ratings encouraged a flow of global investor funds into these securities, funding the housing bubble in the U.S.

Economist Joseph Stiglitz stated: "I view the rating agencies as one of the key culprits...They were the party that performed the alchemy that converted the securities from F-rated to A-rated.

And actually mortgages were being created at over the property value level withthe idea in mind that rising property values would meet the difference in a few years.

Right. Thats because there was literally no regulation on either the shadow banking system (investment banks and hedge funds), and on these securities themselves. Like I said... these things are simply vehicles that allow investors to place a bet. You take a long position if you think the housing market will go up... and you take a short position if you think the housing market will go down.

I think the Fed not putting the brakes on spending by increasing the interest rate, for reasons of promoting homeownership - government policy of the day, contributed to the dilemma and then Wall Street packaging up and re-selling these securities further exacerbated the situation until, housing prices could be pushed no more and the market couldn't be sustained.

Yeah that what I posted on page one. They were a full two years late raising the rates even according to their own thesis. They ignored their own best practices. We were going to have an asset bubble either way but all that foreign money is what made it into a crisis.

I liked the article I posted but once again I feel not enough emphasis is placed on the initial spark of a boom and the monetary, fiscal and social policies that encourage a boom that affects not just a sector of the economy but the macro-economy. Everybody gets in on the action but like any Ponzi scheme the first in make the money and the last in wind up broke.

You wont find ANY articles by people that have real studied this that dont tell you the same thing. You have a "pet peeve" against the fed and the banking system in general that causes you to disproportionately focus on it. Again the article you linked echoes exactly what Iv been trying to tell you for this whole thread.

That is a mortgage had an LTV(Loan to Value) ratio of 125%. If housing prices increased 14%/yr. then the value of the LTV ratio would be at less than 100% in a few years and the homeowner vould start building equity. How sane is that? Pretty risky!

Yeah allowing that financial sector to turn the US housing market into a global casino, wasnt real bright in hindsight.

But still the most beautifull part of this massive corporate scam was this...

The firms that were doing all the securitization were shortselling their own securities!!! BRILLIANT! They sold these products to global investors with the help of the private ratings agencies who were on THEIR PAYROLL, and then place a bet on them all to fail.

Edited March 27, 2011 by dre

[maple_leafs182]

These securities are made up of a number of different layers called "tranches". These tranches make up the capitalization/liability of the security. The "senior" tranches are secured and are normally rated AAA, AA, or A. A junior tranch is unsecured and might be rated BBB. These instruments are INTENTIONALLY complex for the SPECIFIC PURPOSE of making it hard for an investor to really understand what they are buying.

They ended up dividing the junior tranches up into more tranches, so there were AAA rated BBB securities.

If someone doesn't understand this all, I would watch the movie Inside Job, it explains the role the market played in this. The only problem I had with the movie is it does not mention monetary policy at all.

Now that I think we are all on the same page, lets talk bailouts, stimulus, zero percent interest rates and the current economy.

From where I see it, Ben Bernake is trying to re-inflate the real estate bubble. It has not been working, many of the banks are reluctant to give out loans. However, since the banks have all this extra money, they have been investing it in the stock market. This is why the stock market has rising, there is a stock market bubble.

Ben Bernake also says there will not be QE3, I am having a hard time believing him. The US monetary base has more then double in the past 3 years as the Fed has been trying to create an inflationary boom. Since an expansion of the money supply leads to a devalued dollar, why would people continue to invest in US government bonds. Pimco, the largest mutual fund in the world just sold off all its US government bonds. So Who is going to be there to buy the bonds. China has been the big lender but even they have began diversifying away from the dollar. The US government can't just stop having a 1.5 trillion dollar deficit if the want to see some stability or growth in the economy, they will have to sell more bonds and I think the Fed will be forced to buy them.

If the US dollar continues to be devalued, at some point nations will drop it as the world reserve currency leading to a crash of the dollar.

[dre]

They ended up dividing the junior tranches up into more tranches, so there were AAA rated BBB securities.

If someone doesn't understand this all, I would watch the movie Inside Job, it explains the role the market played in this. The only problem I had with the movie is it does not mention monetary policy at all.

Now that I think we are all on the same page, lets talk bailouts, stimulus, zero percent interest rates and the current economy.

From where I see it, Ben Bernake is trying to re-inflate the real estate bubble. It has not been working, many of the banks are reluctant to give out loans. However, since the banks have all this extra money, they have been investing it in the stock market. This is why the stock market has rising, there is a stock market bubble.

Ben Bernake also says there will not be QE3, I am having a hard time believing him. The US monetary base has more then double in the past 3 years as the Fed has been trying to create an inflationary boom. Since an expansion of the money supply leads to a devalued dollar, why would people continue to invest in US government bonds. Pimco, the largest mutual fund in the world just sold off all its US government bonds. So Who is going to be there to buy the bonds. China has been the big lender but even they have began diversifying away from the dollar. The US government can't just stop having a 1.5 trillion dollar deficit if the want to see some stability or growth in the economy, they will have to sell more bonds and I think the Fed will be forced to buy them.

If the US dollar continues to be devalued, at some point nations will drop it as the world reserve currency leading to a crash of the dollar.

Since an expansion of the money supply leads to a devalued dollar, why would people continue to invest in US government bonds. Pimco, the largest mutual fund in the world just sold off all its US government bonds. So Who is going to be there to buy the bonds. China has been the big lender but even they have began diversifying away from the dollar.

Countries that trade heavily with the US will keep buying bonds because otherwise theyre biggest export market will collapse. Countries like China, Japan, the rest of the pacific rim, and all the oil exporting countries. And lets not forget more than half of Americas debt is held by American citizens, state governments, cities etc.

What you say is true though, but its still quite a ways off.

[Michael Hardner]

I hope you aren't being sarcastic there.

Not at all.

We have had more and larger wars, and a boom bust economy ever since.

Really.

It is probably safe to say that in a free market some sector, portion, industry, or business in an economy is in turmoil at any given time. This is what the central bank concept attempts to mitigate (along with ensuring banks make a profit and are less subject to bank runs) and bring some sort of relief to economic turmoil and poor entrepreneurial skills and to stabilize wages and prices for a more equitable distribution of misery.

The central bank theory along with government economic policy is to keep the macro-economy more or less

on an even keel by controlling the money supply, the interest rate and maintaining a policy of low inflation. The macro-economy, a national governments ultimate concern, is considered unstable when prices and wages are increasing too fast or decreasing in any respect.

Ok. So give me some metrics then, along the time line of the 20th/21st centuries starting with the New Deal...

Edited March 28, 2011 by Michael Hardner

[maple_leafs182]

Countries that trade heavily with the US will keep buying bonds because otherwise theyre biggest export market will collapse. Countries like China, Japan, the rest of the pacific rim, and all the oil exporting countries. And lets not forget more than half of Americas debt is held by American citizens, state governments, cities etc.

What you say is true though, but its still quite a ways off.

Most citizens and state government are borderline bankrupt too.

What makes you say it is still quite a ways off.

[Pliny]

Borrowing may or may not expand the money supply.

It has to in a fractional reserve system.

Expansion happens through Fed then is multiplied by the fractional reserve system. But what happened here was that already existing money (70 trillion dollars worth of funds from global investors) moved from abroad into the US housing market. This was not monetary expansion but it has the same effect, and this phenomenon is is key to understanding bubbles.

I'm still researching this trying to find how much new money was created.

This is an interesting tidbit from the Motley Crew website:

It was under Raines' management that Fannie morphed from being a company in a sleepy business -- issuing debt to buy mortgages from lenders -- into a far more risky and exciting one: buying up mortgages and holding them,

So it looks like Fannie and Freddie bought mortgages with new "money" - That's 5 trillion dollars worth. That's why their role was key.

I don't have an argument with what you are saying Wall Street did, or that investors and speculation drove the bubble. My argument is that the Fed could have stopped this but didn't and in fact created it and encouraged it.

The GLB act, or Financial reform act of 1999 is interesting and an important aspect of it was that it was overseen by the CRA act which encouraged the policy of homeownership. I found that tidbit on Wiki.

Those companies on the subprime top 25 list were not mortgage brokers, they were investment trusts, thrifts, and pure mortgage companies. They origionated theyre own loans with money from investors. Only one of them was a true FDIC bank.

Investment banks don't originally finance mortgages since they don't take deposits. They match buyers and sellers. They are broker-dealers. The "money" from mortgages comes from lenders, mostly commercial banks who can sell them as securities to Wall street. Investors are buying derivatives in the form of MBSs and CDOs.

You see, very little info about the origination of mortgages is available. I just dug out the above that Fannie and Freddie issued debt to buy mortgages. What percentage of new mortgages was created that way, is the question. I have a basic disagreement with you on the origination of mortgages. Sure investors may have invested 70 trillion, on the market buying MBSs and CDOs and creating a speculative bubble but the mortgages were already there and securitized as MBSs. So what is the origination of the mortgages. Your information doesn't tell me that and your assupmtion that they come out of real savings from investors isn't specified by anyone or anything you have quoted. The fact that Fannie and Freddie issued debt to buy mortgages tells me that quite a bit of the mortgage market was created out of thin air.

I have to go but I am will get back to you.

[dre]

So it looks like Fannie and Freddie bought mortgages with new "money" - That's 5 trillion dollars worth. That's why their role was key.

I don't have an argument with what you are saying Wall Street did, or that investors and speculation drove the bubble. My argument is that the Fed could have stopped this but didn't and in fact created it and encouraged it.

The GLB act, or Financial reform act of 1999 is interesting and an important aspect of it was that it was overseen by the CRA act which encouraged the policy of homeownership. I found that tidbit on Wiki.

Those companies on the subprime top 25 list were not mortgage brokers, they were investment trusts, thrifts, and pure mortgage companies. They origionated theyre own loans with money from investors. Only one of them was a true FDIC bank.

Investment banks don't originally finance mortgages since they don't take deposits. They match buyers and sellers. They are broker-dealers. The "money" from mortgages comes from lenders, mostly commercial banks who can sell them as securities to Wall street. Investors are buying derivatives in the form of MBSs and CDOs.

You see, very little info about the origination of mortgages is available. I just dug out the above that Fannie and Freddie issued debt to buy mortgages. What percentage of new mortgages was created that way, is the question. I have a basic disagreement with you on the origination of mortgages. Sure investors may have invested 70 trillion, on the market buying MBSs and CDOs and creating a speculative bubble but the mortgages were already there and securitized as MBSs. So what is the origination of the mortgages. Your information doesn't tell me that and your assupmtion that they come out of real savings from investors isn't specified by anyone or anything you have quoted. The fact that Fannie and Freddie issued debt to buy mortgages tells me that quite a bit of the mortgage market was created out of thin air.

I have to go but I am will get back to you.

Investment banks don't originally finance mortgages since they don't take deposits. They match buyers and sellers.

The "money" from mortgages comes from lenders, mostly commercial banks who can sell them as securities to Wall street. Investors are buying derivatives in the form of MBSs and CDOs.

No. Mortgage companies like countrywide origionated the mortgages. Investment banks sell stocks and other financial products to raise money.

You see, very little info about the origination of mortgages is available.

Theres lots of information and I already posted some of it. CountryWide was the number one origionator, along with the other players on SubPrime 25 list I posted.

http://www.thetruthaboutmortgage.com/top-subprime-loan-originators/

They are broker-dealers.

No not at all. These companies are ABSOLUTELY NOT mortgage brokers. They are loan originators.

Your information doesn't tell me that and your assupmtion that they come out of real savings from investors isn't specified by anyone or anything you have quoted.

Yes it does. Very clearly... in multiple different places.

So it looks like Fannie and Freddie bought mortgages with new "money" - That's 5 trillion dollars worth. That's why their role was key.

Not really. Like I said they were a bit player that accounted for less than 1/4 of subprime mortgages, and their share was getting smaller and smaller during the runup to the crisis, as private mortgage companies took over.

Investment banks don't originally finance mortgages since they don't take deposits. They match buyers and sellers. They are broker-dealers. The "money" from mortgages comes from lenders, mostly commercial banks who can sell them as securities to Wall street.

No thats absolutely false. Investment banks are not broker dealers and it was the mortgage companies that origionated all the loans. Investment banks simply helped them raise the money to loan out by selling stocks and bonds. However in this case things got a little convoluted because the big investment banks actually OWNED quite a few of these pure mortgage companies.

The GLB act, or Financial reform act of 1999 is interesting and an important aspect of it was that it was overseen by the CRA act which encouraged the policy of homeownership. I found that tidbit on Wiki.

The CRA only applies to commercial banks that accept FDIC insured deposits. Only one company in the SubPrime 25. The CRA is almost a complete red herring... it was the popular scapegoat in the beginning for people that wanted to blame the government for the whole crisis but those claims have been aggresively debunked and pretty much abandoned. As I said none of big players were even subject to it, and if you read the thing (I actually did a couple of years ago) youll see that theres absolutely nothing in it that forces lends to loosen their standards. It just makes it harder for them to "red line".

Edited March 28, 2011 by dre

[dre]

Most citizens and state government are borderline bankrupt too.

What makes you say it is still quite a ways off.

Because the countries buying up US debt are dependant on the US consumer market. They have no choice but to prop up the US dollar, and will probably keep doing so until some of the other emerging consumer markets get really big. This has been going on for 30 years already, and will continue to some degree for at least a couple more decades.

[WIP]

If I recall right Carter was President before 1980 and there was quite a recession then. There was quite an economic crisis in 1972 as well when the gold window slammed shut.

Nixon's recession correlates with the rise of OPEC and America reaching peak oil around 1973; also, there was a lot of debt leftover from the military buildup during the Cold War and the Vietnam War....which was the no.1 reason why Nixon wanted out of Vietnam and a policy of detente for dealing with the Soviet Union and China. Carter's recession was from the Energy Crisis from start to finish.

But, what I'm talking about is not the recessions, but rather the stock market bubbles and busts that had been absent from 1929 until the re-introduction of free-wheeling, deregulated capitalism beginning with Reagan.

The derivatives market is basically a repackaging of debt sold on the market. The debt stems from those willing to loan money and without it there would be no debt to repackage. One has to look at how much debt is created in lending, how much new money is created on the interest of that debt and compare it to how much is asset backed as opposed to created out of thin air.

When U.S. real estate prices were already inflated beyond reasonable levels, and there was no more money to be made to keep high commissions rolling in, all of these "repackaging" schemes started popping up to keep high profits and lavish bonuses coming in. They created CDO's to hide bad mortgages blended in with good investments, and giving the blend an undeserved high credit rating. A small hedge fund dealer was a major factor in the banking meltdown, through the 23 to 40 billion dollars worth of CDO's they created, and then bet against them with AIG's unregulated insurance scam - Credit Default Swaps: The Magnetar Trade

Apparently, Alan Greenspan was a major factor in keeping derivatives markets unregulated and free from any independent oversight....and we're all still waiting for the libertarians to explain why the "invisible hand of the market" failed to work, and U.S. taxpayers, along with taxpayers in many other nations with banks that were exposed to over-inflated U.S. real estate had to be bailed out.

The no.1 crime committed here for U.S. citizens is the fact that banks got their money, and yet have refused to write down mortgages of millions of underwater property owners -- choosing instead to foreclose and force them out of their homes...and consequently create a cascading effect that lowers property values for existing homes in the neighbourhood. And, needless to say, the Government has declined to put any pressure on the banks to provide relief for homeowners, even though they have the leverage -- if what I've heard is accurate, the are still receiving money from the Fed at 0% interest, and profiting from whatever interests rates they charge for borrowers.....further proof that the banksters and other gangster capitalists own the system, and the political institutions of democracy are a sham, since the majority of the people have no say over the policies that are made which effect their lives.

Our economy didn't escape any mess. Banks, your favourite corporations, - did indeed escape the mess.

They did lower interest rates, encouraging borrowing, but they didn't get into subprime mortgages as they did in the States with irrational exuberance. Some of their mutual fund investment portfolios suffered - meaning RRSPs and other investors, like pension funds, in the mutual fund market lost money.

I know Canadian banks got dragged down in the banking crisis, especially the banks with the highest exposure to U.S. real estate investments, but at least we didn't end up bailing out the banksters.

The infusion of cash from economic stimulus packages have brought some gains to the market over the past few years but expect inflation and further necessary corrections to take their toll on real value in the future.

According to the top Keynsian economists like Paul Krugman, the stimulus wasn't big enough to re-inflate the economy; nor was it the right kind of stimulus, since at least 40% of it was tax breaks and tax deferments....money that would be used for savings or paying off existing debt. What was needed was a large public works projects system similar to what FDR created in the 1930's.

Looking at the big picture, I couldn't get over-excited about stimulus strategies, since it doesn't deal with the big no.1 problem -- the U.S. economy, as well as most economies around the world are facing constraints being applied by the environment and declining resources. Sooner or later we are going to have to get beyond an economic system that depends on continuous growth...may as well start preparing now, instead of waiting till we hit the wall.

[Pliny]

No. Mortgage companies like countrywide origionated the mortgages. Investment banks sell stocks and other financial products to raise money.

Countrywide was a financial corporation. What do you mean by originated mortgages? They certainly did mortgage brokerage paperwork. They couldn't finance them unless they had a commercial banking arm, which they did.

Yes. Investment banks do raise their money by selling stocks and financial products, not servicing mortgages.

Theres lots of information and I already posted some of it. CountryWide was the number one origionator, along with the other players on SubPrime 25 list I posted.

The subprime mortgage industry had to be financed somehow.

You keep saying investors are the ones that financed the mortgages to the point of yelling at me in 6 point. I am not convinced. Fannie and Freddie issued debt to buy mortgages. Now did the mortgages exist and they bought them, or did the mortgage brokers and investment banks bring the buyers and sellers together - that is, after all their job. Mortgage brokers certainly do the paperwork and in that respect do originate the mortgage but they don't finance them. Now they have to find a buyer to present the paperwork to who will underwrite and service the mortgage.

In Canada, it is quite clear who holds and services mortgages. The banks. They finance them. How do they do it? Do they depend on 100% reserves to mortgages? No. They do it through the fractional reserve system. The same fractional reserve system that exists in the States.

At what point do investors come in?

A homeowner or speculator is the first investor. They come with a down-payment on the property, or in the case of subprime mortgages, no down-payment and the financing is 100% with a low initial interest rate. The line for mortgage approval obviously broke down.

The bubble starts with low interest rates. More people can qualify for mortgages at the low interest rate and they start to make applications. This increase in demand decreases the supply of housing.

Building contractors and developers realize the increase in demand and with low interest rates borrow and start buying land to develop. The builder and the developer are investors. They will make a proposal for development, put a down payment on the land and the bank will either finance the project or not.

The bank can legally create the money out of thin air to finance the project as long as it has a specified fraction of reserves on account. Why would they go to investors when they don't have to?

There is certainly some development or loans that are 100% privately funded but the greater percentage is underwritten by banks with fractional reserve ability. They don't have to go looking for investors to raise the money for a project. They get what they need on a down payment.

Your claim is that mortgages are 100% created out of real wealth from investors. Untrue.

Investors are investing in financial products. Financial products on Wall Street created from, and with varying degrees of risk, debt and estimations of future economic growth.

Mortgages are held by the mortgagor as assets on their balance sheets when a bank says it has 12 billion dollars in assets the implication is it owns that amount in real wealth. It doesn't. Some of those assets are debt.

So what percentage of the assets in mortgages are real wealth and what percentage is debt?

A house valued at $100,000 with a mortgage of $80,000 and then 2 years later, sold for $200,000 with a down payment of, say 10%, leaves a mortgage of $180,000 to the new buyer. The seller now has $100,000 dollars in the bank.

The new mortgage is $100,000 dollars more. $200,000 new dollars have been created in 2 years.

This is great for the guy who sold at the right time. Now if the market crashed and the house dropped back to a $100,000 value. The guy with the money still has his $100,000. The bank with the new mortgage has to write off $180,000 if the new mortgagee defaults.

Now here's the kicker. Luckily, Wall St. has securitized these mortgages and sold the securities on the market, essentially providing liquidity to the holders of the mortgages. Risk of default or losses due to a crash in real estate prices is now transferred to Wall St. investors and that is where a lot of the created money is written off. Investors lose.

The investor loses. The banks that hold as yet unsecuritized mortgages or are holding unsold securities are caught with their pants down and they lose as well.

That's basically what went down. None of it could have happened without creating money out of thin air.

The CRA only applies to commercial banks that accept FDIC insured deposits. Only one company in the SubPrime 25. The CRA is almost a complete red herring... it was the popular scapegoat in the beginning for people that wanted to blame the government for the whole crisis but those claims have been aggresively debunked and pretty much abandoned. As I said none of big players were even subject to it, and if you read the thing (I actually did a couple of years ago) youll see that theres absolutely nothing in it that forces lends to loosen their standards. It just makes it harder for them to "red line".

You can dismiss the CRA as a red herring but it was essential in passing the GLB Act(the GLB Act) and repealing the Glass Steagall act.

Who aggressivley debunked these claims? Barney Franks?

The Wall Street crash of 1929 was caused by Wall St. itsself. I think that is a generally accepted fact. The market went wild and crashed - same thing today in the housing bust. You won't get too many people arguing the fact of responsibility. I will. If we knew the real truth it would never happen again.

[maple_leafs182]

Because the countries buying up US debt are dependant on the US consumer market. They have no choice but to prop up the US dollar, and will probably keep doing so until some of the other emerging consumer markets get really big. This has been going on for 30 years already, and will continue to some degree for at least a couple more decades.

I do not think the US will be able so sustain their economy for that long. Look at how much money they have pumped into the economy trying to create an inflationary boom and look at what is happening, minimal growth, higher unemployment and higher commodity prices. There will be a point where the US won't be able to pump any more money into the economy because the resulting inflation will be too much for the economy to take.

Also, in China there is 1.5 million people a month migrating from rural areas to urban areas. Those people are going to need jobs which means china will have to increase production. China is heavily reliant on the US for consuming their goods but the US is in no shape to increase the amount of Chinese goods they consume in order to meet the increase amount of production needed to employ all those people.

I know that America and others like to say the the revolutions in northern Africa and the middle east are occurring because the people want democracy, that is a lie. Those places have the highest youth unemployment in the world, that is why there is civil unrest. I believe China too will see civil unrest because the needed increase in the supply of jobs to meet the increase in demand. China will be facing some big problems of their own soon.