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Here we go again!

post #1 of 14
Thread Starter 
Now the Fed wants to buy up to $540 billion in money market mutual funds! Fed unveils new plan to assist money-market funds

Combined with the equity purchases in banks (the bail out) and the commercial paper purchases, this has become nationalization on such a massive scale it's just surreal. Next it's going to be the hedge funds.

OK. So "main street" needs the credit markets to crank back up to help avoid a depression - and the sooner they get back up and rolling, the better it is for the economy. But where, in any of this, are the people who are losing their homes getting help?

Laurie
post #2 of 14
I don't think there should have been any bail out.

And a sad fact of life is that many of the people that are losing or have lost their homes should never have had them in the first place.

FTR, not everyone can afford to own a home. FTR, I said "many" not all.
post #3 of 14
I wish I could thwack myself on my head and gain a clear understanding of the financial implications of all of this mess like you have. But alas, I'm a business analyst and not a financial analyst.

Can you explain to the laymen out here what the implications of this are? I know that nationalization is bad, but don't understand why it is bad. I get the fact that it doesn't help main street.
post #4 of 14
Thread Starter 
Let me give it a shot. It's not that "nationalization" per se is necessarily a bad thing. It's just that given what they want to accomplish, it is a temporary stop-gap measure which, in long run, may turn out to prolong the problem. OK. $700 billion. Now $540 billion. Put this into context first (see this thread: Putting it all into perspective) We see this as being a start, not a solution, and that is what scares me.

For the most part, I think that both democrats and republicans agree that the basis of our economy is free enterprise with some grains of salt - those being rules and regulations in place so that big business doesn't take advantage of the little guy, and so that systems of reporting are in place such that investors understand what they're investing in, and the government gets paid the taxes it has coming to it.

So in a simplistic nutshell, I guess, it's that the government investing directly in businesses means that the risk of investing is being transferred from the investors to the government, and they're doing it to kick-start the credit markets - which are frozen because of a lack of confidence AND the problem of the falling housing and RE prices in the U.S. and now globally.

So what I see as being the real problem is - what if it ISN'T enough? Then what happens? The government now has an equity stake.

I posted this in another thread - I don't remember where, so I'll just post it again. But Christopher Whalen, MD of Institutional Risk Analytics puts it - I think - quite clearly:
Quote:
Rather than resolving the crisis, the government's plan to inject capital into big banks is "merely the appetizer and soup course" in what will ultimate be a multi-course meal...
Here's a link to the summary article and the more comprehensive video interview: Bailout Nation

Greenspan got lucky with the tech bubble, because it got replaced by the housing bubble - and then he wasn't responsible anymore. But what, right now, is going to drive the economy? So our government proposed to kick-start the credit markets by taking equity stakes in our failing banks. And the banks definitely needed recapitalizing. But is this the "right" method to accomplish it? It helps restore confidence - but it doesn't fix the underlying problem.

In most of human history, credit has been based on the borrowers ability to repay. But for the first part of the 21st century the lenders ability to securitize and repackage mortgages became the basis of credit. And yet for those decisions, we are bailing out the businesses that made those decisions.

Cindy - you're right. Some people are in homes they couldn't afford. But many didn't understand they couldn't afford them - so the issue is basically moot. What happens now? The treasury plans to date have not addressed the problem of reducing the debt burden of the distressed homeowner. Without such a component, the debt overhang of the household sector will continue to depress consumer spending, which will exacerbate the current economic recession.

Taking equity stakes in the banks makes MUCH more sense than buying up the toxic assets of those banks. In order to kick-start the credit markets, the banks had to be recapitalized and confidence restored.

But was this the best way to do it? Again - the underlying problem is STILL the value of the housing market.

At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. Ultimately, the only mechanism to restore balance and get the credit flowing is for prices to fall steeply to true market levels (in housing and for the value of loans and related derivatives, etc.), and for losses (for consumers and corporations) to be recognized and absorbed. So how does our government taking an equity stake in JP Morgan, B of A, Citigroup, etc. achieve that? The underlying value of their loan portfolios IS STILL FALLING - and what were being reported as gains during the rise of home values will now have to become additional reserves, as the housing market continues to fall. In other words - they will need to be recapitalized again.

So with this bailout - taking equity stakes in banks, buying commerical paper, and now taking equity stakes in money market mutual funds - the government is trying in vain to get funds flowing again and to essentially put a floor under prices. But it's too late.

Maybe it helps to summarize it like this. U.S. home prices were like a beach house supported by eight pillars:

1) lax lending standards,
2) low down payments,
3) 'teaser' interest rates,
4) widespread real estate speculation,
5) pliant appraisers,
6) willing lenders,
7) easy refinancing, and
8) a market for mortgage-backed securities.

So knock out even half of these pillars and the house comes crashing down. We've knocked out all of them - but our government appears to be hoping that by putting one or two of those pillars back up that the house can defy gravity and that bubble-era prices can be sustained in a post-bubble world.

Does that help?

Laurie
post #5 of 14
When the ABX Index tanked, there went the economy on its heels. That's what determines the values of the mortages that we've heard so much about, the "mark to market" rules make lenders devalue their holdings resulting in tightened lending rules.

Suspiscion its being manipulated by large hedge funds is out there. Even our "friend" George Soros has come up as possibly being involved. And we can ask the Bank of England how that worked out 20 years ago.
post #6 of 14
Quote:
Originally Posted by ckblv View Post

And a sad fact of life is that many of the people that are losing or have lost their homes should never have had them in the first place.

FTR, not everyone can afford to own a home. FTR, I said "many" not all.
This is true and it is kind of sad that people can not make the good judgment on their own when deciding how much to spend on a house. I do blame the greedy companies in a way however people need to take the responsibility as well. Unfortunately the people who made good decisions are paying as well. Although I don't agree that people who didn't cause it should have to pay I do think that it is better for us to fix it now then just have the attitude that I didn't do it I'm not paying. It is hard to say though who knows if the economy would have picked up on it's own or if the stimulus package will even work in the first place. Even if it does seem to work I will always wonder if we just left things alone if it would have picked up on it's own just the same.
post #7 of 14
Thread Starter 
Quote:
Originally Posted by neetanddave View Post
When the ABX Index tanked, there went the economy on its heels. That's what determines the values of the mortages that we've heard so much about, the "mark to market" rules make lenders devalue their holdings resulting in tightened lending rules....
I have to disagree. The Markit ABX indices tanked because the subprime market fell apart. Also, the ABX indices do not "determine" the value of mortgages - they fell apart because the underlying value of the mortgages fell as defaults and default risks on those loans increased. The fall of the ABX indices contributed to the credit freeze because the ABX indices were used by many institutions to value portions of their loan portfolios. But those indices reflected market conditions, they did not create them. I'm happy to discuss the mark-to-market issue and Level 1, Level 2, and Level 3 assets if anyone is interested in the more in-depth discussion.

The date is VERY clear in my mind, because the day before the first subprime lender was supposed to report earnings for the fourth quarter of 2007 we recommended that our clients sell short the subprime lenders (three specifically, none of which exist any longer). That company reported a loss - and a big one, much larger than anticipated. The stocks lost 30% - 50% of their value that day. That was when the ABX-HE-BBB-07-01 index FIRST tanked.



Laurie
post #8 of 14
My opinion is I don't mind paying some to help fix it, IF the Feds go after the greedy CEO's and Politicians that have siphoned off billions that us poor taxpayers are expected to have to pay for. That is what just infuriates me.

I want heads to roll, I want prison time, I want those blood suckers hounded.
post #9 of 14
Some people may have had their jobs outsourced and therefore can't afford their homes. Or something else catastrophic happened. Not the majority but some of them.
post #10 of 14
Quote:
Originally Posted by LDG View Post
Maybe it helps to summarize it like this. U.S. home prices were like a beach house supported by eight pillars:

1) lax lending standards,
2) low down payments,
3) 'teaser' interest rates,
4) widespread real estate speculation,
5) pliant appraisers,
6) willing lenders,
7) easy refinancing, and
8) a market for mortgage-backed securities.

So knock out even half of these pillars and the house comes crashing down. We've knocked out all of them - but our government appears to be hoping that by putting one or two of those pillars back up that the house can defy gravity and that bubble-era prices can be sustained in a post-bubble world.

Does that help?

Laurie
Actually, yes it does a lot! But it makes my mind go down the path of what is the practical way to enable a balance between the pre and post bubble prices? It makes me a bit nervous to think that the average citizen is going to end up "sucking it up" and taking the hit on the value of their home. I'm comforted that I live in an area where houses weren't outrageously inflated as they are in other parts of the country so I won't be hit as bad, but I represent a small portion of the country.

So we're in a vicious downward spiral until someone can figure out a way to restore the balance in the country. (just my simple way of looking at it)
post #11 of 14
Thread Starter 
Quote:
Originally Posted by Momofmany View Post
So we're in a vicious downward spiral until someone can figure out a way to restore the balance in the country. (just my simple way of looking at it)
That's basically it. It's a deflationary spiral, and I'm not sure that there's much to do about it other than to let the prices find their levels. Gold has fallen from roughly $1000 in July to around $700 now; Crude oil (December futures) has fallen from $140/barrel in July to $66.70/barrel today.

And this morning home foreclosure data is out - home foreclosures spiked 71% for the 3rd quarter: http://biz.yahoo.com/ap/081023/foreclosure_rates.html.

Laurie
post #12 of 14
Quote:
Originally Posted by LDG View Post
And this morning home foreclosure data is out - home foreclosures spiked 71% for the 3rd quarter: http://biz.yahoo.com/ap/081023/foreclosure_rates.html.

Laurie
And while foreclosures continue to rise, it will only add to the downturn, as property values continue to deflate.

This is why I prefer "trickle up" over "trickle down" economics. Give money (thru jobs) to the highest percentage of people that spend in this country and the economy will heal itself.

I think I'm going to start reading up on what FDR did to turn the depression around. I know a lot of people criticize him for it, but it did turn the country around at that time. Can you tell that I'm the type of person that likes to solve problems?
post #13 of 14
Well, frankly the way the US came out of the Depression was World War II because of the massive increase in production facilities to make the gears of war, as it were. That created a huge new wealth of jobs and industry that didn't exist before, so people were able to find jobs or join the military to fight in a cause they believed in. At least that's how I understand it.

There was a huge, hyper-inflation to the housing market and it does need correction, IMO. And yes, I bought a home during those years and even though I got a heck-of-a-deal on it and financed within my means, I totally understand that it could mean that my home's value may well go below the amount of the mortgage I have. But, I also got into a home as a long term investment and was never planning on using my home as a large scale ATM (i.e. refinancing to get the equity out).

I personally don't get why people seem to think that all markets must keep increasing? That's not how it works. The housing market (and stock market, IMO) increased exponentially over the past decade or so. It simply can't keep going up at those rates. I'm no economist and I get that much! What happened to good ol' common sense? You know, "What goes up must come down" referring to more than just the ball you throw? I guess it's not taught in school, and apparently not taught by parents either. Those people who got into ARMs when the interest rates were low...did they really think that over 30 years interest rates wouldn't go up again at some point? There's no common sense in that, and frankly it makes me angry that people are so ignorant (meaning never being taught or shown) about basic economic that they were able to be taken advantage of by greedy predatory lenders and/or banks.

And then it makes me even more angry that people are so unwilling to accept reality that they want the goverment to make everything all better when the going gets tough. They don't even realize that the bailout packages is going to come out of their own pockets. Being a Federalist, I really don't believe that the government should have stepped in beyond regulations that should have been in place years ago. Unfortunately the politicians (both sides!) had too much to gain monetarily and politically to put those regulations in place, which is really what we pay them to do (their jobs as Congressmen and women).

OK, now I'm just ranting.
post #14 of 14
Quote:
Originally Posted by valanhb View Post
OK, now I'm just ranting.
Rant away! Its a topic worth ranting about!!
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