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Thread: Financial and Economic Crisis

  1. #166

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    The Treasury’s $700 billion bailout fund, meanwhile, is based on the premise that investors are collectively undervaluing assets and that the government can pay above current market prices without losing much money. “One has to be at least a bit skeptical,” the economist Greg Mankiw says, “about the idea that government policy makers gambling with other people’s money are better at judging the value of complex financial instruments than are private investors gambling with their own.”
    Why does this skepticism not extend to banks and their lending rates?
    ``We are now looking at the first page of the global- depression playbook,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ``The only solution is to cut rates as close to zero as you dare,'' pump money into the banking system ``hand over fist'' and increase government spending, he said.
    A system that became so imbalanced because of a reliance on easy credit will be cured by the same?
    [The Fed] have lent enormous amounts of money to banks and trumpeted those efforts to try to restore some confidence to the credit markets. Fed officials have pointed out that they are nowhere close to being out of bullets either. They work for the central bank, after all. They can always print money.

    But Mr. Bernanke and the Treasury secretary, Henry Paulson, have also emphasized that they’re not being too generous. They are mainly making loans and investments, and they expect to recoup much of the money they’re spreading around.

  2. #167
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    Quote Originally Posted by lofter1 View Post
    That ^ could be due to specific actions by the US Congress in 1999 & 2000 ...
    Actually, the repeal of Glass-Steagall was probably one of the best decisions ever made by regulators, because it forced certain investment banks to combine with larger, more stable commercial banks. This had been the preferred arrangement in Europe and Japan for years, and we're seeing that it's a more stable business model. The stand-alone investment banks were the most affected by the crisis, and their business model is now extinct. It had NOTHING to do with the development of "shadow banking," which was already well under way by 1999.

    This was part of the Commodity Futures Modernization Act of 2000, passed by the Republican-led legislature and signed into law by President Bill Clinton in December 2000.
    As is to be expected during a time of panic, people look for specific targets to assign blame. While it's certainly not a bad idea to regulate credit default swaps - and, at the least, create a central clearing exchange - assigning government supervisors would have done little, IMO, to prevent the current crisis, which touches every corner of finance and not just derivatives. Even if CDS had never been invented, that would not have prevented the housing bubble, nor the subsequent saturation of banks' balance sheets with mortgage assets.

    The best way to look at "what went wrong" is to identify why banks are so bad at predicting possible losses from their various investments, and devise a mechanism that forces an acknowledgment of that risk. That would, hopefully, prompt banks to have higher capital ratios, and to raise enough capital earlier - when the first signs of a financial disruption appear.

  3. #168
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    Quote Originally Posted by Jasonik View Post
    A system that became so imbalanced because of a reliance on easy credit will be cured by the same?
    At this point, it's pretty much a moot point, because even 0% interest rates would not stimulate the type of lending we saw over the past few years. The Fed is now following Milton Friedman's theory of monetary policy "a l'outrance": when faced with a financial crisis, the last hope for preventing a shutdown of the economy is to flood it with money in the short-term. Other than that, the remaining option is full government control of the economy (which is where we're gradually heading, anyway).

  4. #169
    Disgruntled Optimist lofter1's Avatar
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    Quote Originally Posted by pianoman11686 View Post

    Actually, the repeal of Glass-Steagall was probably one of the best decisions ever made by regulators ...
    I was responding to a question regarding the legality of credit swaps, not making a value judgment.

    Interesting that the loosening of those regulatory laws which had been in effect for so long preceded the crisis we are now experiencing.

    Would the current and devastating financial crisis have occurred if Glass-Steagall had NOT been repealed?

  5. #170

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    Quote Originally Posted by alonzo-ny View Post
    Lehman Bros files for bankruptcy

    The fourth-largest investment bank in the US, Lehman Brothers, has filed for bankruptcy protection, amid a growing global financial crisis.

    Lehman had incurred losses of billions of dollars in the US mortgage market.

    Congrats! Lehman's Ex-Mortgage Banking Chief Nabs 10-Room Condo for $5.25 M.

    by Max Abelson
    October 8, 2008

    PropertyShark.

    Capitalism is a cruel, cruel thing. According to city records filed today, Kurt A. Locher, formerly a Lehman Brothers managing director and the head of its mortgage banking, bought a $5.25 million apartment at 500 West End Avenue.

    According to a listing, the five-bedroom apartment was "one of the largest and grandest homes on the market on the Upper West Side," with a formal dining room, a maid's room, a living room, a library, and a windowed, eat-in chef's kitchen "large enough to serve a growing family or entertain like a professional!"

    Mr. Locher reportedly left earlier this year for Lehman's billion-dollar hedge fund, One William Street Capital, which was founded with something called a "heavy distressed focus." According to a report, they trade "collateralized debt obligations, asset-backed securities and non-performing loans." Sounds lucrative!

    Mr. Locher, whose old place on Park Avenue is still on the market, closed on Sept. 26, which means he made the purchase knowing his old firm had tanked. According to city records, he took out a $3,225,000 mortgage.

    http://www.observer.com/2008/real-es...m-5-25-m-condo

    © 2008 Observer Media Group

  6. #171
    Senior Member joe25's Avatar
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    Intersting article I came across.


    http://www.cnn.com/2008/US/10/08/chi...ons/index.html

  7. #172
    Chief Antagonist Ninjahedge's Avatar
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    Interesting Joe.

    It would seem to me, that even in a foreclosure, that the tenants should have some rights in where they are living.

    If a person buys a piece of property here in the city, they don't have the right to kick out the renters just because they feel like it. there are some things that they need to do or prove to make it legal.

    I guess they don't have anything like that in, what was it, Cook County?


  8. #173

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    Mr. Locher, whose old place on Park Avenue is still on the market, closed on Sept. 26, which means he made the purchase knowing his old firm had tanked. According to city records, he took out a $3,225,000 mortgage.

    Pennies to this guy

  9. #174
    Senior Member joe25's Avatar
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    Quote Originally Posted by Ninjahedge View Post
    Interesting Joe.

    It would seem to me, that even in a foreclosure, that the tenants should have some rights in where they are living.

    If a person buys a piece of property here in the city, they don't have the right to kick out the renters just because they feel like it. there are some things that they need to do or prove to make it legal.

    I guess they don't have anything like that in, what was it, Cook County?

    Yeah the case that really brought to the publics attention was this guy who cheated the tenants out of their rent, and fled the country, cook county is where Chicago is situated, this city is miles behind some others, it is true.

  10. #175

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    Quote Originally Posted by pianoman11686 View Post
    The Fed is now following Milton Friedman's theory of monetary policy "a l'outrance": when faced with a financial crisis, the last hope for preventing a shutdown of the economy is to flood it with money in the short-term.
    To understand what Bernanke is doing it is better to look back to Walter Bagehot.

    LOMBARD STREET
    A Description of the Money Market


    Chapters V., VI. and XI especially.

    In my opinion, rather than allow the market to raise interest rates and welcome new capital into the market -- the mechanism Bagehot recognizes -- Bernanke et al. are trying to retain real estate values by keeping rates down to keep municipal bonds etc. which are based on property tax revenues from being written down.

    One unsound Rube Goldberg intervention after another will not fix the structural problems in this economy.

    Inflation nor nationalization is the answer. The fed should get out of the business of price manipulation in the capital markets via rate setting.


  11. #176
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    Jasonik, I'm inclined to strongly agree. There needs to be a fundamental rethinking of the way economic policy guides the market in the US. I'm certainly not arguing we lower rates and keep them low indefinitely. It's unnatural.

    I do recognize, however, that the downside risks posed by an uncontrollable deflationary spiral are much greater than the risks of short term inflation.

    Deleveraging is going to happen no matter what. Banks are undercapitalized, and even with a government injection of capital, will remain so. I look at the current policy as a way to protect sound businesses from undue harm. Those too far in the hole will have no choice but to go bankrupt.

    Whether the Federal Reserve changes course or not, expect a very different-looking economy a year from now.

  12. #177
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    Quote Originally Posted by lofter1 View Post
    I was responding to a question regarding the legality of credit swaps, not making a value judgment.
    And in doing so, you implied that the repeal of Glass-Steagall somehow insulated CDS from legal challenges, and that the subsequent combination of commercial and investment banks somehow contributed to the financial crisis. Both of those arguments are patently false. Whoever wrote that editorial has conflated facts to make a point about deregulation. I assure you, it's incorrect.

    Interesting that the loosening of those regulatory laws which had been in effect for so long preceded the crisis we are now experiencing.

    Would the current and devastating financial crisis have occurred if Glass-Steagall had NOT been repealed?
    Most certainly yes. As I mentioned before, the crisis most strongly affected the stand-alone investment banks, which suddenly found they could not conduct operations in an environment where wholesale funding has all but disappeared. If anything, Glass-Steagall still being in effect today would have caused the crisis to be even worse, because there would have been more than 5 major broker-dealers in operation, and they would have all been threatened.

  13. #178
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    Quote Originally Posted by pianoman11686 View Post
    As is to be expected during a time of panic, people look for specific targets to assign blame.
    Are you saying that no one is to blame? The no executives who were steering the companies that drove this mess should be exposed and dealt with harshly?

    I actually think that the general population is dealing with this rather calmly. Even if we do characterize it as panic, dismissing it as an overaction seem to indicate poor observation abilities.

    This isn't an issue of the "markets" as our propagandized news portrays it. This loss of points on the stock market equals money invested and missing. The loss of value on home is money invested and missing. Even the repeated false claims of insolvency in Social Security is money invested and now missing.

    Where has the money gone? We're talking about $120billion to cover AIG, which insured - and is still liable for - assets with value.

    We are dealing with a pandemic of criminal fraud in the same vein as Enron. The country and much of the western world is now in the same shoes as those Enron employees left high and dry. The more one follows this the more complicity we discover between government, big business, and political parties.

    As others have pointed out: In China, those responsible would be executed; In 18th Century France, the guillotine was used to cleanse the nation. It's not hard to see who was responsible for this.

    They can start by arresting Cheney.

  14. #179
    Senior Member joe25's Avatar
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    I am starting to get scared I might not even be able to go to college because I wont be able to pay for it...

  15. #180

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    Your worrying about college, if this keeps there will be no college for the middle class.

    You'll only be able to go if you Brad Pitt or Madonna's kids.

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