The "crisis" explained.

Discussion in 'Economy' started by Skull Pilot, Sep 24, 2008.

  1. Skull Pilot
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    Skull Pilot Platinum Member

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    This WSJ Op Ed is one of the better explanations of our Wall Street woes that I've seen.

    A Mortgage Fable - WSJ.com

    Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania. Let us take the roll of political cause and financial effect:...


    The Federal Reserve. The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV....

    Fannie Mae and Freddie Mac. Created by government, and able to borrow at rates lower than fully private corporations because of the implied backing from taxpayers, these firms turbocharged the credit mania. They channeled far more liquidity into the market than would have been the case otherwise...

    A credit-rating oligopoly. Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong, and this goes to the root of the credit crisis...

    Banking regulators. In the Beltway fable, bank supervision all but vanished in recent years. But the great irony is that the banks that made some of the worst mortgage investments are the most highly regulated. The Fed's regulators blessed, or overlooked, Citigroup's off-balance-sheet SIVs, while the SEC tolerated leverage of 30 or 40 to 1 by Lehman and Bear Stearns....

    Meanwhile, the least regulated firms -- hedge funds and private-equity companies -- have had the fewest problems, or have folded up their mistakes with the least amount of trauma. All of this reaffirms the historical truth that regulators almost always discover financial excesses only after the fact.

    The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval....


    Our point here isn't to absolve Wall Street or pretend there weren't private excesses. But the investment mistakes would surely have been less extreme, and ultimately their damage more containable, if not for the enormous political support and subsidy for mortgage credit. Beware politicians who peddle fables that cast themselves as the heroes.
     
  2. editec
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    editec Mr. Forgot-it-All

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    No, it does not.

    This is more republicanism bullshit.

    Spew a half truth and pretend that is the entire story.

     
  3. RetiredGySgt
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    RetiredGySgt Platinum Member

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    Yup cause we all know the dems had nothing to do with creating a system that catered to poor and minimum solvent people. Forcing the Banks to consider loans that were bad right off the bat. Which then lead to selling loan packages from one institute to another in a shell game designed to be like musical chairs, just hoping you were not the one at the end with no chair.
     
  4. Skull Pilot
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    Skull Pilot Platinum Member

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    if you say it doesn't, I'll guess I'll just take your word for it since you provide no support for your statement.
     
  5. Care4all
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    Care4all Warrior Princess Supporting Member

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    This is another CROCK OF POOP......

    One- the 1977 regulation/act encouraging home ownership has been in effect for 3 decades....Why didn;t the bubble or the crisis occur back in the 70's or the 80's or back in the 90's instead of now, in the 2000's if this law were the sole cause of this financial mess that we are in...???

    Two- This Act did not force any bank/thrift to loan money to those that would not be able to pay back the money....it just specifies that any bank or thrift servicing a community should look to service the ENTIRE community with their services, not just the wealthy, but also the middle and lower classes.

    Three- this act DOES NOT specify to the banks and thrifts a percentage of loans that had to be serviced to the lower income families, in fact it specifies that the banks/thrifts make sound business decisions based on their own risk assessment.

    Four- More than 50% of the subprime mortgages are with financial institutions that WERE NOT COVERED AT ALL BY THE 1977 ACT......because they were not banks or thrifts....
     
  6. Skull Pilot
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    Skull Pilot Platinum Member

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    No where did the piece say that the '77 act was the 'sole" cause of anything. you'll see that it was a variety of causes and that the "77 act was a part of the puzzle.

    the part i like the best is that the least regulated entities were much better able to handle the problem than the most regulated entities.
     
  7. Care4all
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    Care4all Warrior Princess Supporting Member

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    The other thing that i read that just doesn't make sense is that ONLY 12% of the Subprime mortgages have defaulted or are in foreclosure...?

    What the heck?

    How in the hell can only 12% of all subprime mortgages going in to default make us at risk and the whole world at risk, when we alone have a $14 trillion dollar gdp? let alone the world's gdp?

    how is $700 billion going to be the save ALL in a $14 trillion dollar economy?

    Who really gets this money? The Gamblers? The people that never took a penny out of their own pocket to invest, but just placed a casino style bet on whether 7 or 11 or neither, would be rolled?

    If anyone should be bailed, and this is a big if, it would make more sense to help the home owners refinance their adjustable rate mortgages in to conventional mortgages, then, the homeowners and the financial institutions would both benefit, the financial institutions would not have as many foreclosures or potential bad debt, those of us in good standing with our own homes or own them outright like we do, would be helped because not so many homes in foreclosures would be in our own neighborhoods which has made many with good mortgages go in to upsidedown positions and those of us that own their homes lose value daily, in our own wealth...., and it would keep more people in homeownership, which is NOT a bad thing.
     
  8. dilloduck
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    dilloduck Diamond Member

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    ahhhh but there's a catch-22 written into the staute---how could a bank or thrift claim it was servicing ALL the community needs (to include minorities and high risk ) without making and unsound business decisions ?
     
  9. dilloduck
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    dilloduck Diamond Member

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    .

    Community Reinvestment Act of 1977: Definition from Answers.com
     
  10. Care4all
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    Care4all Warrior Princess Supporting Member

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    you don't think the less fortunate can afford to own a home? my inlaws were DIRT POOR and they were able to buy a home back in 1962 with a conventional mortgage and paid it off....

    How did they follow this ACT in the late 70's and the 80's and the 90's without going belly up dillo?

    ONLY 12% of these subprime loans are in default....that means 88% of these people COULD AFFORD to own a home....

    that number would be 2% or 3% of defaults IF these banks had not CHANGED THEIR TERMS AND LOAN PRACTICES in the 2000's to offer these SHOTTY loans, where they did not even get proof of income and debt of the person they were loaning to....or a down payment, or anything at all in any kind of risk assessment....

    this was pure greed on the institutions part, and poor risk assessment, in fact they IGNORED their obligation to the stock holders and the Federal gvt as their insurance backers to make sound business decisions.
     

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