What follows is my own little un-researched rant. Please correct me if my ideas are totally off-base, but in trying to answer the topic question I came to the conclusion that the money is still here, in the United States.
1. Joe Alpha buys a house for $100K and takes out a note.
2. He sells the house to Joe Blow for $200K, who takes out a note and pays Alpha the $200K who pays off the note and has $100K left over in cash.
3. Blow sells the California bungalow a week later to Charlie for $300K, pays off his note and walks away with $100K.
4. Charlie sells to Dick for $400K and walks away with $100K.
5. Dick takes out a sub-prime loan at 15% ARM with 0% down at Echo Bank.
6. Echo sells half of that note to F Bank of England (simulating some notes getting bundled and sold over seas, not parts of a note I realize) and part of the note to USA Bank - taking a current profit on a future annuity.
7. Dick defaults on his note. The property is liquidated for $340,000 (the worst markets are off 15%).
8-A. Leaving USA Bank and F Bank each out $30K (60K loss) and Dick out some incidentals (and a house which he didn't really own).
8-B. In actuality the notes are wrapped in securities and indistinguishable. The result of the foreclosure is a reduction of the value of the entire note, due to poor record keeping (in the bundling) and panic the overall value of the note might be off more than 15% and it's liquidity compromised. But the underlying value remains.
- - -
At the end of the day, this pyramid scheme resulted in a gain of $240,000. In real life, very similar gains were seen over the course of the 10 or 15 years running up to this crash. Each seller gaining and walking away with cash. The last buyer really only lost out on any money he had put in - which was usually a zero equity line anyway, which made it similar to paying rent on the property.
So we leave F Bank and USA holding the bag for the 15% drop. But over the course of the rise they made far more than 15% on the transacting real estate market AND about half of the sub-prime loans have been sold over seas. The resulting build up and cash flow has left trillions of dollars in the hands of home selling Americans.
So when you hear that XYZ French bank lost $7,000,000,000 - that money is now in the United States. A small bit of it is with E Bank for selling the annuity and the rest of it is in the hands of the prior seller(s). The last one holding the bag - the largest financial institutions, have taken the hit.
(of course, those idiots sold their house and took their profit and drove it into a new house because of our tax laws and probably lost their house in an ARM, enriching that seller)
That's about how it worked out. I can find any holes in that structure.
For the most part it was a pyramid of stupidity. I would like to think of it as "economic natural selection."
The worst markets are down more than %15 (that's also a disproportionate average) but the example is good.
I would not make a huge issue out of the mess in sub prime. It's spread out. But I still am concerned about future inflation as a result of the excess of money being printed. And those that can least afford it are the victims here. Not the security holders.
The Saudi's told Bush the price of oil would be $30 not $90 if he had protected the dollar. And poor Georgie couln't do that and prop up Wall Street simultaneousy.
The trouble of fat and lazy is the problem with our attitude as a nation. The nation is of pigs. Lazy and incompetent. It's reflected in the manner in which we run our economy based on self satisfaction and stuff while not going for higher standards of morality.
It's all bound together. And our leaders continue to play into the self perpetual selling out to China and the Arabs.
That money is now circulating around the economy, creating inflation. Some financial institutions are in a cash crisis since people are defaulting on their loans instead of making their payments - which would have pulled that new money back out of the economy and given it to the lenders. Instead of getting the full amount of the mortgage plus interest, they are only getting back whatever they can auction or sell the house for (which just took a sharp turn downward during the bubble burst).
So the Fed's system of creating new money wouldn't have been too damaging to the economy if people were making their payments and streaming that money back to the lenders. But in this collapse, much of that money is spilling out into the general economy causing inflation.
The lower class who had nothing to do with the housing bubble still gets to deal with the inflated prices caused by the money supply growing. Manufacturers of construction materials profitted greatly from the fed artificially fixing the price of loans at a low point. At some point, the production and investment surpassed a sustainable point in reality, since the availability of credit was SET to a cheaper level than the market would have otherwise set it at. Now, everything has to unravel for a while and get back in tune with reality.
Cannon, the only thing I don't see accounted for is all the interest paid by the subsequent owners in your scenario. I'm first to admit I'm a little slow on big-picture economic theory. Hell you may have even said it and I just glossed over it. At some point it goes beyond accounting logic which I get easily and goes off into the algebraic which I've always struggled with.
As everyone knows the bulk of the interest is paid in the first 1/3 to 2/3 of a mortgage note. For the first third, unless you are making extra principal payments, progress is dreadfully slow on the balance.
Let's assume Dick who paid $400K for the home lived there and made timely payments for four years. Dick was paying in the neighborhood of $2000 per month in interest.
Let's round it off there for ease of calculation.
That's $96,000 in interest paid. The investors/lenders took a $60K hit on prinicple. Let's assume with legal costs of the foreclosure and other associated costs of preserving the property- add $10K. They still gained $26K on the original $400K. So is that really still a loss? Granted that's pretty crappy return on a four year investment, but it's still not a net loss. Let's say he defaulted on a five year interest-only baloon because he couldn't re-fi on the day of reckoning. He would have paid $120K in interest in that case.
See where I'm going with this?
We don't even know how many of these foreclosures are five year interest-only baloon notes. The idea behind these were for flippers who were playing an inflating house market or people who assumed the market would have kept going and/or they would be earning more in five years and could handle more payment. Now they can't re-fi because the house won't appraise at the principal balance, and they don't have the money to pay it off.
quote:
Originally posted by cannon_fodder
What follows is my own little un-researched rant. Please correct me if my ideas are totally off-base, but in trying to answer the topic question I came to the conclusion that the money is still here, in the United States.
1. Joe Alpha buys a house for $100K and takes out a note.
2. He sells the house to Joe Blow for $200K, who takes out a note and pays Alpha the $200K who pays off the note and has $100K left over in cash.
3. Blow sells the California bungalow a week later to Charlie for $300K, pays off his note and walks away with $100K.
4. Charlie sells to Dick for $400K and walks away with $100K.
5. Dick takes out a sub-prime loan at 15% ARM with 0% down at Echo Bank.
6. Echo sells half of that note to F Bank of England (simulating some notes getting bundled and sold over seas, not parts of a note I realize) and part of the note to USA Bank - taking a current profit on a future annuity.
7. Dick defaults on his note. The property is liquidated for $340,000 (the worst markets are off 15%).
8-A. Leaving USA Bank and F Bank each out $30K (60K loss) and Dick out some incidentals (and a house which he didn't really own).
8-B. In actuality the notes are wrapped in securities and indistinguishable. The result of the foreclosure is a reduction of the value of the entire note, due to poor record keeping (in the bundling) and panic the overall value of the note might be off more than 15% and it's liquidity compromised. But the underlying value remains.
- - -
At the end of the day, this pyramid scheme resulted in a gain of $240,000. In real life, very similar gains were seen over the course of the 10 or 15 years running up to this crash. Each seller gaining and walking away with cash. The last buyer really only lost out on any money he had put in - which was usually a zero equity line anyway, which made it similar to paying rent on the property.
So we leave F Bank and USA holding the bag for the 15% drop. But over the course of the rise they made far more than 15% on the transacting real estate market AND about half of the sub-prime loans have been sold over seas. The resulting build up and cash flow has left trillions of dollars in the hands of home selling Americans.
So when you hear that XYZ French bank lost $7,000,000,000 - that money is now in the United States. A small bit of it is with E Bank for selling the annuity and the rest of it is in the hands of the prior seller(s). The last one holding the bag - the largest financial institutions, have taken the hit.
(of course, those idiots sold their house and took their profit and drove it into a new house because of our tax laws and probably lost their house in an ARM, enriching that seller)
Reads almost exactly like the Texas real estate flipping schemes of the 80s that busted the state's real estate values and the S&L business in the late 80s.
That took about a $ trillion hit to the US treasury. This current sub-prime is on a wider scale so who knows how much it's going to take now.
^Nope. Back then inflation was running double digits as was the prime rate. The S+L industry had a different set of regs back then from banks.
We have a much different set of circumstances today which is setting the country up for a bigger fiasco further down the line. By then, it will not be the Busheviks fault. And the dumbed down dems just made it so it's gonna be their fault for playing into the bad hand being dealt.
A more fundamental problem than sub prime.....breaking of the American Labor Unions by Raygun. Their motives caused standards of lending to deteriorate. The process also added to the downward spiral of the family unit as two incomes became neccesary to raise a family. In 1990, a $35,000 salary had to increase to $125,000 income today to keep up. Americans, especially their leaders, are fat and lazy idiots.
http://coanews.org/video/us-recession-the-result-of-decline-in-middleclass-wages
quote:
Originally posted by Conan71
That's $96,000 in interest paid. The investors/lenders took a $60K hit on prinicple. Let's assume with legal costs of the foreclosure and other associated costs of preserving the property- add $10K. They still gained $26K on the original $400K. So is that really still a loss? Granted that's pretty crappy return on a four year investment, but it's still not a net loss. Let's say he defaulted on a five year interest-only baloon because he couldn't re-fi on the day of reckoning. He would have paid $120K in interest in that case.
See where I'm going with this?
We don't even know how many of these foreclosures are five year interest-only baloon notes. The idea behind these were for flippers who were playing an inflating house market or people who assumed the market would have kept going and/or they would be earning more in five years and could handle more payment. Now they can't re-fi because the house won't appraise at the principal balance, and they don't have the money to pay it off.
In your example, I'm guessing approximately 5.5 interest on a 30 year loan. 400K in new money was created. After 4 years, he has paid $96,000 in interest and perhaps $12,000 in principal (guestimate). So the bank got back $108,000 after it cut a check for $400,000. It had hoped to get over $800,000 back over the life of the loan. At this point, if it could sell the house for $300,000 there would be room to break even. I don't think this situation is extreme enough to be causing the problems that are going on right now.
A more extreme example would be someone who forecloses in a little over 2 years after he takes out the mortgage.
I really don't have a lot of experience with the mortgage lending industry, I am just seeing if I understand the economic theory behind whats happening here. Follow me and let's see if I understand how this works.
Let's say "Jimbo" takes out an adjustable rate mortgage on a $400,000 home that he could barely afford, but he was assured prices were only going to go higher. He buys into the dreams that his $400,000 home would be a $500,000 home within a couple of years. Jimbo buys his new house from its previous owner, Vinnie.
Let's call it Summer of 2004.
The data I am looking at says that the prime rate went 2% higher by the summer of 2005, and 2% more by the summer of 2006 (from 4.25 in July 2004 to 8.25 in July of 2006).
A 2% jump in your mortgage rate translates to nearly a 20% jump in your monthly payment. And for people who got into loans they didnt need EVEN at the lower rate, they are in trouble.
- Subplot
Part of the problem with the housing bubble included lenders approving people for loans without any solid proof of their income. An eager salesperson could help an applicant "fudge" the numbers a little bit, maybe exaggerate just a bit, so they could qualify, he could get his bonus, and the lender can make a sizeable closing fee. Once interest rates started rising up from their artificially low points set by the Fed from 2001 to 2003, that is when the lenders got extra desperate and extra tricky. It was a mad dash to approve as many loans as possible for the people that were merely profitting from the closing costs and commissions.
- Back to the main story
Flash forward to 2006, and Jimbo is hit with a mortgage that has adjusted to a payment around $1,000 per month higher than it was just over a year ago. He could barely afford the original payment, and thought things would be better by now. But he can't afford his payment anymore. By the time he comes to the harsh realization that he can't afford his home anymore, people everywhere around him are foreclosing as well. Going by CF's data that the "market" is down by 15% in bad areas, his home is only worth $340,000 now. Incidentally, he has paid just a little over $60,000 in interest (and a teensy bit of principle) in the two short years he occupied this home. He doesn't have the ability to cover a $50k to $100k gap if he were to attempt to sell his home for that much less than he owes on it (still nearly the full 400 large). He stops sending money in, and forecloses.
Despite what you say about the "value" of the home being down 15%, if the market is flooded with foreclosures, it would be very difficult for the bank to turn that house back around for $340,000. The bank has no intention of hiring a top dollar realtor to advertise the home and wait 6 months to a year to get the "market" 340,000 for the home. Infact, the bank is desperate for money at this point, with all sorts of payments not coming in. So they are in a situation where they put the house up for auction. The house goes up for auction. Let's say they are lucky and get 200,000 in the auction. So in 2004, they cut a check to the previous owner Vinnie for $400,000. Jimbo paid them about $60,000 before he realized he was screwed and gave up the fight. They lucked out and got $200,000 back quickly from the auction. They still gave out $140,000 that they never got back. That is now money that has potentially spilled out into the economy.
The original owner, Vinnie, was just holding on to the property as an investment as he watched prices climb. In 2004, at $400,000, Vinnie felt the time was right to cash in his investment. Vinnie gets to convert his inflated home into whatever he wishes. Vinnie just happens to be the patriotic consumer that Bush is encouraging all of us to be, so he buys some cars, electronics, and lives extravagantly. That INFLATED money, new money created, is now circulating into the economy. There is now more money out there, thus bringing down the value of ALL money by just a little bit.
Now, on the downside of this bubble, what WAS an inflation of HOME prices shifts into the general economy as inflation of CONSUMER goods. Meanwhile, the financial institutions are in a money crisis trying to bridge the gaps caused by people not making their payments, and them not being able to liquidate their assets for nearly as much as they loaned out to begin with. It all happened over the span of a few years.
The problem was that, in 2001, the folks in power decided we didn't want to have a recession and correct the market manipulations that had gone on prior to 2001. The Fed made money cheaper to borrow, and the problem was pushed back a few more years, and into another market: the housing market. This "prosperity" was prolonged long enough to keep the Bush admin in power during 2004, then interest rates started coming back up. During the rise back up is when lenders started to become increasingly irresponsible, because the lending spree was almost over. The mad dash to approve as many loans as possible caused the foolishness in subprime lending. By 2006 it started falling to pieces. Now, in 2008, we still do not know exactly how far reaching this situation really is.
Now the folks in power want to create $150,000,000,000 in new debt, and hand it out to the people hoping they go out and consume more. Meanwhile the Fed is making money cheaper to borrow. They are trying to fight off a recession that the economy NEEDS to get everything back in line with reality. They swept it under the rug in 2001. Now they are trying to sweep it under the rug in 2008. The futher we go without having a full correction to realistic valuations in all markets, the bigger risk we have of a HUGE collapse that leads to DEPRESSION, not recession.
January 26 / 27, 2008
The Profile of a Third World Country
How Bush Destroyed the Dollar
By PAUL CRAIG ROBERTS
It is difficult to know where Bush has accomplished the most destruction, the Iraqi economy or the US economy.
In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while US household debt doubled.
This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.
This is the profile of a third world economy.
The "new economy" has been running a trade deficit in advanced technology products since 2002. The US trade deficit in manufactured goods dwarfs the US trade deficit in oil. The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit.
To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.
The dollars are accepted, because the dollar is the world's reserve currency.
At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar's reserve currency role was drawing to an end: "The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars."
If the world is unwilling to continue to accumulate dollars, the US will not be able to finance its trade deficit or its budget deficit. As both are seriously out of balance, the implication is for yet more decline in the dollar's exchange value and a sharp rise in prices.
Economists have romanticized globalism, taking delight in the myriad of foreign components in US brand name products. This is fine for a country whose trade is in balance or whose currency has the reserve currency role. It is a terrible dependency for a country such as the US that has been busy at work offshoring its economy while destroying the exchange value of its currency.
As the dollar sheds value and loses its privileged position as reserve currency, US living standards will take a serious knock.
If the US government cannot balance its budget by cutting its spending or by raising taxes, the day when it can no longer borrow will see the government paying its bills by printing money like a third world banana republic. Inflation and more exchange rate depreciation will be the order of the day.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com
http://www.counterpunch.org/roberts01272008.html
(neo-con motto)
"reduce the size of the US government until it will drown in a bathtub of water". Nordquist
A couple of glitches in the scenario:
-- presumably your first three buyers/sellers have plowed at least a portion of their profit into more real estate, so the $100k that each of them made isn't necessarily protected from the housing slump.
-- home values are continuing to fall and the majority of ARMs out there haven't yet reset, meaning that this cycle will continue for awhile -- possibly into 2009. Combine that with muuuuuch slower sales, and Echo liquidating it's foreclosed properties at 15% begins to seem pretty rosy.
-- If liquidation of assets can't happen fast enough, then Echo Bank must rely on its own cash reserves to pay the loans which it has securitized and sold to USA Bank, and to F Bank. Echo Bank, in the past, might have relied on a short or medium term loan from another lending institution to pay off its debts, in part to give it time to wait out price instability and to liquidate its assets, but since potential lenders can't tell what Echo Bank's assets are worth, they're much less likely to extend a loan.
-- so USA Bank and F Bank are seeing losses to their CDO investments (not to mention their own mortgage portfolios) but don't know how much, because Echo Bank doesn't know how much. This is one reason you're seeing multiple write-downs from single lending institutions; no one really know who's holding the bag, and the entire thing is still unfolding. At this point EVERYONE'S taking the hit and just keeps on taking the hit.
-- lastly, I can't see how the underlying value of the home remains. An asset is only worth what others agree it's worth, not what you declare it to be. Or, what it USED to be worth. That's why investors were getting into the market in the first place: perceived value was going up up up.
FWIW, one of the things that's been showing up more and more is the willingness of homeowners with negative equity to just walk away from their house. One of the econ blogs I read (I can't recommend it enough; it's called
Calculated Risk (//%22http://calculatedrisk.blogspot.com/%22)), quoted BofA CEO Kenneth Lewis as saying:
quote:
"There's been a change in social attitudes toward default. We're seeing people who are current on their credit cards but are defaulting on their mortgages. I'm astonished that people would walk away from their homes."
In other words, homeowners in the most vulnerable markets are SO underwater, that being foreclosed on is a better outcome than trying to get a refi. This (//%22http://latimesblogs.latimes.com/laland/2008/01/a-tipping-point.html%22) quick blog entry from the LA times makes the point pretty succinctly.
Wevus -
I agree with some of your assessments.
1. Much of the money was plowed into more real estate. But presumably into a nice property than that which they had just sold. Meaning, at the end of the day, they are probably better off.
This has to assume that they did not go for broke and take out a Dick style massive ARM with zero down that they could not afford. Which should not be the case, since they had $100K in profits to put down.
2. The trend will continue and worsen for a while. But unless value actually reset the net impact will be a gain. Keep in mind prices were up 400% in 15 years. So even if they lost 50% of the value there would still be a net gain... the prior insanity clearly could not have continued.
3. The resulting credit crunch of a slower market is a more serious concern. I am not arguing that it is not creating economic difficulties, I was merely pondering where the 'lost' money went to. I'd need an entirely new thread to speculate on the inflationary and credit ramifications of a massive home lending slow down (I see some positives -> business loans and solid home loans should be more available).
4. Lastly, assets are only worth what people are willing to pay them. The 15% drop in the California realestate market represented actual sales - it is what people are willing to pay. I suspect that number will drop a little more, but likely it will soon level off as people eat their losses and most actually live in their homes instead of flipping them. This will result in a slow down of appreciation for a good number of years as prices slowly creep back up to their prior levels.
- - -
Conan:
I'm not arguing that people are not going to get screwed. I'm basically saying the last person - the poor guy left holding the bag (the note, as it were) is the one that gets screwed (as is the bank). The guy that sold him the house is just fine as he has cash in hand (assuming again, that he used his profits as a down payment as tax laws encourage).
In my example, Dick would be out the horrible interest. However, in many instances the $2000 a month in interest would be about equal to what he would pay in rent for a comparable dwelling. So at that point it becomes just the cost of living in luxury (or in California, in a home).
- - -
YoungTulsan:
Great read. You took my example and tied it into the current issue.
Few doubt that the real estate market was not sustainable as the buyers bought more than they could afford, banks bought notes they did not understand, and brokers/realtors pimped whatever they could to get a commission. Sorry, but they are all equally at fault. A market correction NEEDED to happen and needs to continue. I'd like to see it slowed, but the $150Bil is a joke.
Why would the guy that makes $60K a year and bought a $300K house use his $1200 check to try to catch up? Clearly the guy isn't financial responsible anyway. Money we don't have so people can buy crap they don't need.
- - -
AOX: show me the secret discussion where the Saudi's told Bush he could have $30 oil if he held the dollar and I'll bother discussing it.
- - -
Did the Saudi's do that? We'll never know. It's obvious though.
The Saudi's may have told Bush had he protected the dollar, the price would be much lower per barrel today. Surely they too know what an idiot government he's running where his people come before the American people.
This is a theory I have with not a lot of evidence, except for some strong hunches.
The housing market slump is a complex situation. But I'm getting a strong vibe that there will be a lot of people indicted in the banking and appraisal industries on fraud charges.
Here's why I think so: About six months ago, I went fishing for a home equity loan among several banks for home improvements. One national chain bank that I ultimately didn't do business with appraised my home at a value that had risen 50 percent in just three years since I bought it. To say that my eyebrows went up is an understatement.
I live in an area that's nice and quiet, but hardly what I would call super-desirable. The more I've been thinking about it, the more I suspect something fishy has been going on between appraisers and/or banks. To see a house go up in value five times the rate of inflation seems crazy, especially when Tulsa was more of a slow-and-steady-growth real estate market. There seemed to be no earthly reason this should happen, other than someone cooking the books to try to give out loans.
Thoughts?
I agree with your idea. I am confident that banks instruct appraisers to give a number they are comfortable with for whatever reason, not necessarily what the market price is. This is an instance of the banks having too loose of credit/too much risk AND appraisers with no integrity (sure, I'll say it's worth whatever you want).
But it is probably NOT fraud. Not in an actionable manner anyway. At the end of the day you got your loan and the bank got it secured against you house. Both parties agreed to the value and got what they bargained for - it's "true" value is not relevant.
quote:
Originally posted by rwarn17588
There seemed to be no earthly reason this should happen, other than someone cooking the books to try to give out loans.
Thoughts?
Yes, lenders want to make loans....it's their life blood. In cahoots? Definitely. Poor oversight seems to have brought this all on.
In the 80's, this region was "red lined" by lenders who knew the Feds were in here keeping close watch on terms, conditions and credit. In addition, local banks had no money to lend after the banking debacle precipitated by the drop in the price of oil, a big prime rate and practically no government supervision.
Well, well, well.
Look what just came down the pike today: 14 companies are being investigated by the FBI for their subprime mortgage practices.
http://online.wsj.com/article/SB120163969101526197.html?mod=hpp_us_whats_news
Cannon,
You and I are thinking along the same lines.
I guess my thinking is, the money has not disappeared, it has shifted from one place to another. Unless money is purposefully removed from circulation by the government, or someone sets fire to a pile of cash, it does not disappear.
Well, Stock market "money" can disappear with demand - as in my portfolio worth $100K in Oil is only worth $50K if solar catches on (whatever). And, just to be a jerk - burning a pile of cash would increase the relative value of whatever cash is left. So the net effect would be a wash (think stock buyback).
My real concern was more WHERE the money went. The net result seems to be importing money TO the United States. Which would explain why our currency is being devalued now that the flow of cash IN to fund these loans has dried up. But, at the end of the day we have piles of foreign cash circulating in our economy. Avoiding inflation... we still win.
quote:
Originally posted by cannon_fodder
Well, Stock market "money" can disappear with demand - as in my portfolio worth $100K in Oil is only worth $50K if solar catches on (whatever). And, just to be a jerk - burning a pile of cash would increase the relative value of whatever cash is left. So the net effect would be a wash (think stock buyback).
My real concern was more WHERE the money went. The net result seems to be importing money TO the United States. Which would explain why our currency is being devalued now that the flow of cash IN to fund these loans has dried up. But, at the end of the day we have piles of foreign cash circulating in our economy. Avoiding inflation... we still win.
Maybe I'm misunderstanding here, but isn't that exactly what happened to the subprime market? The equivalent of your oil stock losing value when mass solar comes online. It's not that money's being physically taken out of the system (as in the burning pile of cash) it's that assets are being revalued, and being revalued much lower than the amount of money you borrowed to pay for them initially. Money IS actually evaporating into thin air.
Okay, so wait: bank extends a mortgage loan for $100k (let's say) to a subprime buyer, who then pays that to, let's say a homebuilder, for a home. So that $100k is paid immediately to the homebuilder from the bank, and the subpime buyer now owes that $100k, plus interest to the bank.
After two years of timely payments, the subprime buyer's interest rate doubles, as do his payments. At this point, he's probably not even touched the principle, meaning the original $100k from the bank hasn't started to be paid off yet. They've only taken their profit.
The subprime buyer, unable to make his new huge payment, defaults. He walks away. His credit is damaged, but he never put up a down payment and can't be forced to continue paying. So the bank then is out its principle ($100k), plus whatever it had thought it would make in additional interest. It has gained an asset (the house) whose value is off 15%
at this point, but is still sinking. In order to get that $100k back, the bank has to sell (or auction) the house, though it's now worth at best $85k and probably much less.
So after all that, what you're focusing on is the money the bank originally loaned? What happened to the original mortgage money?
The sub prime mess is yesterdays news. What shoe drops next?
While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/
quote:
Originally posted by we vs us
So after all that, what you're focusing on is the money the bank originally loaned? What happened to the original mortgage money?
Wevus, here's the interesting part: the proceeds used to buy that $100K house in the first place could have been put back in a bank by the seller and been loaned back out to the new buyer. I'm sure that's a gross over-simplification...
quote:
Originally posted by FOTD
The sub prime mess is yesterdays news. What shoe drops next?
While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/
The Haliburton conspiracy is so yesterday, it's got a long grey beard. How much do you think companies like General Motors, Springfield Armory, Lockheed-Martin, Boeing, Teledyne, and others have profited off Iraq? Very few politicians in Washington can claim entirely clean hands when it comes to not having a vested interest of one sort or another in companies who have made money off this war.
Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed.
Sure as ****, let the heads in DC start talking about a recession openly and companies will stop hiring out of fear and start figuring out ways to trim payroll. Bam! You get your recession.
The sub-prime collapse has so little to do with the bigger economic picture and how people and companies really are doing.
Wevus, at the end of the day value has disappeared from the market. But MONEY has been added to the system. Just like the stock, if A bough at 10 and sold at 20, B sold at 40, C sold at 80 and D sold at 100... there has been $90 in cash money added to the economy.
If buyer E then rides the stock back down to $50 HE loses money. But $40 has still been added to the economy in net. What's more, if he bought on margin (mortgage) and defaults the lender is out the money. But only to the extent that it failed to sell the security - if it sold that note over seas than our economy STILL gained $90 in spite of the $50 loss by E. Though, to E that detail is not important.
I'm not arguing all is well nor that the man holding the bad did not lose out (he did), just trying to track the actual flow of capital in a simplified manner (all economics is simplified or your head explodes).
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"Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed."
+.8, the government's policy to encourage home ownership and DEMAND banks make bad loans was certainly partly to blame (yes, FDIC banks are "encouraged" to make loans to 'poor' knowing full well they will default, then get called big bad meanies for taking the house. Not the underlying problem in the sub prime issue, but a contributor). But overall most managed to screw themselves just fine.
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AOX: relate to me how Halliburton doing well is a detriment to any homeowner.
I bet the 30,000 employees and 250,000 investors are happy they did well. Houston and the State of Texas is happy to get the tax money. The Fed is happy to get tax payments . Their customers must be happy to give them so much business.
Why is it bad then a company does well? Are you upset that Apple made money too? You realize United Airlines made $22 BILLION - should we tax them extra too? Citigroup & Bank of America saw killer profits and actually DID take people's houses. GE again made a multi billion profit. Pfizer too. AIG, MS, Altria, Wal-Mart, Johnson & Johnson, IBM, P & G, Owens Corning... all made more than them. Berkshire Hathaway consistently makes billions for decades. Goldman Sachs... hundreds of companies made more money.
You need $8 Billion in profits to be in the top 20 of US companies.
Deere had 4.5B
Williams Co had 4.1B
AEP, a utility, had $2billion in profits
So many companies made more money. I'm guessing they aren't in the top 200.
SEARS. There we go, they made about as much money as Sears. Evil, evil Sears. Get over it.
Cannon, indulge me for a sec.
Let's say someone sold 100 shares in XYZ at $75 per share through their broker. I thought XYZ would go up another $10 per share, so I bought 100 shares at $75 from my broker.
Next day, XYZ announces they've been cooking the books and they are filing for Chapter 11.
Stock plummets to $25 per share.
I've just lost $5000 in stock "value". The $7500 I wired to my broker did not up and disappear like a fart in the wind though.
Someone else still has the $7500 they sold those 100 XYZ shares for. Or perhaps they bought 1000 shares of ZXY for $7.50 a share and ZXY doubles in six months on news of an AIDS cure.
For me, I have not really lost the $5K so long as I don't sell the stock when it bottomed out and the company rebounds under new directors and the bad guys become white collar prison whores. [;)] That money went nowhere.
Subprime money is going to lower earning safe investments...Fannie mae...Freddie Mac....T-Bills...Municipal bonds....
Conan, in that example you are out the value. The value has left the economy, but the money is of course still in play.
At transaction time the seller had $7500 and you had $7500 worth of stock. Now he still has the $7500 in cash but your value has gone away. So long as you do not sell, you do not take a cash loss, but you and I both know it sucks nearly as bad to lose money on paper as it does to hand over cash.
Value is a much more fickle friend than cash. Which is why stock markets, or anything else influenced by the herd, is a risky business. So long as there is still value in the company even at 25% of the value, the economy as a whole is probably up over the long run - but you got stuck holding the bag.
quote:
Originally posted by cannon_fodder
Wevus, at the end of the day value has disappeared from the market. But MONEY has been added to the system. Just like the stock, if A bough at 10 and sold at 20, B sold at 40, C sold at 80 and D sold at 100... there has been $90 in cash money added to the economy.
If buyer E then rides the stock back down to $50 HE loses money. But $40 has still been added to the economy in net. What's more, if he bought on margin (mortgage) and defaults the lender is out the money. But only to the extent that it failed to sell the security - if it sold that note over seas than our economy STILL gained $90 in spite of the $50 loss by E. Though, to E that detail is not important.
I'm not arguing all is well nor that the man holding the bad did not lose out (he did), just trying to track the actual flow of capital in a simplified manner (all economics is simplified or your head explodes).
- - -
"Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed."
+.8, the government's policy to encourage home ownership and DEMAND banks make bad loans was certainly partly to blame (yes, FDIC banks are "encouraged" to make loans to 'poor' knowing full well they will default, then get called big bad meanies for taking the house. Not the underlying problem in the sub prime issue, but a contributor). But overall most managed to screw themselves just fine.
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AOX: relate to me how Halliburton doing well is a detriment to any homeowner.
I bet the 30,000 employees and 250,000 investors are happy they did well. Houston and the State of Texas is happy to get the tax money. The Fed is happy to get tax payments . Their customers must be happy to give them so much business.
Why is it bad then a company does well? Are you upset that Apple made money too? You realize United Airlines made $22 BILLION - should we tax them extra too? Citigroup & Bank of America saw killer profits and actually DID take people's houses. GE again made a multi billion profit. Pfizer too. AIG, MS, Altria, Wal-Mart, Johnson & Johnson, IBM, P & G, Owens Corning... all made more than them. Berkshire Hathaway consistently makes billions for decades. Goldman Sachs... hundreds of companies made more money.
You need $8 Billion in profits to be in the top 20 of US companies.
Deere had 4.5B
Williams Co had 4.1B
AEP, a utility, had $2billion in profits
So many companies made more money. I'm guessing they aren't in the top 200.
SEARS. There we go, they made about as much money as Sears. Evil, evil Sears. Get over it.
CF, your illustration about stock buyer A, B, C, D, E, etc. talks about money now being "in the economy". All that happened in that cycle was X amount of money was pulled out of the stock market. Money wasn't created or lost.
The mortgage situation is different. New money is actually introduced into the system when new lines of credit are opened. With proper valueation of the collateral (in this case, people's homes) that would not neccesarily throw the economic system off. But when loans are being extended based off of gross overvalueations, excess new money is created from nothing, introduced into the system, and it wreaks havoc in the form of inflation.
In my theoretical example earlier I was mainly trying to plot it out for myself to see if I understood the process - But I think I explained pretty well how inflation can occur. Jimbo bought an overvalued house from Vinnie for $400,000. Vinnie knew he cashed out at the peak (he had the house as in investment) - and he took his $400k haul and spent it on consumer goods. Jimbo meanwhile, was talked into a loan much bigger than he needed, and 2 years later when it adjusted he had to walk away from a losing battle. The banking system entered new money into the system based off an exaggerated value of its collateral. That money went into the consumer goods market, weakening everyone else's dollars. The bank had to auction the house for quick cash to avert crisis. Houses are now on their way back to more realistic values, but of the credit extended based off the unrealistic values of the last few years - much of that money escapes when sellers cash out and buyers bite off more than they can chew.
The Halliburton connection is a generic one. But what you need to do is follow where the newly created money goes.
Imagine, when new money with no intrinsic value is just entered into the system, it devalues the dollar as a whole. The price of bread is based on supply and demand. The price of $2.00 for a loaf of bread is based on supply and demand. More dollars start circulating. The supply of bread is the same. People have more dollars, so they are easier to come by. Demand for $2.00 bread increases because money is easier to come by these days as more of it is in the system. Hell, the price of my home just went up 50%, I'll just take out a home equity loan and get a huge stack of cash for next to nothing!
The supply of bread is the same. Money is easier to come by, at least for some. The market then has to set the price of bread higher, or else there would be a shortage. $2.00 bread becomes $2.25 bread.
Where did the new money go?
- If you are super wealthy and you own a company that sells building supplies, you made out like a bandit. Tons of new construction was initiated, NOT because people had generated the wealth to finance it through traditional means, but because the fed just made the money easier to get, and in more abundant supply. You profit handily, the new money flows directly to you.
- If you are somewhat wealthy - Perhaps you own a lot of properties, your wealth had great potential to benefit as long as you know when to hold 'em and know when to fold 'em. Your assets inflated by the bubble. Tons of false equity which you could leverage to acquire more assets during the bubble. As long as you cash out when the time is right, you stand to make a hefty profit, mostly in the form of that newly created money.
- Upper middle class - You are "creditworthy" and probably own your home. You benefitted by having easy access to the new money, by and large "on the cheap". Low interest loans increase your buying power, and you end up buying more house than you could a few years ago. You may have opted to take out some easy money in the form of a home equity loan. You may still end up worse off after the bubble bursts, because you could end upside down in your house after the market devalues. But hey, at least you did get to participate in the bonanza, and had potential to profit if you made some clever moves.
- Lower middle class - You may have had "subprime" credit - You got access to money with strings attached. Times are tough for you, and you aren't really enjoying all of this so-called "prosperity" that Neil Cavuto assures you we are experiencing. But banks were all-too-willing to lend you money, so long as you paid a hefty interest premium to make up for your unproven ability to pay bills consistently.
- The lower class - They have no participation whatsoever - They get no access to the new money. Their lives consist of paying rent to slumlords and getting taken advantage of by predatory lenders and a whole array of exploitative businesses surrounding them and keeping them where they are. When the cost of living inflates by 10%, their employer does not give them a 10% raise.
If you are deemed "uncreditworthy", you do not get to share in the same cycle of "prosperity" caused by the easy money. But you still have to pay the increased prices caused by the devalueation of your dollar. You still have to pay the increased prices caused by demand for goods being artificially high (due to money being cheap and easy for those who make the big orders).
Where does the new money go?
It generally migrates towards the wealthy. And it typically ends up on Wall Street. I used to have the same opinion about people just bringing up "but... but... Halliburton!" - seems like a generic way to make some statement about how corporations that turn a profit are evil.
Profits are not evil. The potential of making a lot of money is the motivation that makes the capitalist system great. The problem in this system is that the market is not free, it is manipulated. Manipulated by the fed (by fixing the price of borrowing), and manipulated by the government (by taxing us and redirecting that money to whereever the lobbyists prefer). When you ask yourself WHY would the fed manipulate the market, you must look at who benefits. When you ask yourself WHY would the Bush administration, claiming to be fiscal conservatives, increase spending dramatically, you must look at who benefits.
Halliburton doesn't exactly come out smelling like roses when you follow the money that came from the unfair manipulation of the free market.
quote:
Originally posted by Conan71
quote:
Originally posted by FOTD
The sub prime mess is yesterdays news. What shoe drops next?
While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/
The Haliburton conspiracy is so yesterday, it's got a long grey beard. How much do you think companies like General Motors, Springfield Armory, Lockheed-Martin, Boeing, Teledyne, and others have profited off Iraq? Very few politicians in Washington can claim entirely clean hands when it comes to not having a vested interest of one sort or another in companies who have made money off this war.
Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed.
Sure as ****, let the heads in DC start talking about a recession openly and companies will stop hiring out of fear and start figuring out ways to trim payroll. Bam! You get your recession.
The sub-prime collapse has so little to do with the bigger economic picture and how people and companies really are doing.
Halliburton's obscene profits are not conspiratorial. They are as real as all the dead and all the lies.
YoungTulsan, I understand what you are pointing out. I'm trying to over simplify everything and break out that incident. Truthfully, between my recent research into foreign markets at night for personal gain, year end stuff at work, year end stuff for my company, and the growing depth of economic discussions here I'm getting kind of economied out.
You and everyone else. It's called economy burn out though. You need recess...
Hey, I have a great idea, why don't we reduce the size of government and let private enterprise monitor themselves?
quote:
Originally posted by FOTD
Hey, I have a great idea, why don't we reduce the size of government and let private enterprise monitor themselves?
I get what you are insinuating. Regulating companies to death is not the answer though.
Imagine the amount of corruption that would be eliminated if there were simple rule of law regarding money. Sound money, meaning money has intrinsic value. It is the distortion of money, the ability to create false valueations, the ability to shift wealth away from the bottom and towards the top that creates a lot of the corruption.
You couldn't just drop all government regulation of business, but leave everything else the same. I'm sure that is how you are imagining it.
Before you reduce government regulation, you need to have sound money. Before you reduce government regulation, you need to have courts that defend the rights of the individual. If that all came together, we would be better off without the government getting involved in business.
Excessive regulation punishes honest business just as much as it punishes corrupt business. Giving government power and control over business, just GIVING them the power, sets up an environment where lobbyists can have the rules shaped to benefit their interests. So in some instances, regulations can cause MORE corruption. Why should an honest businessman have to shoulder massive compliance costs to meet a bunch of excessive government regulations? Sometimes regulations can be so massive that it shuts the little guy out of the field, only the big dogs (the ones you undoubtedly think are evil) can compete when the price of entry is so high. Yes, reduce regulations.
Enforce the rights of individuals! Take them to court! We have regulations in place right now where corporations can commit heinous acts, but get away with them by paying FINES that are much lower than the actual damage they are doing to individuals around them. Refineries GLADLY pay fines from the government, because they know the government is giving them a hell of a deal compared to if they were actually legally obligated to compensate people for their troubles, reduced property values, health problems, etc caused by their pollution. The companies that are actually doing bad things to people could be punished, but the companies operating honestly will prosper and not have to pay penalties because other players in their industry decided to operate in a different fashion.
You could reduce the size of government, protect the individual, and reduce corruption all at the same time if you employed all of the correct policies together.
Bravo, YoungTulsan. An excellent couple of posts.
+8
YoungTulsan, to be fair everyone (including AOX) knows that larger governments are corruption free. In spite of his deep hatred of Bush and constant accusation of corruption, more power for Bush is the way to stop the problem. The countries with the strongest central governments have the least problems (North Korea, Russia, Dubai, Cuba...).
quote:
Originally posted by cannon_fodder
YoungTulsan, to be fair everyone (including AOX) knows that larger governments are corruption free. In spite of his deep hatred of Bush and constant accusation of corruption, more power for Bush is the way to stop the problem. The countries with the strongest central governments have the least problems (North Korea, Russia, Dubai, Cuba...).
Oh my bad! I spasmed and accidentally typed all of that anyway.
And every time I read this line I agree more:
quote:
Excessive regulation punishes honest business just as much as it punishes corrupt business.
But I'd step it up a notch. For every 1 crooked business you punish with regulation you punish 10 honest businesses. It's akin to "safety" checkpoints looking for drunk drivers - you punish every driver on the road to catch the 5% that are doing wrong. But in business, instead of 10 minutes it costs tons of money.
Anyone who thinks more regulation is needed has never had to try to comply with the current mass of regulations.
Time for the government regulators to get back to doing their strict compliance over site that changed under Bushco. What slackers.
"He (and cronies) Got the Gold Mine, We Got the Shaft."
Ok....off to recess(ion).
quote:
Originally posted by FOTD
Time for the government regulators to get back to doing their strict compliance over site that changed under Bushco. What slackers.
Thank you for showing you have NO idea what you are talking about.
The regulations have gotten so tough trying to undo the harm done in the anything goes 1990's that many financial services have moved to London. Long, ENGLAND is again the financial capital of the world because there is so much regulation in the good ole' USA. In the 90's the good times were rolling so no one paid close attention. Under Bush we uncovered all sorts of fraud, laundering, and other cases of criminal behavior.
As a result the pendulum has swing towards over regulation and it has cost the United States tens of thousands of top notch jobs. Instead of just enforcing the laws on the books (that would have dealt with the issue being that it was already illegal) we have induced mores punishments for the vast majority of companies that followed the rules.
Financial regulation has gotten stiffer, not more lax under the current administration and Sarbanes-Oxley and enforcement of existing laws has stepped up. You have told me before you have never work in, studied, or even really followed finance. Why keep making statements that emphasize that point?
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Originally posted by cannon_fodder
quote:
Originally posted by FOTD
Time for the government regulators to get back to doing their strict compliance over site that changed under Bushco. What slackers.
Thank you for showing you have NO idea what you are talking about.
The regulations have gotten so tough trying to undo the harm done in the anything goes 1990's that many financial services have moved to London. Long, ENGLAND is again the financial capital of the world because there is so much regulation in the good ole' USA. In the 90's the good times were rolling so no one paid close attention. Under Bush we uncovered all sorts of fraud, laundering, and other cases of criminal behavior.
As a result the pendulum has swing towards over regulation and it has cost the United States tens of thousands of top notch jobs. Instead of just enforcing the laws on the books (that would have dealt with the issue being that it was already illegal) we have induced mores punishments for the vast majority of companies that followed the rules.
Financial regulation has gotten stiffer, not more lax under the current administration and Sarbanes-Oxley and enforcement of existing laws has stepped up. You have told me before you have never work in, studied, or even really followed finance. Why keep making statements that emphasize that point?
Hold up there, CF. Much of what's gone on with the subprime mess has to do with a complete absence of regulation. And when I say subprime, I'm meaning that to also include the credit crunch, the collapse of CDOs and other debt-backed securities, liquidity issues around the world, and the recent implosions of bond insurers.
The entire house of cards -- starting with selling the riskiest buyers big loans and running all the way up to these bond insurers certifying the securities made from those loans -- was underscrutinized and people were allowed to make up their own rules. They created their own weird investment products, created their own weird credit standards, and weird mortgage terms, and then quite possibly got the private companies who certify the bonds and the insurance and the products to either look the other way or collude entirely with the weirdness.
Consequently -- as rwarn rightly pointed out on this or another thread -- even the guys who came out to appraise the house were in on the scam. Things were so loosey-goosey (money was so very cheap) that there was incentive all over the place to commit fraud. And there's some strong circumstantial evidence at this point that it was committed en masse.
I'm not quite sure how "too much regulation" fits into this economic problem. How would less scrutiny have fixed the subprime crisis?
It's also worth pointing out that regulation on the face of it is not a bad thing. In fact, ones like SarbOx have a real purpose in the free market, by improving transparency, setting out common rules, and in general reinspiring trust. Make the playground safe, and everyone can join in. Let the people with power make the rules, and the bullies will take over. That's why I really just don't get the knee jerk thing against regulation. I don't think anyone -- even FOTD -- wants to make it harder for companies to do business just out of spite. But if the environment is permissive enough to endanger our economy, then heck yeah, time to reign 'em in.
I was referring to governmental regulation of the economy as a whole.
I was not referring to the subprime issues at all, which we agreed was the result of greed on behalf of originators, lenders, and home buyers. If the parties on both sides decide it is a good deal, the government should not tell them otherwise.
How could the government better regulate the subprime market WITHOUT dictating market prices and at the same time continue it's policy of "encouraging" banks to make bad loans to people too poor to afford them? The government has no business, at all, telling me what my house or anyone else's house is worth. They have no business telling me how much money I can borrow or how much bank X can lend me.
Such notions go against the basic precepts of a free and open society (which is based largely on property rights). Under the current system I am free to employ whomever I choose to appraise a house, I am free to ignore that figure, I am free to borrow only a portion of the loan or an amount in excess of the value. I get to choose, if I make a bad choice I get punished.
If there is fraud involved that is a crime - fraud. Being that it is already illegal why pass more laws addressing the same issue? If a bank colludes with an appraiser, a title company clears a title that is not, or terms of a note are disingenuous those things are ALREADY illegal. Passing another law is akin to saying it is illegal to murder ones wife and a new law making it illegal to shoot her to death.
What additional regulation would you propose that would not further erode my right to conduct my financial affairs as I see fit? The vast majority of ideas that I have heard would punish and reduce the rights of the 90% of homeowners who are OK to protect the 10% that made a bad financial decisions. Keeping in mind that mortgages are already the most heavily regulated financial transaction most people ever undertake.
So the question is NOT how would less scrutiny have fixed it, the question is would more regulation do more to help or to hurt?
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My knee jerk reaction to regulation comes from my understanding of it. The government's involvement in the economy should be limited to correcting market imperfections. Not everyone has perfect information, so insider trading is banned. It is inefficient to have competing utilities each string power lines. Pipelines in interstate commerce need a common set of guidelines to operate smoothly and safely.
Ever regulation the government passes is a new tax. Each government form says right on it how long they think it will take to fill it out. Most companies of any size has a compliance officer for safety, for tax, for environmental, and for DOT regulations. Even small business owners will tell you most of their time is spent on such nonsense. And too often the purpose of the regulation is lost in the effort.
Yet another portion of my disdain is that regulation rarely goes away. With each new regulation we add a new level of ingrained bureaucracy to over come before we can get the job done. The purposes usually over lap and on occasion contradict each other. Not only does it cost companies more money to comply, it is doubly so as their taxes increase to cover the new governmental expense associated with it.
quote:
f the environment is permissive enough to endanger our economy, then heck yeah, time to reign 'em in.
And that is the heart of the matter. The government does not
PERMIT anything, I do not do business under the grace of our government. as a government of "limited power" they need to show cause and authority to regulate me. I do not have to illustrate my right to operate free of additional control.
If my behavior in a free market endangers the economy so be it, the economy will have to adjust. So long as I am not exploiting a market imperfection the government should leave it well alone. A more planned economy will have more ups and downs, but it will outperform a more regulated economy in the long run.
I, and most investors, trust the market. Not the government. As you said, keep the playground safe with vivid enforcement of laws designed to correct imperfections (capitalism is based on the illusion that everyone ha perfect knowledge and equal opportunity, which needs government help) - otherwise leave me well alone.
and for the record, I am of the camp that says SarbOx will do nothing to prevent further snafus. Existing laws dealt with the previous situation which was already illegal and the new regulation has simply driven many filings over seas and thus, has no effect. Better enforcement of existing regulation would have been far, far more effective.
- - -
R.I.P. Limited Government.
The way I see it, the government un-wittingly allowed banks to entrap a new group of previously inelligible buyers into debt by enacting home ownership initiatives without fully understanding how that could be bastardized into something bad for the consumer.
I even have a hard time seeing home-ownership initiatives of the 1990's as even being that altruistic. I'm sure banks were more than happy to grease the skids to make that a reality.
Wevus, even before the advent of sub-prime, appraisers (at least in the Tulsa area) were made aware of the purchase price of a home. Every house I've bought, the appraiser was advised of the sale price by the lender. That pisses me off no end. It is in everyone's interest, especially the lender for the appraisal to be "blind". When the agreed-upon purchase price is known, the appraiser does his appraisal knowing he has to please the buyer, seller, and lender.
If it's a blind appraisal, I think it creates far more objectivity.
I agree that the appraiser thing sucks, but it is less fraud than common knowledge. The lender is not trying to dupe you into buying a home, a mortgage appraisal really means it is ok to lend XYZ amount on this house - it says nothing of actual value. And you can hire an independent appraiser if you so choose (I did and by his account I stole the house, though it was officially appraised right at the sale price).
If you want to use a "government" figure you can use the one from the county assessors... because clearly they are always on the money. [;)]
From what you've said here, you will like Sen. Dodd's proposal which sets supervision standards to watchover new regulations on lenders and appraisers AND sets up 20 Billion in financing to help get the housing debacle settled down.
It takes a democrat......but I do worry about the second shoe dropping http://news.yahoo.com/s/nm/20080131/bs_nm/usa_economy_dc_1 .