Current Financial Mess 22

[cjd97]

I thought that a group of Engineers would be the perfect audiance to ask the question......Is this financial crisis being talked about on TV for real? What do you guys think?

A large part of me doesn't feel sorry for people who bit off more than they could chew with their mortgage. I also don't feel sorry for the banks who wrote the bad mortgage. I personally think we should let the banks fail, let the people lose their houses, and get back to the old times of actually sharing risk when lending/borrowing money, ie having 20% down to buy a home.

Kind of a side note, with everyone supposedly losing their homes and the banks not being able to liquedate them, where does the PMI insurance come into play? I would assume these folks are paying PMI if they are "subprime" loan canidates. Isn't PMI designed for situation such as this?

Just wondering your thoughts.

 

[spongebob007]

bvanhiel you are wrong. Here is why:

1. People are greedy
2. People have a collective short term memory loss
3. People collectively suffer from the "We're different" fallacy.


Human history is chock full of market boom/bubble/bust stories. Try doing an internet search on "Dutch tulip craze" for example. In my relatively short adult life I have lived through two such events: the dot-com craze and the current real estate mess and it is the same story every single time. True, no one can predict when the bust will come or how bad it will be, but rest assured every bubble will eventually burst despite the snake oil salesmen touting "This time it's different." Well, no it's not! I remember during the dot-com boom when stock of startup companies were trading at insane P/E ratios. Young MBA talking heads were on TV and in print touting that "This is a NEW economy, things are DIFFERENT now in the age of the internet." Well history has proven them wrong yet again.

If you are looking for signs of when a market is about to go bust, here it is: By the time Joe Sixpack realizes that he "needs" to be in the market because it will make him rich, it's already too late.

 

[TheTick]

The crisis hit home today. Plant manager announced we are losing orders due to customers' inability to secure financing. These are good customers who never had trouble in the past. It is a growth industry (long term healthcare products).

How far down is your 401K? Among my friends and acquaintances, it seems to be 20-30%. In a stagnant economy, don't expect a rebound to happen at the same speed.

 

[Overvoltage]

Yeah...20% is about right. I'm dollar-cost averaging and diversified in my holdings, so all I can really do is just hold on for the ride. Not like I'm planning to retire for 20-30 years anyway...

 

[bvanhiel]

spongebob007,

1. Yup.
2. Maybe so.
3. Sometimes things really are different.

Steel, the assembly line, electricity, trains, computers, the internet... all of those bandwagons were for real, but some of them were overvalued and got pummeled.

-b

 

[spongebob007]

As painful as it might be in the short term, I say no bailouts, let the guilty suffer and the market will eventually correct itself. I feel absolutely zero sympathy for the fools who bought more house than they could afford and are now potentially facing being homeless. They don't deserve those homes, they couldn't afford them in the first place. I also think those in the industry who made irresponsible loans and those that then packaged them up as investment vehicles should also hang along side those who treated their primary residences as their own personal ATM machine.

We didn't get into this mess overnight, and we CAN NOT get out of this overnight. What we are seeing today is the result of an economy that has been propped up with funny money for far too long. It may not be of Great Depression proportion, but I predict things are going to get much, much worse, and it could be more than a decade before it gets better again.

The roots of today's problems go back to the 1970's. This is when big banking got into bed with big government. Prior to this time lenders were bound by usury laws that were on the books in most states. These laws placed a limit on how much interest could be charged on a loan. Ever wonder why Citibank is located in South Dakota? The answer is simple. South Dakota had no usury laws. Citibank lawyers greased the political wheels in order to facilitate their move to SD and get Federal law rewritten so that they could skirt the usury laws of other states where they did business. Thus began banking deregulation. The fire is now burning out of control. If consumer greed is the gasoline, banking deregulation surely is the match that set things ablaze.

The bailout is a terrible idea because it is government meddling that played a big hand in the financial crisis we are in right now. When the dot-com boom went bust, the FED should have let the guilty parties hang in the wind. Instead, they attempted to soften the landing by lowering interest rates. Working in the manufacturing seector, we as engineers have seen our greedy corporate overlords ship more and more of our jobs overseas while at the same time holding back our pay raises and bonuses. There has been absolutely zero real wage growth for the average American worker for nearly a decade. But yet the economy grew. The U.S. economy has NOT grown however. The economy has been propped up by funny money since 2001. The problem with funny money goes back to ECON 101. The intersection of the supply and demand curve is the price point. Increase demand and prices increase. This is what happened in the housing market and to some extent the U.S. economy overall. But only so much price increase can be sustained before something goes horribly wrong, and that horrible thing was $4/gallon gas. Then the house of cards started tumbling and it's a downward spiral.

 

[SomptingGuy]

The rot set in in the UK when building societies became banks.

- Steve

 

[TheTick]

The best synopsis I have seen to date. Got it this morning from Stratfor.com.

As interest rates declined in recent years, investors — particularly conservative ones — sought to increase their return without giving up safety and liquidity. They wanted something for nothing, and the market obliged. They were given instruments ultimately based on mortgages on private homes. They therefore had a very real asset base — a house — and therefore had collateral. The value of homes historically had risen, and therefore the value of the assets appeared secured. Financial instruments of increasing complexity eventually were devised, which were bought by conservative investors. In due course, these instruments were bought by less conservative investors, who used them as collateral for borrowing money. They used this money to buy other instruments in a pyramiding scheme that rested on one premise: the existence of houses whose value remained stable or grew.

Unfortunately, housing prices declined. A period of uncertainty about the value of the paper based on home mortgages followed. People claimed to be confused as to what the real value of the paper was. In fact, they were not so much confused as deceptive. They didn’t want to reveal that the value of the paper had declined dramatically. At a certain point, the facts could no longer be hidden, and vast amounts of value evaporated — taking with them not only the vast pyramids of those who first created the instruments and then borrowed heavily against them, but also the more conservative investors trying to put their money in a secure space while squeezing out a few extra points of interest. The decline in housing prices triggered massive losses of money in the financial markets, as well as reluctance to lend based on uncertainty of values. The result was a liquidity crisis, which simply meant that a lot of people had gone broke and that those who still had money weren’t lending it — certainly not to financial institutions.

 

[KENAT]

Sompting, true. But to a 16 or so year old as I was then the 500+ pounds looked real good.

Thanks Tick, nice summary.

KENAT,

Have you reminded yourself of faq731-376 recently?

 

[SomptingGuy]

KENAT: What's up, no £ on your keyboard? I used to really hate that when I was over there.

- Steve

 

[TheTick]

Another quote from the same Stratfor report (bold emphasis mine). Seems it's a matter of how bad we want it to get before it gets better.

Societies have two sorts of financial crises. The first sort is so large it overwhelms a society’s ability to overcome it, and the society sinks deeper into dysfunction and poverty. In the second sort, the society has the resources to manage the situation — albeit at a collective price. Societies that can manage the crisis have two broad strategies. The first strategy is to allow the market to solve the problem over time. The second strategy is to have the state organize the resources of society to speed up the resolution. The market solution is more efficient over time, producing better outcomes and disciplining financial decision-making in the long run. But the market solution can create massive collateral damage, such as high unemployment, on the way to the superior resolution. The state-organized resolution creates inequities by not sufficiently punishing poor economic decisions, and creates long-term inefficiencies that are costly. But it has the virtue of being quicker and mitigating collateral damage.

Like most, I have no sympathy for homeowners in over their heads. Problem is that it's gotten way bigger than that.

 

[KENAT]

No, the £ is lacking.

I haven't got a house yet, waiting for the market to get to a realistic level, houses that 6 or so years ago were less than $100,000 are still advertised at more than twice that round our way and the prices are still dropping.

So for me house prices dropping is good. However, to buy that home I'll need a job, which with the current state of things may be a risky assumption. Also I'll need a mortgage and though we've cut back and are trying to save it's not going as well as I'd hoped so we may struggle with a large deposit too, though we have a plan...

I'm generally againste the bail out in principle, but I'll admit I don't want that principle to cost me my job.

KENAT,

Have you reminded yourself of faq731-376 recently?

 

[TheTick]

I'm generally againste the bail out in principle, but I'll admit I don't want that principle to cost me my job.

[!]Another great synopsis![/!]

 

[IRstuff]

Lots of hype about there being no crisis. The reality speaks otherwise.

There were a grand total of 5 IPOs in the entire last quarter, contrasted with 37 IPOs for the same quarter last year. That's an 86% drop, which means the VCs are unable to recoup their investments. Even the quarter ending in June was sluggish, with only 13 IPOs.

TTFN

FAQ731-376

 

[TheTick]

£ = <alt> + 0163
remember that the numbers need to be typed on the number pad

 

[jetmaker]

The financial mess is alos a produce of the media. They hype it up and make people panic. That in turn cause more panic and a downward spiral insues.

The bailout (no refered to as a rescue package) is flawed. If the gov't buys all these bad debts, then the taxpayer is saddled with all these homes/properties that are in states of disrepair. The gov't would need to spend $$$ fixing and maintaining these assets until they could sell them, otherwise they will eventually become worthless and the taxpayer will pay the piper.

The cause of the problem is the decrease in housing values. The gov't needs to freeze all arm adjustment until something better can be resolved. This would stop the hemoraging of the housing market, dramatically slowing the increase in forclosures and thus helping financial institutions. The gov't should then allow all homeowners to refinance their homes at the current market rate, and reimburse banks for the difference on their books. In exchange for the reimbursement, the gov't gets stock in the bank. Homeowners who refinance at the lower home value would be taxed over X years until the difference was made up. Something like this seems more equitable as it is addressing the main issue, and not giving the money away to wallstreet.

As someone who bough a house near the high, I have to live with the fact that my house is worth less than what was paid. However, I was responsible and made sure that I could afford the payments. I see no reason to help out the greedy, stupid, or ignorant, without helping those who were responsible also.

jetmaker

 

[IRstuff]

The issue isn't necessarily with the loans that have already defaulted. The issue is with the loans that they don't have any idea whether they will default or not. Those are also part of the "toxic" assets. Because you don't know the quality of the assets, you have to bump up the loss reserves. In many cases, 90+% of the assets have no problems what

Freezing ARM rates isn't going to help either, since many people were simply marginal at the original ARM rates; any job changes or financial emergencies tank the borrowers' reserves, causing them to default, or, they get transferred, and can't unload their house because they're negative and have no money to make up the difference. Our neighbors are in the middle of a divorce and got foreclosed because they max'd out their equity at the peak of the market, but afterwards, they were negative on the loan, and couldn't make the short sale work either.

TTFN

FAQ731-376

 

[stanier]

I have heard no mention of going after those that made money out the whole scam? What about the big bonuses paid to execs in the financial market/ Why are not these people in Alcatraz? They make Al Capone look like a modern Robin Hood.

It is a bit like governments crying over the increase in the medical budget. Do they go after the grossly over paid doctors?

Whilst we are on it, the lawyers who drew up the financial instruments that have fallen apart should be hunted down and stripped of all their assets. They were knowledgable in what they were doing.

A few lynch mobs would not go astray for the midery imparted on the populous. Dont you guys get angry in the US?

 

[KENAT]

Stanier, yeah people get angry in the US.

However, they also have the right to bear arms.

How angry do you really want them to get?

KENAT,

Have you reminded yourself of faq731-376 recently?

 

[KENAT]

http://www.msnbc.msn.com/id/26953481/?GT1=43001

Well the senate passed the bailout 'relief' bill.

KENAT,

Have you reminded yourself of faq731-376 recently?

 

[stanier]

For years the engineers of the world have had to bear the responsibility of development in real terms. But who gets the rewards? Lawyers and financiers in their plush offices. Most engineering offices are tawdry places with poor furnishings, aircon that doesnt work etc etc.

Salaries are not comparable between these professions and engineers.

The guy who invented the wheel never earnt a buck . The lawyer charged him for the patent, the insurance salesman took him for a policy, the advertising guru insisted he had a campaign, the doctor charged an arm and leg to heal the wounds he sysustained in making the thing...

Time to redress the balance and chuck the lawyers and financiers out of their comfortable dwellings and take away their fat fees.

How many designers earn more than the company lawyer or accountant?

Angry, I am damn angry. Spent my life building up a nestegg to retire on for these fools to squander it. What a mug believing that they had something special in the investment world. They are just punters at the track with our money.

So why are not the authorities tracking them down and putting them in jail? Surely we dont believe we need them to straighten out the financial system they stuffed up in the first place?

Where are the financial regulators that supposed to stop the greed of the banks? perhaps they dont want them in jail or the great unwashed will begin to look at them too.