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Old 10-13-2008, 06:36 PM   #41
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In broad strokes, as I understand the financial crisis, financial institutions are in trouble because they are over-leveraged and their customers took on too much debt -- and are increasingly unable to pay back their loans. As defaults rise, financial institutions have become increasing reluctant to make loans, even to each other for fear of not being repaid.

The proposed cure to this mess is for the various Western governments to inject massive amounts of money into the financial system. Of course, the governments involved donít actually have this money . . . they will have to borrow it from the folks (citizens) who couldnít pay their own bills in the first place. Hmmmm . . . interesting if it works.

Assuming we can all collectively borrow ourselves out of debt, what effect will this massive borrowing by the various governments have on the cost of borrowed money? As demand rises, am I correct to assume that we can expect to see the cost of money increase? Does this mean that I can expect a higher yield on Government bonds that I purchase in the future?
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Old 10-13-2008, 06:37 PM   #42
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Old 10-13-2008, 06:39 PM   #43
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Some how, when I look at last quarters numbers this does not feel like a gain. Guess everything is relative. Not so big a loss looks like a gain.
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Old 10-13-2008, 06:39 PM   #44
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Assuming we can all collectively borrow ourselves out of debt, what effect will this massive borrowing by the various governments have on the cost of borrowed money? As demand rises, am I correct to assume that we can expect to see the cost of money increase? Does this mean that I can expect a higher yield on Government bonds that I purchase in the future?
For an answer to that question look at the trend of real yields available on TIPS. Good now and seemingly getting better.

Ha
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Old 10-13-2008, 06:56 PM   #45
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All I know is, I'm happy the market is up!!!!
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Old 10-13-2008, 07:04 PM   #46
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let it all hang out if just for one day....
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Old 10-13-2008, 07:07 PM   #47
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Wonder how all the folks who sold last week are feeling........
Some of them are scared to death and sick about it but will stay out. Others are sick about it and will rush to buy back in because they're afraid the train is leaving without them. Then when it drops dramatically again in the near future (if not tomorrow), they'll be scared again and sell. And on and on.

I can't imagine we won't see either another dramatic drop or two still when the next shoe drops or a more gradual drawback as we start to really think about what the economy's going to look like in the next couple of years.

But who the heck knows!
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Old 10-13-2008, 10:05 PM   #48
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Some days investing in the stock market is like playing Craps. Last week was like rolling craps. Today was like making the hardways...
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Old 10-13-2008, 10:44 PM   #49
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Here we go again:

The futures are up strongly again tonight. The US will use $125 of the bailout package to directly invest in 9 major US banks - thus recapitalizing them. This is basically the same as what Europe decided over the weekend.

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Old 10-13-2008, 11:32 PM   #50
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Here we go again:

The futures are up strongly again tonight. The US will use $125 of the bailout package to directly invest in 9 major US banks - thus recapitalizing them. This is basically the same as what Europe decided over the weekend.

Audrey
Listen to us socialists gleefully celebrating! All it takes is a good scare and niceties go out the window.

Ha
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Old 10-14-2008, 02:47 AM   #51
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Listen to us socialists gleefully celebrating! All it takes is a good scare and niceties go out the window.

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No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY
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Old 10-14-2008, 08:52 AM   #52
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No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY
Agree completely. Since as big taxpayers we are going to be paying for all this, we had better get what we can from the lift.

Ha
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Old 10-14-2008, 09:28 AM   #53
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No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY
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Agree completely. Since as big taxpayers we are going to be paying for all this, we had better get what we can from the lift.

Ha
But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor? If so, I don't think it's fair to say that capitalists are being hypocrites. To the extent the govt got us into this problem, we need them to help get us out.

I would have preferred they stay out in the first place.

-ERD50
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Old 10-14-2008, 10:21 AM   #54
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But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor?
Well that's certainly one perspective. Mine is that banks and mortgage brokers were greedy. They could make almost pure profit on the fees, and then go and borrow more $ to lend. That's how people were convinced it was their right to own a home. The failure to adequately underwrite the risk was shunted aside to make profits (pay commissions, executive bonuses, etc.).

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Old 10-14-2008, 10:26 AM   #55
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Well that's certainly one perspective. Mine is that banks and mortgage brokers were greedy. They could make almost pure profit on the fees, and then go and borrow more $ to lend. That's how people were convinced it was their right to own a home. The failure to adequately underwrite the risk was shunted aside to make profits (pay commissions, executive bonuses, etc.).

-- Rita
But didn't that happen because the govt was backing these loans through Freddie/Fannie?

That's my understanding, but I'll be the first to admit that I've been buried in all the info, I'm not sure that I know what I
know, or that I don't know what I don't know. So take that as a question, just as I wrote it, not a rhetorical one.

edit/add: Mine is that banks and mortgage brokers were greedy.

I addressed this earlier, but it bears repeating. I just don't buy this 'greed' thing as an explanation. Sure, they were greedy. Just like the majority of businesses and people are greedy. That is not a recent phenomenon. So it does not explain recent events. It appears to me that the normal risk that keeps greed in check is what got messed with - and that allowed greed to run free, and contributed to the mess.

So back to my question - wasn't it the govt support of Fannie/Freddie that took the checks/balances off of the ever-present greed?

-ERD50
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Old 10-14-2008, 11:42 AM   #56
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So back to my question - wasn't it the govt support of Fannie/Freddie that took the checks/balances off of the ever-present greed?

-ERD50
It was greed that gripped the populace... the truly great makings of a bubble. I haven't given this enough thought, but something akin to this could be causal.

There's a limited number of houses at all levels of supply (there's a finite number of $50k houses, $150k houses, $500k houses, $5mm houses, etc).

Purchases increase along the lower band. As supply goes down, if demand remains, then price will go up to stabilize demand.

But, now we see that prices are going up, this looks like more of a sure bet. I'm comfortable taking on a slightly higher mortgage, especially since I'm leveraged and more leverage plus increase in price means I make even more.

This ripples up and down the chain. Supply is still limited. I can only build so many houses at a time.

We can assume supply was tight simply because of the percentage increase in home ownership (from 65%-74% or thereabouts). I recall that, at one point, even in Minneapolis... with lots of land to expand and no reason for a bubble, houses would be bid over asking price by 5-10% on the first day of listing at the height of the craze. That promoted a weird mentality of people being convinced that they had to buy.

At some point, we're not even talking about F&F backed paper any more. We're talking about people going for loans for houses they could barely afford that were well over the size of the loans that F&F would buy.

So, it takes greed on a few parts. You need someone that thinks their house will only go up and they should get the biggest house they can afford. You need someone that will offer them an ARM, 40 yr mortgage, whatever. You need underwriters that will go along with it. you need appraisers that will agree that the house is fairly valued.

It's not just greed in an isolated form of capitalist greed, but a weird kind of greed that makes shows like Property Ladder and House Flippers popular.
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Old 10-15-2008, 11:24 AM   #57
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....

So, it takes greed on a few parts. You need someone that thinks their house will only go up and they should get the biggest house they can afford. You need someone that will offer them an ARM, 40 yr mortgage, whatever. You need underwriters that will go along with it. you need appraisers that will agree that the house is fairly valued.

It's not just greed in an isolated form of capitalist greed, but a weird kind of greed that makes shows like Property Ladder and House Flippers popular.
Sorry I didn't reply sooner - been busy....

But it seems that the MAIN reason that prices were going up, up, up and tempting so many to jump on board, was the easy mortgage money. If every buyer required the traditional 20% down, and trad income, there would be fewer buyers. Less demand relative to supply, more stable prices.

So wasn't that govt intervention that caused that? If we look at what was happening in Australia, we see that this money was not easily available. I think the main diff is the extent to which the govt got involved.

Down Under In Australia

So I would not call it 'weird greed'. I would call it government subsidized greed.

I am very open to challenges on this, it's a complex topic and I don't pretend to know the details - but I'm getting a pretty good sense that this govt intervention was key to the problem. Please, (anyone) correct me if there is flaw in my logic/info. I'm trying to learn.

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Old 10-15-2008, 11:59 AM   #58
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But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor? If so, I don't think it's fair to say that capitalists are being hypocrites. To the extent the govt got us into this problem, we need them to help get us out.

I would have preferred they stay out in the first place.

-ERD50
I don't know if universal homeownership is a socialist ideal (everyone should have a home, yes, but not necessarily own it). The percentage of people owning their homes is much lower in many socialist countries than it is in America (60% in the US Vs. around 50% in much of Western Europe).

NationMaster - Home ownership (most recent) by country

I think that the high level of homeownership in the US has more to do with people wanting to live the American dream rather than socialist practices. Having lived in a socialist country, I can assure you it is much harder to buy a home there than it is to buy a home in the US. Credit is much harder to obtain (qualifying for credit is often based on many factors such as your income and credit score but also your age and health) and the down payment requirements are much higher. Those obstacles are in place in part to protect the banks, but also to prevent people from overextending themselves (that's the socialist part of the equation: the state must protect people, from themselves included).
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Old 10-15-2008, 12:59 PM   #59
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In response to ERD50:

Yes, I believe the low interest rate by the government and the greedy loan processors and mortgage bankers got us in this mess. More than that, our tax policy didn't help either. Instead of channeling money into "good investments" (alternative energy, mass transit, etc...), the low interest rate pours it into McMansions. People looked at the mortgage deduction and figured that was where they would get the "surest return" for their money! I'd rather the tax was cut across the board. Incentivizing homeownership too much causes a good thing to turn bad.

In response to FireDreamer:

From many earlier threads, I learned that no other countries encourage home ownership to the extent that we do, with easy loans and special tax treatment. I am referring to posts by ladelfina and some Canadian posters. What was the American Dream turned into the American NIGHTMARE. There is no other better illustration of the Law of Unintended Consequences, regarding our housing policy.

Don't get me wrong. I like to own my home(s). But the system encouraged us to buy a much bigger house than we needed or could afford. All that homebuilding drove up the GDP, making the economy look very good indeed. Now, the nation is stuck with big houses that were funded by foreign money. They won't be sending us money anymore.

I am trying to say that there are many factors at play here. Collectively, they cause this problem, the bad karma.
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Old 10-15-2008, 01:02 PM   #60
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OK, thanks for that perspective. I guess 'socialist' wasn't the best term to use then. Maybe the 'redistribution of wealth' idea? Is that closer? The idea that 'rich' and 'middle class' people own homes, so the lower class should too? And if they can't really afford it, the govt (I guess that's where I come back to 'socialism') will help them get it?

And since looser lending practices helped the lower classes to afford housing, it also helped the middle and middle-upper class to afford MORE housing than previously. Bubble forms.

And it is my impression that, left to themselves, the banks would not have made such risky loans. So it seems the protections are already in place, and it was the (US) govt that messed with them.

I don't know - was this housing bubble mostly a US phenomena? Did the more conservative lending practices in other countries protect the people there? I assume that is the case.

-ERD50
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