Economics business.The Sub-prime Crisis. How bad is it?

[freeztar]

Originally Posted by Cedars

Why do I have to invest in others failures? My gawd the failure and resignation in your tone.. powerless to do anything?

Well, to be fair, we could all write our congresspeople to let them know our opinions. Beyond that, I'm not sure what else we can do.

"The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003. (The agency doesn't disclose the names of institutions on its internal list of troubled banks; doing so would likely spark a run on deposits. On average, 13 percent of banks that make the list fail.)

While the vast majority of banks are in good shape... "

Mortgage mess puts more banks at risk - Eye on the Economy - MSNBC.com

This list is rather telling:

FDIC: Failed Bank List

Did you even have a clue that issues arose in 2003? Nope. Why wasnt anyone screaming about the potential economic collapse then?

No, I had no clue. I wasn't really watching the economy at that time. I'll look into it though. Thanks.

The GLOBAL economy is and has been slowing. Every news report is saying even with the money infusion expect another 14 months of economic turmoil. And there is no guarentee it will work. No Guarentees!

Yeah, I think we will see hard times regardless.

The guarantee part bothers me as well.

Your really not the one telling me I have too. People in suits with political agendas or financial agendas are touting this "We gotta" mantra.

Correct.

Isnt that even more reason to sit back and say No? Economic experts ? Define that exactly. and please tell me where they have been the last 4 years as this bubble expanded and burst before their very eyes (or portfolios).

Being an expert does not absolve someone of human tendencies like making a mistake, or greed.

Whos desperation?

Everyone's!

Lemme guess, once this infusion of my future tax dollars (which the US government will borrow from someone else until I finally pay enough taxes (plus interest) to pay off these other investors, the benefit will trickle down to me, the taxpayer. Ya think I will see a return on this investment of my tax money in 5 years? 10 years? Silly me thinking that what happened here was private enterprise. Who coulda guessed that the tax payer was gonna have to bail out the investors. How'd that work for the enron employees who were truely screwed? How'd that work out for the GM retirees who had their retirement guarentees washed out? And why oh why is it critical that I bail out these people now when the economy didnt collapse when all these other investments were wiped out via the same type of financial paper magic?

We have a different situation now. The $700 Bil is obviously a *ton* of money. Why do you think they came up with *that* number?

You tell me what % of the market these companies occupy. I am not touting a 700 Billion dollar handout to cover my bets.

Well, I don't know, that's why I was asking. But, I'll look it up as best I can.

Obviously this has nothing to do with putting the american people before the interests of these companies.

Obviously?
Am I missing something? What about the talk about "Main Street"?

And to quote your earlier position. No one forced them to sign the contract! No one forced them to buy their c/ds, money market accounts, stocks, lottery tickets, airline tickets to vegas, visa applications, discover card applications, blah blah blah.

Indeed.

[freeztar]

Originally Posted by Michaelangelica

Well I really like my idea
1 Give the sub-prime mortgagees enough money to pay off their mortgages

Ok, so instead of giving money to the 'scandalous banking industry' (SBI), you suggest that we instead put that money towards the 'victims' of the SBI?

How does that help tax payers? How does that help people who actually own a legitimate mortgage and work hard to secure it?

If Bush doesn't make Wall St happy the threat of world economic recession is real.

Indeed, yet, the onus is not entirely Bush's.

As a closing, I'd like to state that it would be much more agreeable (and most of the time much more logical) to affirm the consensus in this case. Unfortunately, that really doesn't make for good debate.

[Moontanman]

Ok I have on my fire retardant suit so I'll ask this question. Why does interest have to be different for different people? The very people who can least afford it have the highest interest rates. Why couldn't home mortgages have the same interest rates for all home mortgages? Is simply some way to show who is worth more money? I would say that higher interest rates cause people to have to default on their mortgages. Interest rates for all forms of credit should be set. A certain percentage for things like credit cards, a certain rate for auto loans a certain rate for home mortgages and a certain rate for second mortgages. No more trying to make the people who can least afford it pay more. No more breaks for people who could care less. No more buying selling of mortgages or other loan contracts to try to make more money.

[Zythryn]

Originally Posted by Moontanman

Ok I have on my fire retardant suit so I'll ask this question. Why does interest have to be different for different people?

That is a good question.
However, I have a good answer (you may not like it though).
Interest rates at any given time vary because the risk of the loan is different for different people.
For examply, lets say Bob goes into a bank and asks for a home loan. He has 2 Million dollars in the bank, shows 2 years of W-2 forms showing he has an income of 1 Million a year and has other assets worth 5 Million dollars he puts up for collateral. The bank will give him a very low interest rate as the loan is seen as very very safe.
Bob walks into the bank, he has a $100 savings account, has no proof of income and no assets he can put up as collateral. He is offered a loan, but it will be at a very high interest rate as his loan would be a high risk loan.
It is very unfair that those that need the loans more end up paying more, but the business logic is sound.

[Cedars]

Originally Posted by freeztar

This list is rather telling:

FDIC: Failed Bank List

Is it? Lets do some math.

Your list has 16 failed banks in 2007 -2008

From the same website:

Chart 4. The title is "Number of U.S. Banks by Size Category"

"4,893 banks or savings institutions have more than $100 million in assets; 3,517 have $100 to $500 million; 859 have $500 million to $5 billion; 150 have $5 to $50 billion; and 22 have more than $50 billion."

The above is from 2003, the most current info I could find quickly.

So are we really going into economic collapse because of 16 banks? I dont think so.

So where is the money (700 BILLION) going to?

Being an expert does not absolve someone of human tendencies like making a mistake, or greed.

Being a taxpayer doesnt oblige me to pay for someones free market choices like gambling on that 2nd, 3rd, etc home, the stock market, etc.

We have a different situation now. The $700 Bil is obviously a *ton* of money. Why do you think they came up with *that* number?

I have no idea why they are spewing out that number. I have no idea why they are meeting behind closed doors. I have no idea why we must pump money into these various places to ensure the economy doesnt falter.

Speaking with another commoner recently, his first reaction was, Hand them the money so they can run with it?? He has no delusions that this is good for the economy of anyone except those wanting to flee.

Obviously?
Am I missing something? What about the talk about "Main Street"?

What is the substance of the talk about "main street" freeze? Thats the missing piece. They say this will help main street, but there isnt any detail about how this is going to help main street. Typical political grandstanding and once uncle sam signs the check (read swears the politician into office) the talk of "main street" will dissapear as fast as the guys who will be cashing the checks.

Main street is boarded up and manufactured in china. Main street is boarded up and manufactured in India, or mexico, or south america. This is the main street they are talking about freeze.

[Moontanman]

Originally Posted by Zythryn

That is a good question.
However, I have a good answer (you may not like it though).
Interest rates at any given time vary because the risk of the loan is different for different people.
For examply, lets say Bob goes into a bank and asks for a home loan. He has 2 Million dollars in the bank, shows 2 years of W-2 forms showing he has an income of 1 Million a year and has other assets worth 5 Million dollars he puts up for collateral. The bank will give him a very low interest rate as the loan is seen as very very safe.
Bob walks into the bank, he has a $100 savings account, has no proof of income and no assets he can put up as collateral. He is offered a loan, but it will be at a very high interest rate as his loan would be a high risk loan.
It is very unfair that those that need the loans more end up paying more, but the business logic is sound.

I know the supposed reason behind some people getting low rates and others getting high rates but I suggest the entire system is not only wrong but it claims high rates are necessary to cover the costs of foreclosure while assuring the foreclosure rates to be higher. Very few banks ever loose money in the home loan market. Most people owe quite a bit less than their house is worth. If a house is foreclosed on the bank can often make a significant profit. My house had a book value of less than a third of what was owed on it when my bank tried to foreclose. No way they could have lost money. As a matter of fact they had tried to get me to take out loans for more money several times because i owed so little on it. but when i got into a bind they were all about taking it away from me. It's a racket that is slanted against the home owner. If everyone received a low rate we would see fewer foreclosures. the difference between 5 or 6 % and 14% is significant in payments. I can see everyone getting a reasonable rate being conductive to less foreclosures and a better housing market for everyone. One of my favorite commercials for car loans is the one where they offer 0% and no down payment to well qualified customers. But some poor smuck who desperately needs a car will have to pay 25% down and 18% or walk. Just like insurance spreads risk across many people a reasonable but not ridiculously low rate could spread the risk across everyone. Even people who are "well qualified" occasionally default.

[Michaelangelica]

Originally Posted by freeztar

What agro?

My "put downs" of people? I really am stumped by this one. The only statement I've made that can be construed as such is when I claimed that I didn't think you really understood the situation. I apologized for that as it was an unfair statement.

Thanks for your apology (of your 'put down") my apologies that I missed it

Or perhaps it's my tone? When I'm *debating* with people I certainly take a different tone. It's not meant as hostility.

I think it sad, that because of our adversarial legal system, we also tend to learn to debate in the same style. Unfortunately it is not always the best way to the truth and it is by definition aggressive
There are a lot more debates in Australia where cleverness and humour are used instead of adversarial attacks on the opposition or its ideas. Once upon a time we even had a parliament that did it and was fun to watch..
i am told the French legal system is different and looks to find the truth rather than scoring points or "winning".

I disagree. Credentials are very important. Should we rely on Paris Hilton to fix the economy? How about Brad Pitt?

Could they do any worse?

But what about that quote that you like saying? "When the US sneezes, the world catches a cold".

Yes that is now happening. look at how the world stock markets rise and fall in tandem with NY. However the EU, SE Asia, India and China, possibly even the Arab world; probably have enough economic momentum to keep the world from a 1929 type crash.
it just depends on how many sub-prime mortgages they have in their portfolios !

"good chance of failing"? How so?

Btw, the US economy is already in a recession and it looks like it will be for quite a while regardless of what the "experts" do.

failing= recession
failing because of political disagreement (as now)
failing because I am not sure if everyone is now being completely honest about their SP exposure- Mutual Funds for example that do not have to report to the public.
It seems every day some new disaster comes out of the wool-shed. My dinky local council, for example, just blew $70 millions on SP. God knows why.
Fortunately most Australian banks seems immune. They also have much more in reserves than other countries (What is 'required reserves' in one country say UK or USA or Australia works out to a very different % depending on regulations and how it is calculated)
(Your congress actually said some years ago that they should reform US banking on Australian lines but they didn't of course.)

I wasn't trying to make a direct comparison, it was an analogy.
I'm upset aboutthe corruption as well, don't get me wrong. There will be plenty of time to deal with that *after* we try to correct our flight path enough to avoid collision with the ground.

and the lawyers find out who has the money and where in the world they have fled to. It might make a good video game ?

There are several economic models which work great! But, on the whole, I understand what you are saying. Economics is Chaos Theory at work.

Yes about 50% of chaos mathematicians work in the stock exchange ( Don't ask me to reference that it is in my head's large "useless information" file)

It's hard to make accurate predictions and verify these through repeated experiments. In this sense, it falls below the standards of "true" science. Nonetheless, I think there are several scientific qualities to economics that should not be dismissed.

My favourite theory is when prices go up demand always falls. Tell Gucci or Chanel that. If economic theory was tempered with a bit of social psychology we may be better off-

That's not what I'm saying.
I encourage everyone to have an opinion on this and other issues.

Good. I am sorry i mis-understood you.

The point I'm trying to make is that I think the most qualified people should be helping to structure whatever economic "fix" is put in place.

You see there are so many special interest groups and lobbies etc- we are bound to end up with a camel. ("camel is a horse put together by a committee")
I doubt is any pure, wonderful, economic thinking/model will get a look in.

I'm declaring that I am not an expert in economics. I also stated that nobody else here is, for reasons given in my last post. I certainly think it is helpful for everybody to participate in the debate with their own informed opinion.

I studied & read economics for many years (still I would consider myself an amateur) but I became disenchanted with its simplistic models that did not take account of personal/individual/social motivations, feelings and differences.
For example I am picking up a lot of agitation, anger and fear in the various discussions on this topic. Fear of a recession/depression is a certain way of getting us one. Whatever economic checks are in place.
It is probably certain that the crisis is not as bad as we fear it is. The Asian melt down some 10 years or so ago was supposed to send us all to the wall. It didn't, and resulted in a better managed Asian banking system.
Even having said that I would be putting my money, if I had any, in gold or solid Oz Gold stocks.

I'm unfamiliar with Norway economics, but I'll look into it.

Well I would be surprised if anyone except Norwegians would be. But it was an interesting, very recent NYT article -probably listed under "Other readings about sub prime"

I'm completely in favor of stricter regulations/oversight to prevent this sort of scandal from occurring again. Yet, I don't advocate government intervention beyond that.

Amen

Warmest wishes

PS
Translation of Michaelangelica's "I am told":-
The guy at the pub, who becomes more and more and more intelligent, perspicacious and perceptive as the night wears on, told me. As yet, I have found no reason to doubt him.

[Zythryn]

Originally Posted by Moontanman

I know the supposed reason behind some people getting low rates and others getting high rates but I suggest the entire system is not only wrong but it claims high rates are necessary to cover the costs of foreclosure while assuring the foreclosure rates to be higher. Very few banks ever loose money in the home loan market. Most people owe quite a bit less than their house is worth.

I don't doubt this was the case in YOUR situation. However, do you have any data indicating that this typically the case?
The reason for the high rates is not to cover the cost of forclosure, it is to cover the risk that the loan will not be honored. It is also to draw investors.

How about this, pretend your income comes through making loans to people. You have money to loan to one person. One person has no verifiable income, the other has more money than they know what to do with. Both offer a 6% interest.
Why would anyone give the loan to the riskier applicant? Sure, the house MAY be worth more than the loan at the time of a default on the loan, but it may not. Why deal with the hassle of fixing up a foreclosed house (most end up in really bad shape) putting it on the market and trying to sell it for a gain?
The higher interest rates also serve the purpose of attracting investors, especially in the current atmosphere where loans are sold to other investors.

Don't get me wrong, I agree with you that higher interest rates lead to higher foreclosure rates. But it is not the ONLY reason for this. And with banks and mortgage companies the size they are, they don't look at individuals (which is sad) they look at the numbers and the risk.

[Donk]

In older, simpler, times, property buying worked like this: a group formed a Temporary Building Society. They put some money into the pot and bought land and materials. Some of the group would be craftsmen, putting in their labour rather than cash. They built a house. One of the group occupied it and started paying rent to the group. Everyone continued to put in either cash or labour until everyone had a house. The group was then dissolved.

This led on to Permanent Building Societies. The permanent societies accepted savings, paying say 6%, and lent for house purchase at 8%. They were very careful not to lend more than the buyer could afford, and having valued the property would only lend perhaps 75% or 90% of its value. The buyer was unlikely to get into arrears unless his circumstances changed, but if the loan had to be foreclosed, the building society would be almost certain to get the loan paid in full.

The rules were harsh and inflexible. You had to jump through a lot of hoops to get a loan. I certainly did But everyone knew that the Building Societies were solid investments. All their loans were fully secured against assets. Then the money-market men decided that borrowing pennies to lend thousands was too slow, and started to borrow millions on the open market. The whole thing became a gamble.

I've already mentioned stock market dealing here. Stock markets were set up to fund businesses. Long-term investments, with a slow, solid payoff. Again, that wasn't good enough for the money-market men, so they began to borrow millions to invest. Again, the whole thing became a gamble.

It seems to me that the much-vaunted "world economic system" that is about to come crashing down is just a giant casino filled with players who have bet more than they can afford. They should have read their own small print about "prices can go down as well as up", but they thought that advice was only for the little people. Why should we protect them from their own folly?

The real economy is still going. It's stumbling, yes. People are being careful what they buy, and trying not to use credit. In many cases they can't get credit, because the gamblers are scared to lend. But people are still buying, selling, working, living, loving. Life goes on. A few companies have had to admit that they aren't worth as much as they've been telling people. This has got people wondering whether those companies are worth anything at all, and the share prices have dropped violently. Why don't they just call in the auditors to check debts against assets and give a true figure for the company's worth? The share price would then stabilise around that. Some banks might fold. Most will be ok, but not nearly as successful as they thought.

Why do ordinary taxpayers have to prop up a giant casino which, whatever they tried to tell us all those years, has never managed to create wealth, only absorb it.

[questor]

Who is getting hurt by the mess we are in? Is it the sub-prime borrower?
He bought a house he could not pay for. He put down 0%-5%. This is not much money. When his ARM expires, what does he do? He walks away, and rents a house for less than he was paying for the mortgage. He has been a renter most of his life, so nothing much has changed. The house goes to foreclosure. The people who made the loan and sold the package of loans made money. They are not holding worthless paper. The investor who bought the paper loses the most. He is a schoolteacher, fireman, scientist, etc. Now, how could this hapen? Where were our bank examiners and auditors whose job it is to check bank loans as to their worthiness and loan to value ratios? Could it be that some members of congress wanted to give the less fortunate a chance at home ownership and loosened the regulations on lending and encouraged freer credit, perhaps not understanding that all markets FALL as well as RISE?
Could this have been a grand social experiment that we will have to pay for for years to come? Mr. Market has a way of punishing those who feed to long at the trough.