Warren Buffett Says We're Already In A Recession

[Subdude]

So where are they sold? And better question ... why not?

Yes, they are sold in poor places, like Europe and Japan. Fuel-efficient cars are not sold here because real Americans sneer at them, and call them go-karts.

[Subdude]

Now, me buying gold instead of stocks the past couple of years doesn't sound so MadMax after all.

I need to find that Bloomberg story about the Bear Sterns chairman playing in a bridge tournament while his firm circled the drain. Talk about Nero fiddling while Rome burned....

That was a classic about the chairman playing bridge. One article said his mobile kept ringing, but he wouldn't answer it. I definitely have mixed emotions about the bailout, but their first priority is stemming the panic.

It will be interesting to see how the market reacts. Lehman is rumored to be next. Oil is hitting new highs, dollar new lows.

[houstonmacbro]

This thing we call the American economy is about to get bad. Really bad.

Take a look at this ... Each time they (Feds) lower the interest rate or pump more money into the system, the dollar weakens, price oil rises, and we're further into a free all.

I'm thinking, pretty soon, it (dollar) will only be good for toilet paper.

Think I'm kidding.

Look at today's headlines:

Dollar Plumbs New Troughs Despite Fed Action

http://www.cnbc.com/id/23664454

Oil Hits Record Near $112 as Dollar Slumps

http://www.cnbc.com/id/23664455

Gold Hits Fresh Record Highs at $1,030

http://www.cnbc.com/id/23665389

oh yeah ... one more

Asian Investors Sour on Fed Measures

http://www.cnbc.com/id/23666482

[Subdude]

This thing we call the American economy is about to get bad. Really bad.

Take a look at this ... Each time they (Feds) lower the interest rate or pump more money into the system, the dollar weakens, price oil rises, and we're further into a free all.

I'm thinking, pretty soon, it (dollar) will only be good for toilet paper.

Think I'm kidding.

Look at today's headlines:

Dollar Plumbs New Troughs Despite Fed Action

http://www.cnbc.com/id/23664454

Oil Hits Record Near $112 as Dollar Slumps

http://www.cnbc.com/id/23664455

Gold Hits Fresh Record Highs at $1,030

http://www.cnbc.com/id/23665389

oh yeah ... one more

Asian Investors Sour on Fed Measures

http://www.cnbc.com/id/23666482

You are correct about the effect of the Fed pumping money into the system. By running the printing presses day and night, they are increasing liquidity but decreasing the value of the dollar. If a commodity is priced in dollars, such as gold or oil, then it stands to reason the commodity will price up to offset the decline in the value stated in dollars. The initial problem with subprime mortgages has morphed into a broader financial liquidity problem. The risk is that this in turn leads to an even stronger run on the dollar, since as a large debtor nation the US would prefer that others bear the burden of depreciating dollar assets. As John Connally once told some Europeans, "It's our currency, but it's your problem."

All that said, having a cheap currency isn't all bad news. At least the government seems to think so. They haven't done much to strengthen it.

[BryanS]

You are correct about the effect of the Fed pumping money into the system. By running the printing presses day and night, they are increasing liquidity but decreasing the value of the dollar. If a commodity is priced in dollars, such as gold or oil, then it stands to reason the commodity will price up to offset the decline in the value stated in dollars. The initial problem with subprime mortgages has morphed into a broader financial liquidity problem. The risk is that this in turn leads to an even stronger run on the dollar, since as a large debtor nation the US would prefer that others bear the burden of depreciating dollar assets. As John Connally once told some Europeans, "It's our currency, but it's your problem."

All that said, having a cheap currency isn't all bad news. At least the government seems to think so. They haven't done much to strengthen it.

Except that it may not longer be about liquidity. It's now about genuine solvency, I think. All the liquidity in the world is not going to help if you are fundamentally insolvent. And it is appearing that several banking institutions are in real trouble. If fact, we know we're in trouble when the FDIC is going on a hiring spree, looking to bring out of retirement the same people who worked the S&L crisis.

The bottom is falling out, and even if the Fed came in and bought all the garbage - that no one wants - the underlying value of assets (namely real estate and all the securities, loans, bonds, derivatives, - tied to it), can still go down. No one wants to catch a falling chainsaw... except maybe me. I really, really want to buy BSC at $2/share! I must restrain myself though!

[westguy]

All that said, having a cheap currency isn't all bad news. At least the government seems to think so. They haven't done much to strengthen it.

We've been borrowing way to much from foreign investors to get control back. (Hello, Iraq) For years, things Cheney and Bush have been assuring people were harmless are really eating away at everyones' savings.

[Mark F. Barnes]

People just need to remember, a dollar bill is nothing more than a voucher, or script as we called it in the Army. When the Government says it's no longer legal tender it's then toilet paper, as long as you can still trade it for something else it's then still worth something. Investments are great, but always have a backup plan involving hard commodities that you can use as legal tender if necessary. Property is the best. Property will always be worth something. It may not be money, if all the doom and gloomers get their way, but it will always be worth something. People bought sold and traded, before there ever was legal tender, and can do it again if necessary, there will just be a lot of fat cat's entire world crumble, because they were only rich on paper. Just something to think about. We survived one depression we can again. It may not be pretty, but might be a way to thin the herd some. Just something to think about. However we will bounce back, just those that didn't plan ahead will suffer the worst losses. Hard lessons learned are always the best.

[crunchtastic]

The bottom is falling out, and even if the Fed came in and bought all the garbage - that no one wants - the underlying value of assets (namely real estate and all the securities, loans, bonds, derivatives, - tied to it), can still go down. No one wants to catch a falling chainsaw... except maybe me. I really, really want to buy BSC at $2/share! I must restrain myself though!

Techincally the fed just allowed the garbage to be used as collateral. Not that it changes the potential end result much.

I think BS was less sold than just outright liquidated. And the great thing there is that now JPMorgan has an ironclad excuse for more writedowns and suck performacne the next year -18 months.

[TheNiche]

All that said, having a cheap currency isn't all bad news. At least the government seems to think so. They haven't done much to strengthen it.

Pick your poison.

I am very much inclined to believe that in the face of a recession, the Fed and U.S. government would strongly prefer greater consumer price inflation resulting from a weaker dollar and lower interest rates to greater job losses resulting from a stronger dollar and higher interest rates.

I'm in favor of this approach as well. Although it really screws over our foreign creditors, a weak dollar will be of tremendous benefit to those metropolitan areas with the highest exports per capita.

• City / 2006 Export Value / Exports per Capita
  
• New York City - $66.2B - $3,519
  
• Houston - $53.3B - $9,618
  
• Los Angeles - $48.7B - $3,762
  
• Dallas - $22.5B - $3,741
  
• Atlanta - $11.4B - $2,217
  
• Austin - $8.2B - $5,421
  

[RedScare]

People just need to remember, a dollar bill is nothing more than a voucher, or script as we called it in the Army. When the Government says it's no longer legal tender it's then toilet paper, as long as you can still trade it for something else it's then still worth something. Investments are great, but always have a backup plan involving hard commodities that you can use as legal tender if necessary. Property is the best. Property will always be worth something. It may not be money, if all the doom and gloomers get their way, but it will always be worth something. People bought sold and traded, before there ever was legal tender, and can do it again if necessary, there will just be a lot of fat cat's entire world crumble, because they were only rich on paper. Just something to think about. We survived one depression we can again. It may not be pretty, but might be a way to thin the herd some. Just something to think about. However we will bounce back, just those that didn't plan ahead will suffer the worst losses. Hard lessons learned are always the best.

I've been stockpiling rum and cigarettes myself. Sure makes a depression easier to get through.

[Mark F. Barnes]

They were trading Rum and Tobacco 400 years ago, good plan Red

[houstonmacbro]

I guess another good measure of whether or not prices are rising is to see if groceries are more expensive. I know they are for me.

And I love to eat!

[Mark F. Barnes]

I guess another good measure of whether or not prices are rising is to see if groceries are more expensive. I know they are for me.

And I love to eat!

You can count on that with Diesel @ $4/gallon. Everything in the store gets there by truck, that's a given.

[Subdude]

Based upon the JPMorgan/U.S. Government bailout offer of $2, and based upon the $150 price as of about this time last year, I'm not convinced that a bailout is really all that beneficial to those that caused it, especially considering that so much of Bear was employee held. I'd certainly say that moral hazard has been averted here.

Not quite.

First of all, although Bear shareholders will lose almost everything, thanks to the Fed creditors are being kept whole. Second, the central bank is now funding investment banks at its discount window. I'm not arguing with their rationale, but at the same time I think there is clear moral hazard when risky i-banks are being funded by taxpayers, not "the market". It is a classic case of other people's money. Of course, it is unlikely that the free ride will continue for the i-banks. If they are going to have a government guarantee similar to commercial banks, implicit or explicit, then it is only a matter of time before they will have to submit to a similar regulatory regime. This will probably involve some restrictions on leverage and minimum capital requirements. As with commercial banks, it would make sense to mitigate the moral hazard by having them pay for the insurance policy of having he Fed as lender of last resort.

[BryanS]

Not quite.

First of all, although Bear shareholders will lose almost everything, thanks to the Fed creditors are being kept whole. Second, the central bank is now funding investment banks at its discount window. I'm not arguing with their rationale, but at the same time I think there is clear moral hazard when risky i-banks are being funded by taxpayers, not "the market". It is a classic case of other people's money. Of course, it is unlikely that the free ride will continue for the i-banks. If they are going to have a government guarantee similar to commercial banks, implicit or explicit, then it is only a matter of time before they will have to submit to a similar regulatory regime. This will probably involve some restrictions on leverage and minimum capital requirements. As with commercial banks, it would make sense to mitigate the moral hazard by having them pay for the insurance policy of having he Fed as lender of last resort.

Bingo. The investment banks should not be allowed to take the money - and not be regulated. Options/Futures contracts on wheat and other commodities that you can eat are one thing (because it takes time for a farmer to raise, grow, and bring goods to market), but once you start extending that scheme to stocks and real estate (like what some of these investment banks have been doing)... you can get into trouble real fast, especially if you bet wrong. The equity markets are already somewhat of a gamble... options are just another gambling game, built on top of a gambling game. A game that many now-defunct hedge funds engage had engaged in, where billions and billions have been lost. A game that made some of today's leading personal finance personalities famous (Suze Orman lost all of her money... she got mad, got educated, then worked for the company that lost all of her money, Merrill Lynch vs. Cramer, who put $80,000 on Merck options, which went up 10 fold, and launched him into the hedge fund business.) Everybody was too highly leveraged. In one way or another, we all paid dearly (check your 401K).

This may seem draconian, but: no more hedge funds. No more options trading. No more dangerous, too highly leveraged deals. No more allowing anyone to purchase real estate with less than 20% down. No more piggy backs. No more seconds. No more ARMs. We need separation between equity and real estate markets; eliminating the "chopping up," packaging, and securitizing of loans, "insuring" these instruments by entities who don't have the resources to cover losses - and then trading these "insurance" companies on the stock market, an inherent conflict of interest. Insurance companies should be there for the policy holders, not stock holders; no insurance company should be traded on the stock market. It should be illegal, on the order of a felony, to loan anyone any money, for any reason, without verifying they have the ability to repay, regardless of the amount. All institutions seeking fed funds should be regulated. We need to bring back the Glass-Steagall Act, and separate commercial and investment banking. Our regulatory institutions should be strengthened, given teeth:

...and mercilessly prosecute those breaking the rules, by way of their artifice and fraud, from newly-regulated investment banks to those lying on their loan application. You break the rules, you go to jail.

EDIT: In the effort of full disclosure, and not trying to be hypocritical, I have used a second mortgage - in the past. It worked for me, then. I think as long as our lending/financial/banking system is grounded in reality - and it is effectively regulated - we'll be better off, even if it means taking away options that we have used in the past. We'll just have to work a little harder, myself included.

[TheNiche]

This may seem draconian, but: no more hedge funds. No more options trading. No more dangerous, too highly leveraged deals. No more allowing anyone to purchase real estate with less than 20% down. No more piggy backs. No more seconds. No more ARMs. We need separation between equity and real estate markets; eliminating the "chopping up," packaging, and securitizing of loans, "insuring" these instruments by entities who don't have the resources to cover losses - and then trading these "insurance" companies on the stock market, an inherent conflict of interest.

I completely disagree. Look at the history of banking crises in various countries. Among first-world countries, financial deregulation and liberalization are the most frequent catalysts. But the cause of the crises is that financiers have no historical basis upon which to evaluate the true risk of new securities, and so they don't do appropriate due diligence and end up making bad loans with a lit fuse. Of course, they don't know that the fuse is lit or how long the fuse is, so while those bad loans are still performing they keep on making the same mistakes over and over again, and that's also the stage in which lenders start getting overconfident and ramping up the volume of loans...because of course, the ones out there are still performing so well. And you can imagine, considering the time horizon that this process requires, why banking crises tend to revolve around real estate. Those are long-term, highly-leveraged, and although collateralized by the value of the property, the lender cannot be certain of market conditions at the time of foreclosure; and by liberalizing the financial system, a lender cannot be clear of the extent to which real estate prices appear to be rising as a result of there being more buyers brought to the table with new kinds of debt instruments, or the extent to which the in prices justified by a structural shift becomes speculative.

What you're suggesting is that we ought to regress to the earlier state of things, getting rid of all the new kinds of securities that were the catalyst, even though the cause has been corrected by market forces. CMBS can be pegged for a lot of troubles, especially the B lenders (which tended to be hedge funds) that didn't know what they were getting into. But CMBS is not dead, only more expensive. Spreads on the riskiest tranches have skyrocketed and volume is way down as a result. This is precisely what needed to have happened in the first place. CMBS has a place in the system, just not nearly as large as it had been.

The risk in regulating new kinds of exotic financial products is that such innovation often opens up opportunities to smaller firms and less wealthy households that wouldn't otherwise be able to do something that benefits them. The proliferation of CMBS in the realm of high finance, for instance, reduced the cost of debt for inumerable households, allowing them greater freedom to buy a home or start a business. In and of itself, CMBS is a tremendously good thing. It just hasn't been run very well, and some of those consumers turned into speculators. That needs to change, and it already is...in fact, I'd suggest that the pendulum has swung a little far towards the side of caution just at the moment.

Insurance companies should be there for the policy holders, not stock holders; no insurance company should be traded on the stock market.

Why do you care who owns them? Whether privately-held or publicly-held, the motivation is the same; an insurance company exists in order to be profitable. I can see the benefit is regulating some of their activities, but prohibiting who can own them seems like a tremendously bad idea. The natural course of reasoning by your way of thinking is insurance nationalization.

It should be illegal, on the order of a felony, to loan anyone any money, for any reason, without verifying they have the ability to repay, regardless of the amount.

There can be no such assurance. You could lend me money today and I could lose my job tomorrow. What then? If I'm seeking money for investment in a business, what if inflation spikes, and it turns out in mid-course that I'm undercapitalized? What if the value of my liquid assets held in stocks crater tomorrow morning? If I don't have health insurance and get run over by a METRO bus within an hour of having signed the note, what then?

That debt entails risk is not problematic. That's why interest rates vary.

[TheNiche]

Not quite.

First of all, although Bear shareholders will lose almost everything, thanks to the Fed creditors are being kept whole. Second, the central bank is now funding investment banks at its discount window. I'm not arguing with their rationale, but at the same time I think there is clear moral hazard when risky i-banks are being funded by taxpayers, not "the market". It is a classic case of other people's money. Of course, it is unlikely that the free ride will continue for the i-banks. If they are going to have a government guarantee similar to commercial banks, implicit or explicit, then it is only a matter of time before they will have to submit to a similar regulatory regime. This will probably involve some restrictions on leverage and minimum capital requirements. As with commercial banks, it would make sense to mitigate the moral hazard by having them pay for the insurance policy of having he Fed as lender of last resort.

I agree that it is likely that investment banks will likely facing regulation (whether prudent or not), but I do not conceed moral hazard.

It is doubtful that Bear will be kept whole within JPMorgan. JPMorgan will undoubtedly keep much (but not all) of the Bear organization in place, but change out a lot of personnel and eliminate the worst-performing divisions. Aside from having had their savings wiped out, it'd be a stretch to say that Bear employees have any sort of job security. In that light, it is very difficult to see how they may have truely benefitted from the totality of the mess that they created.

I don't much like the idea of forcing banks to pay into an insurance policy. If insurance of any form is to be enforced by the government on account of that it is socially desirable, then it ought to be issued and backed by the government directly. The same ought to apply to rescued financial institutions. In either case, those that drove the defunct business entity into the ground are not being rescued.

[Subdude]

I agree that it is likely that investment banks will likely facing regulation (whether prudent or not), but I do not conceed moral hazard.

It is doubtful that Bear will be kept whole within JPMorgan. JPMorgan will undoubtedly keep much (but not all) of the Bear organization in place, but change out a lot of personnel and eliminate the worst-performing divisions. Aside from having had their savings wiped out, it'd be a stretch to say that Bear employees have any sort of job security. In that light, it is very difficult to see how they may have truely benefitted from the totality of the mess that they created.

I don't much like the idea of forcing banks to pay into an insurance policy. If insurance of any form is to be enforced by the government on account of that it is socially desirable, then it ought to be issued and backed by the government directly. The same ought to apply to rescued financial institutions. In either case, those that drove the defunct business entity into the ground are not being rescued.

But Bear Stearns isn't the point. The moral hazard doesn't lie with Bear, it is the remainder of the industry, and assorted creditors, that are being bailed out with public funds without (so far) any regulatory regime to answer to. Now that taxpayers are subsidizing the remaining i-banks, those banks will have an incentive to take even greater risks. Shareholders will benefit from higher returns, but the public will foot the bill for failure. Hence the moral hazard. Btw, I'm not saying that derivatives etc should be banned, but that regulators would probably consider measures to ensure there is sufficient capital to back the risks. Think of a Basel 2 for investment banks.

Both commercial banks and drivers are required to carry insurance. By your logic, should the government then pay for our car insurance? I would think that the cost of insurance, required or otherwise, should be transparent and borne by the party that benefits. Again, it's a moral hazard thing. Commercial banks pay for their insurance, so they realize that they can't go overboard on risk. Just because the government requires insurance is no reason to promote behavior that will make claims on the insurance more likely.

[TheNiche]

But Bear Stearns isn't the point. The moral hazard doesn't lie with Bear, it is the remainder of the industry, and assorted creditors, that are being bailed out with public funds without (so far) any regulatory regime to answer to. Now that taxpayers are subsidizing the remaining i-banks, those banks will have an incentive to take even greater risks. Shareholders will benefit from higher returns, but the public will foot the bill for failure. Hence the moral hazard. Btw, I'm not saying that derivatives etc should be banned, but that regulators would probably consider measures to ensure there is sufficient capital to back the risks. Think of a Basel 2 for investment banks.

Insofar as the government handles it like they handled Bear, stocks ought to be expected to be higher, but not so much because of the possibility of a bailout to any particular company (i.e. Lehman isn't appreciably higher just because the government might work out a deal with them as was done with Bear). Stocks will move higher on account of that a collapse of Bear would've entailed lots of wide-ranging negative externalities. In preventing those externalities, government is making shareholders in a variety of industries better off, but at the same time, they aren't providing any incentives to Lehman Brothers to continue doing bad business because if Lehman goes under and gets a deal like Bear Stearns', the shareholders of Lehman still walk away with effectively nothing. And that's just the way it ought to be.

Both commercial banks and drivers are required to carry insurance. By your logic, should the government then pay for our car insurance? I would think that the cost of insurance, required or otherwise, should be transparent and borne by the party that benefits. Again, it's a moral hazard thing. Commercial banks pay for their insurance, so they realize that they can't go overboard on risk. Just because the government requires insurance is no reason to promote behavior that will make claims on the insurance more likely.

If a depositor wishes to have their deposits insured, then they ought to have the option to pay a private deposit insurance corporation to have it insured. Under such a system, banks would have the incentive to increase their own reserve requirements independent of orders from regulators so as to make themselves less risky and thus more palatable for their customers because those customers would be seeking the lowest-cost deposit insurance highest interest rates available to them. Given that this option allows for greater bank differentiation, pressure upon banks to become safer and more efficient in their operations, and the reduction of a truely damaging (albeit not highly visible) moral hazard, I am all in favor of this approach.

If the government deems that deposit insurance for all is in the interest of the entirety of society (i.e. the aggregate of all of that government's constituents), then government ought to provide it directly. And I think that there may be an angle on that; after all, even people without any checking or savings accounts are exposed to the risk that others that do will be wiped out. But to have the commercial banking industry as a whole required to pay into the FDIC just increases the costs of doing business across the board, which get passed on to bank customers in the form of higher costs of capital in one form or another.

[BryanS]

I completely disagree. Look at the history of banking crises in various countries. Among first-world countries, financial deregulation and liberalization are the most frequent catalysts.

You're exactly right. When Glass-Steagall was repealed (in 1999), look what happened. The NASDAQ took off, peaked in 2000. All you saw on television was "QQQQ" and "diamonds" and "spyders" and, to go to trade those items, "eTrade," and many others. Bloomberg was on every TV in the office, at the gym, at restaurants, everywhere. The party didn't last too long, as the NASDAQ crater shortly after. And along with it, the 401Ks and IRAs of hundreds of thousands, if not millions, of hard-working Americans. So the tech bubble burst, but almost immediately, another began to inflate. The Fed kept lowering interest rates in the early 2000's and the line between investment and commercial banking kept getting more and more blurry, resulting in the absolute mess we have today. Glass-Steagall was enacted in the 1930's to help this nation recover from 1929 - a depression. Why we ever thought that breaking down the barriers between investment and commercial banking was a good idea is beyond me. You may argue that it is "innovative." I argue it was too risky. Risk [R] has two components: likelihood [L] of an event happening and consequences [C] of that event occurring, R=LxC. Even though you can minimize the likelihood of an event happening, to drive down the overall risk (you are minimizing L to reduce R) - if the end consequence is too great or too damaging - you don't take that risk, because the consequence overwhelms the likelihood. If the risk should materialize, the end result would be too damaging, and screw every one of us in the end (slight pun intended). So you don't take the risk to begin with (you don't even go there; we should have left Glass-Steagall alone - our country suffering from one depression is enough.)

But the cause of the crises is that financiers have no historical basis upon which to evaluate the true risk of new securities, and so they don't do appropriate due diligence and end up making bad loans with a lit fuse. Of course, they don't know that the fuse is lit or how long the fuse is, so while those bad loans are still performing they keep on making the same mistakes over and over again, and that's also the stage in which lenders start getting overconfident and ramping up the volume of loans...because of course, the ones out there are still performing so well.

How about we not light fuses to begin with. If you have sweaty palms, it's not a good idea to pull the pin on a grenade and hope you can hold the spoon. That's what all these investment banks did with CDOs and all that other "innovative" garbage.

And you can imagine, considering the time horizon that this process requires, why banking crises tend to revolve around real estate. Those are long-term, highly-leveraged, and although collateralized by the value of the property, the lender cannot be certain of market conditions at the time of foreclosure; and by liberalizing the financial system, a lender cannot be clear of the extent to which real estate prices appear to be rising as a result of there being more buyers brought to the table with new kinds of debt instruments, or the extent to which the in prices justified by a structural shift becomes speculative.

They sure do. The Japanese buying up all of Manhattan. The S&L crisis. You'd think Wall Street would have learned by now.

What you're suggesting is that we ought to regress to the earlier state of things, getting rid of all the new kinds of securities that were the catalyst, even though the cause has been corrected by market forces.

Correct, we need to scrap those things that have proven harmful to us/too risky. On the other hand, market forces, alone, have not corrected the situation. The Fed is acting in ways that no other Fed in history has behaved - ever. In many ways, the Fed is damned if they do, damned if they don't. It's in no one's best interest to have our entire financial system collapse.

Why do you care who owns them? Whether privately-held or publicly-held, the motivation is the same; an insurance company exists in order to be profitable.

Not mine. My company operates much like a private, non-profit organization whose #1 job is to make sure that you are covered in the event of a disaster. They model risk, they charge a premium, a huge pile of money is managed by them, in reserve. In the event that policy holders "over pay" their risk premium - the policy holders get a rebate check in the mail. Because its not about profit. My insurance company, and others like it, pride themselves on NOT being listed on the NYSE - because it is a conflict of interest.

I can see the benefit is regulating some of their activities, but prohibiting who can own them seems like a tremendously bad idea. The natural course of reasoning by your way of thinking is insurance nationalization.

Not insurance nationalization. Barring insurance companies from publicly trading. They are insurance companies; they should be there for policy holders. If a huge catastrophic event occurs, and you're traded on the NYSE, your job is to preserve shareholder value. How do you do that? Simple. You shaft the policy holders. You tell them you can't cover their loss for various reasons. It's about minimizing loss - at the expense of giving the shaft to those you are supposed to protect - your policy holders.

There can be no such assurance. You could lend me money today and I could lose my job tomorrow. What then? If I'm seeking money for investment in a business, what if inflation spikes, and it turns out in mid-course that I'm undercapitalized? What if the value of my liquid assets held in stocks crater tomorrow morning? If I don't have health insurance and get run over by a METRO bus within an hour of having signed the note, what then?

Yes, you can lose your job. You could die. A whole list of bad things can happen. But that's not what I am talking about. What I am talking about is you, coming in to my office, and asking for a loan. You want 250K for a home. You make 35K a year. You can't afford it - and I should go to jail if I approve it, based on all information presented to me. Likewise, you lie to me. You tell me your income is 100K/year. I approve you. You should go to jail - because you lied. I am talking about proper due diligence of screening and approving people; I can't control what happens to you, after you close on the loan, no one can.

EDIT: And it was deregulation that brought about all these complex debt instruments, tied to real estate. In ways that not even those who created them can even understand now. We should have never gone there.

[TheNiche]

You're exactly right. When Glass-Steagall was repealed (in 1999), look what happened. The NASDAQ took off, peaked in 2000. All you saw on television was "QQQQ" and "diamonds" and "spyders" and, to go to trade those items, "eTrade," and many others. Bloomberg was on every TV in the office, at the gym, at restaurants, everywhere. The party didn't last too long, as the NASDAQ crater shortly after. And along with it, the 401Ks and IRAs of hundreds of thousands, if not millions, of hard-working Americans. So the tech bubble burst, but almost immediately, another began to inflate. The Fed kept lowering interest rates in the early 2000's and the line between investment and commercial banking kept getting more and more blurry, resulting in the absolute mess we have today. Glass-Steagall was enacted in the 1930's to help this nation recover from 1929 - a depression. Why we ever thought that breaking down the barriers between investment and commercial banking was a good idea is beyond me. You may argue that it is "innovative." I argue it was too risky. Risk [R] has two components: likelihood [L] of an event happening and consequences [C] of that event occurring, R=LxC. Even though you can minimize the likelihood of an event happening, to drive down the overall risk (you are minimizing L to reduce R) - if the end consequence is too great or too damaging - you don't take that risk, because the consequence overwhelms the likelihood. If the risk should materialize, the end result would be too damaging, and screw every one of us in the end (slight pun intended). So you don't take the risk to begin with (you don't even go there; we should have left Glass-Steagall alone - our country suffering from one depression is enough.)

How about we not light fuses to begin with. If you have sweaty palms, it's not a good idea to pull the pin on a grenade and hope you can hold the spoon. That's what all these investment banks did with CDOs and all that other "innovative" garbage.

They sure do. The Japanese buying up all of Manhattan. The S&L crisis. You'd think Wall Street would have learned by now.

Major financial deregulation and liberalization is typically coupled with a banking crisis. That doesn't mean that the deregulation shouldn't happen, just that it may be a hard pill to swallow. You cite Japan; I cite Scandinavia. And btw, the S&L crisis is probably the best known banking crisis of the 20th century, but it was among the least damaging. The United States tends to take for granted the ease with which it deals with and comes out of economic downturns.

Correct, we need to scrap those things that have proven harmful to us/too risky. On the other hand, market forces, alone, have not corrected the situation. The Fed is acting in ways that no other Fed in history has behaved - ever. In many ways, the Fed is damned if they do, damned if they don't. It's in no one's best interest to have our entire financial system collapse.

Your argument sounds a lot like Obama's 'We should get out of Iraq because we shouldn't have been there in the first place' line of reasoning.

News Flash: It's the year 2008 and you don't have a time machine. We're already there. Deal with it.

As I said, the catalyst was financial innovation, but the cause was a lack of good information. We have that information now, and if you look at CMBS transaction data at all, it'll be evident to you that the market is and has been pulling way back from such instruments. The consensus among those in the know seems to be that CMBS isn't going away, just that it's been severely curtailed for a long time (without regulation). And a lot of mortgage products are gone forever (also without regulation). That's how it ought to be. If debt investors were so ruthlessly in to throwing away money and kept on issuing the same kinds of loans even in times like this, I'd consider regulation. But where's the incentive to lose money? Regulation at this point in the game would either be redundant or overkill.

Not mine. My company operates much like a private, non-profit organization whose #1 job is to make sure that you are covered in the event of a disaster. They model risk, they charge a premium, a huge pile of money is managed by them, in reserve. In the event that policy holders "over pay" their risk premium - the policy holders get a rebate check in the mail. Because its not about profit. My insurance company, and others like it, pride themselves on NOT being listed on the NYSE - because it is a conflict of interest.

Not insurance nationalization. Barring insurance companies from publicly trading. They are insurance companies; they should be there for policy holders. If a huge catastrophic event occurs, and you're traded on the NYSE, your job is to preserve shareholder value. How do you do that? Simple. You shaft the policy holders. You tell them you can't cover their loss for various reasons. It's about minimizing loss - at the expense of giving the shaft to those you are supposed to protect - your policy holders.

Yes, you can lose your job. You could die. A whole list of bad things can happen. But that's not what I am talking about. What I am talking about is you, coming in to my office, and asking for a loan. You want 250K for a home. You make 35K a year. You can't afford it - and I should go to jail if I approve it, based on all information presented to me. Likewise, you lie to me. You tell me your income is 100K/year. I approve you. You should go to jail - because you lied. I am talking about proper due diligence of screening and approving people; I can't control what happens to you, after you close on the loan, no one can.

EDIT: And it was deregulation that brought about all these complex debt instruments, tied to real estate. In ways that not even those who created them can even understand now. We should have never gone there.

Oh really...because guess who my biggest lender is on an extremely risky category of real estate for which there isn't any good market data and on which they haven't lent before?

Needless to say, I'm very familiar with that category of insurance company. And insofar as they're willing to lend to me, they're my favorite kind of insurance company.

-----------------

I'd be weary of buying into the hype of a non-profit such as you utilize. I hope you've done your research and that other policy-holders have done the same. Without shareholders keeping a watchful eye on things and demanding certain performance, other kinds of conflicts of interest can arise.

Yes, you can lose your job. You could die. A whole list of bad things can happen. But that's not what I am talking about. What I am talking about is you, coming in to my office, and asking for a loan. You want 250K for a home. You make 35K a year. You can't afford it - and I should go to jail if I approve it, based on all information presented to me. Likewise, you lie to me. You tell me your income is 100K/year. I approve you. You should go to jail - because you lied. I am talking about proper due diligence of screening and approving people; I can't control what happens to you, after you close on the loan, no one can.

In example 1: Your company ought to foreclose, losing a lot of money in the deal, you should subsequently get fired, and I should lose all my money and go bankrupt.

In example 2: Your company ought to foreclose, losing a lot of money in the deal, you should subsequently get fired for not having asked for proof of income, and I ought to get sued...and if an employer or someone else helped to falsely prove up my income, they ought to get sued as well, while in order to prevent moral hazard, your commission on that loan ought to be taken out of your pay. My (and my accomplice's) income ought to be garnished from then forward to pay your company for damages and legal expenses. There are people that belong in jail, and in this example, I'm not that person. Presumably I have the capacity for productive work and haven't been a physical threat to anybody, and if I can be productive and make amends for my wrongs, that ought to be the outcome.

..RedScare might call you a facist...but that would seem to be a preferable alternative to what you've proposed, both to me and general society.

EDIT: Somebody removed the meaningful part of the last paragraph. I do appreciate it when moderators leave tags to note that something has been edited.

[Mark F. Barnes]

Hillary is giving a long speech about how the housing values nationwide have dropped 9 points. Well maybe it has something to do with the over-inflated appraisals and values that have been put on everything, so all these blood sucking lenders can get all these equity loans pushed through easier. Now you have you people out there with notes bigger than the actual value of their property. How can you blame that on anyone except the lender. They over-inflate the actual values of the property, to give false value to a property so they can close a loan, knowing good and well when the market recedes, and everyone knows is does periodically, that they are left with unprotected money, that if there is a foreclosure, which in turn comes up short, and the difference is written off thus adding to the down spiral. Unregulated loaning practices, which is a term (regulated) that I hate to think about, is something that she is leaning towards. Force feeding us her BS health care plan. Now she wants the government to bail out all the people caught in this pinch between the lenders. When in fact these people voluntarily took these overblown loans, and these equity loans (which personally I think are bad news from day one.), and the lender took that chance, giving these loans to people who just cant afford it. They don't check out documentation that is given to them to give the appearance of being able to afford it, (I know this for certain from first hand knowledge, I know a person that got a $600K home financed on 100% BS paperwork. Fake Tax Returns, fake paycheck stubs, fake bank statements.) These lenders were focused on one thing, and that was the commission they were going to get off of deal. SO WHY SHOULD I HAVE TO PAY FOR THEIR GREED???? The FED dumps liquidity into the market to buy some time to let the dust settle, and where does that liquid come from? Mine and your pockets. I worked hard to pay off my house so I can kick back now in my semi-retirement, and finally retire with no worries. People need to grow up and learn what they can and can't afford. People with any sense know the difference. And lenders definitely know, so if you bite off more than you can chew, well that's tough nookies. Lenders if you give out a risky loan, based on BS, that tough nookies too. Once you get burned enough, maybe you will quit this frivolous lending. Sure the housing market (from the builders to the Realtors) is going to take a huge hit, oh well. What good is a market built on false numbers? I guess I just don't get it. Are all these financial institutions on edge because they had all their eggs in one basket, and two many bet on all this false lending and inflated housing market? I'd bet it has a big part in it. Maybe I am wrong.

[TheNiche]

Hillary is giving a long speech about how the housing values nationwide have dropped 9 points. Well maybe it has something to do with the over-inflated appraisals and values that have been put on everything, so all these blood sucking lenders can get all these equity loans pushed through easier. Now you have you people out there with notes bigger than the actual value of their property. How can you blame that on anyone except the lender. They over-inflate the actual values of the property, to give false value to a property so they can close a loan, knowing good and well when the market recedes, and everyone knows is does periodically, that they are left with unprotected money, that if there is a foreclosure, which in turn comes up short, and the difference is written off thus adding to the down spiral. Unregulated loaning practices, which is a term (regulated) that I hate to think about, is something that she is leaning towards. Force feeding us her BS health care plan. Now she wants the government to bail out all the people caught in this pinch between the lenders. When in fact these people voluntarily took these overblown loans, and these equity loans (which personally I think are bad news from day one.), and the lender took that chance, giving these loans to people who just cant afford it. They don't check out documentation that is given to them to give the appearance of being able to afford it, (I know this for certain from first hand knowledge, I know a person that got a $600K home financed on 100% BS paperwork. Fake Tax Returns, fake paycheck stubs, fake bank statements.) These lenders were focused on one thing, and that was the commission they were going to get off of deal. SO WHY SHOULD I HAVE TO PAY FOR THEIR GREED???? The FED dumps liquidity into the market to buy some time to let the dust settle, and where does that liquid come from? Mine and your pockets. I worked hard to pay off my house so I can kick back now in my semi-retirement, and finally retire with no worries. People need to grow up and learn what they can and can't afford. People with any sense know the difference. And lenders definitely know, so if you bite off more than you can chew, well that's tough nookies. Lenders if you give out a risky loan, based on BS, that tough nookies too. Once you get burned enough, maybe you will quit this frivolous lending. Sure the housing market (from the builders to the Realtors) is going to take a huge hit, oh well. What good is a market built on false numbers? I guess I just don't get it. Are all these financial institutions on edge because they had all their eggs in one basket, and two many bet on all this false lending and inflated housing market? I'd bet it has a big part in it. Maybe I am wrong.

The consumer side of it, which is what you're describing, is ugly enough, but it is only symptomatic of a deeper problem that has probably been overcorrected at this point. It's getting to the point that legitimate non-speculative cash-flowing business ventures have difficulty getting financing. And that is really really bad.

[Mark F. Barnes]

And I can go along with that. The reality of it all this is forcing us into a full-blown recession. The stock market has been a volatile roller coaster ride and financial professionals say things will probably get worse before they get better. So you better hang on! As more and more of these sub prime mortgages began to reset in droves and result in foreclosure, housing prices will also decline more. Because of the way these loans and CDO's were globally distributed throughout the financial conglomerance, it's knocked the whole system out of whack. Keep in mind that a single CDO package might contain as many as 100 sub-prime mortgage loans. As the defaults continue, the worldwide CDO's are taking a major hit and the entire thing is going down like a house of cards. The fallout from the sub-prime mortgages have affected the housing market, which trickle down to the financial markets that are having to pull back to try and stay afloat because of "their mistake" and the entire US economy is taking a hit as a result of stupid lending and greed. They can't take as many chances in the commercial end, with investment ventures, that involve quite a bit of risk. Why not, they were throwing money a John Q Public, like they were printing it, in the backroom. Which if you think of it, in a way they were. Frivolous lending is in a sense is printing money that you cannot possibly make good. Again why should I bail them out? They are not going to bail me out if my 15K shares of CVX and my 1K shares of GOOG hit the bricks. I've lost almost two hundred grand in GOOG in the past few months, is anyone offering to help me with that? NO, and I don't expect them to. That's a risk I took and I knew the consequences going in. Are you to lead me to believe that these great financial institutions didn't know what they were doing going into this deal? If that's so that IS scary. If I have to bail them out, I expect to see a return on my money. Will I? Hell no. That's just my gripe, and really has no bearing on economics other than my own.

[TheNiche]

Again why should I bail them out? They are not going to bail me out if my 15K shares of CVX and my 1K shares of GOOG hit the bricks. I've lost almost two hundred grand in GOOG in the past few months, is anyone offering to help me with that? NO, and I don't expect them to. That's a risk I took and I knew the consequences going in. Are you to lead me to believe that these great financial institutions didn't know what they were doing going into this deal? If that's so that IS scary. If I have to bail them out, I expect to see a return on my money. Will I? Hell no. That's just my gripe, and really has no bearing on economics other than my own.

Interestingly, with Bear Stearns, it looks like just setting up the bailout deal as an option that was on the table kept them (and probably other big institutions) from disintegrating completely over the course of last week. Now, it looks like the deal may not go through because Bear was being undervalued. Without spending a dime on the bailout, it is as though the signal that the government would be willing to intervene was enough to restore some degree of confidence and prevent an all-out panic. This is good. It is good for them, it is good for you, it is good for me.

You may have lost a lot of savings recently, but that's not to say that it couldn't have gotten much worse.

[Mark F. Barnes]

I fully agree it can get a heck of a lot worse, and if we don't change probably will. I have been getting ready for this for several years now. Sooner or later the balloon does burst, and if you are not well founded then your cards fall around you. I myself learned my lesson the first time. 1985-87 was a tough lesson but one that was well learned. I think there are people that have no memory of that. It's just a matter of time, if things don't change. It was felt in the 1980's when massive Bank Closings caused a failure of billions in loans and then real estate investors were stripped by the then democratic congress, of deductions which lead to a rescission and the failure of small businesses. However these differences appear to be aligning themselves back up for another clash of conservative principles verses the old guard of the mind set that the majority have held for over 100 years, which is tax and spend through redistribution of the wealth. This crap never ever works long term, it's just a pacifier, can we not learn something from history? And then these penalties to the newer businesses will no doubt result in a repeat of the history of the 1980's all over again. Exactly how to stop this nose dive at this point, it's not going to be easy that's for certain. Somebody is going to have to get hurt, I just hope it's not the little man, which looking at history, other than the depression of the 1930's (everyone got hurt then), almost always does. It's going to be ugly, but I still think it's fixable, it's just going to take time. But we have got to get a handle on these renegade spenders and lenders, that's the big chore ahead, how to stop these from repeating itself, over and over again.

[TheNiche]

Have you happened to have gotten your IRS notice yet about the stimulus package. Reading through the criteria, it sounds like a welfare check is on its way.

I'm not sure whether to be glad or ashamed that I still qualify for it based on the 2007 tax year.

[Mark F. Barnes]

Yeah got mine a couple of weeks ago. When I pay in $121K that little drop is far from welfare. However I don't qualify, anything above $167990 gets zip (if I understand it correctly), and is greatly reduced from there to $150K. It's more targeted for the <$150K group, which is good, those folks could use the little hit I am sure. It's not going to stimulate the economy much, most people will most like, if they're smart, pay down a credit card or something.

[Subdude]

I agree that it is likely that investment banks will likely facing regulation (whether prudent or not), but I do not conceed moral hazard.

Speaking of moral hazard, would one "conceed" it with this week's bailouts of Fannie Mae & Freddie Mac?

From the Economist:

At Fannie and Freddie

[RedScare]

Socialism is only bad when it relates to healthcare, not propping up wealthy investors taking inordinate financial risks. I find it interesting that even those that point out socialism in the US financial markets still laud it as a good thing. "Mr Paulson was still right to intervene: the collapse of Fannie and Freddie would have been a catastrophe." When times are good, the free market ideologues shove their mantra down our throats, claiming that the market cures all, including those who overindulge. But, when catastrophe hits, and profits are at risk, a healthy sense of pragmatism takes its place. Maybe socialism isn't so bad after all. Yet, the fact that 47 million Americans are uninsured, or that even those that have insurance are often denied coverage for illnesses, is still not considered a catastrophe, at least not one worthy of socialist intervention.

Well, at least one good thing has come of this unparalleled expression of entitlement. No one is talking about privatizing Social Security anymore.