Crisis may make 1929 look a 'walk in the park'

[Zeebadee]

Crisis may make 1929 look a 'walk in the park' - Telegraph

As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues things are rapidly spiralling out of their control Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects. As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions. "Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression. "It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Is this just normal "the sky is falling" rhetoric or is the world financial system really headed for massive upheaval? Have we any way to protect ourselves?

With a financial system that's been de-coupled from any form of physical asset, it seems to me that all we really have is a lot of paper, backed only by the faith that people believe it's actually worth something. When that faith is lost, the whole system is going to collapse.

[Charlatan]

All banks want to do is survive for the longest possible time, as the people that work there are supposed to get paid for as long as possible, so underhanded things could happen, but what this article suggests is a conspiracy of all the banks to make a way out of hardship, or a quick steal. Well if they are all in on it, then there is a problem, as any single bank not in on it would not follow suite, pointing out the problem to the consumers and going to make a killing where people pull out of the banks going down to reinvest in them. While saying there might be a conspiracy to make a living, there may be a counter conspiracy with all the banks making it good enough to expose the problem, so there is probably no conspiracy to make a quick steal.

If the banks are acting desperate, then they probably are, all together, in a big mess, logically.

[xyzer]

This may end up being a true test for the Fed. If the "freeze on teaser rates" does not work steeper cuts in the discount rate may be in order?
Here is a pretty good account of whats going on..

Government Scrambles to Deal with Mortgage Crisis - Real Estate * US * News * Story - MSNBC.com

As a loser of considerable(in my modest terms) investment dollars in the recession at the at the end of Clintons term, I'm getting jumpy about this one? Corporate greed along with borrower stupidity, can sure cause problems.

[rmnunez]

I don't understand this mortgage crisis problem at all. It seems more like lots of people are grumpy because they can't afford to buy a house since they are so expensive. The high cost of buying a house has a lot to do with how easily banks will finance the purchase, but that financing costs a lot of money which profits banks considerably. If the answer is to reduce bank profits, they won't lend money as easily to finance these purchases.

[Sonart]

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Quote by: rmnunez I don't understand this mortgage crisis problem at all.

Yes, it's quite obvious that you don't.

Quote by: rmnunez If the answer is to reduce bank profits, they won't lend money as easily to finance these purchases.

Then perhaps the banks shouldn't be making their profits by depending on a way overpriced housing bubble, sold to people who can't afford it, to keep on expanding forever and ever. But they did, and now not only are 100s of thousands of Americans being thrown out of their homes, but the banking industry is left holding billions in uncollectable mortgage loans... debts they've been making even more profits on by trading back and forth internationally... hence the threat to the global economy.

And there's worse on the horizon, rm, thanks in part to our hero, George Bush and his bankruptcy "reform".

Credit Card Debt Next Crisis? --"The sub-prime mortgage crisis has the attention of many, but credit card defaults are rising, up 30%.

A study of the new bankruptcy law accurately reports that the new law has doubled the cost to consumers to file, whether Chapter 7 or Chapter 13."-- Dec. 2007

Debt crisis spreads to plastic --"Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come."-- Dec. 2007

New debt crisis is on the cards - literally --"It seems US consumers, who had previously been borrowing against the value of their properties, resorted to other forms of borrowing when they had exhausted their access to mortgage credit. And banks, which no longer found mortgage lending lucrative, encouraged credit card consumers with lax lending standards."-- Dec. 2007

Making profits by handing out mortgages and credit like so much candy to anyone who asks for it is just plain, stupid greed, Rm.

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[rmnunez]

So I take it you think the problem is that banks are making too much profit. That's a popular perspective, any bankers here? I'd figure everyone would agree it would be nicer if banks didn't profit as much. There are laws against their charging excessive interest (usury) but I don't know what rate is deemed excessive. However, the rates charged for mortgage loans are hardly usurious, last I checked they were around 5-6%, do you think this is too much?

[Sonart]

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Quote by: rmnunez So I take it you think the problem is that banks are making too much profit.

I gotta say, rm, when you don't want to see something, you really don't want to see it. So yeah, if you want to put it that way, the mortgage lenders wanted to make too much money. They showed it by making too many "subprime", adjustable rate loans for overpriced homes to people who couldn't really afford them on the speculation that home equities would continue to keep rising indefinitely. In addition, many mortgage lenders sold the rights to their debts to other institutions in the form of Mortgage Backed Securities. Anyone holding these securities is now also facing serious losses as borrowers default and housing prices continue to fall, and that includes many huge overseas financial institutions.

From there it just gets downright funky...

--"Individual and institutional investors holding MBS faced significant losses, as the value of the underlying mortgage assets and payment streams declined and became difficult to predict. In addition, certain legal entities designed to isolate this risk from the originating lenders, called collateralized debt obligations (CDO) and structured investment vehicles (SIV), held substantial amounts of MBS. As the value of payments into these entities declined, their value also declined, forcing the sale of MBS at fire sale prices in some instances.

The widespread dispersion of credit risk and the unclear impact on large banks, MBS, CDO, and SIV caused banks to reduce their loans to each other or make them at higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of commercial paper was impacted. The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage the lending of funds to worthy borrowers and to re-invigorate the commercial paper markets.

The combination of impacts due to credit risk and liquidity risk caused several major corporations and hedge funds to shut down or file for bankruptcy. Stock market declines among both depository and non-depository financial corporations were dramatic. Many hedge funds and other institutional investors holding MBS also incurred significant losses.

With interest rates on a large number of subprime mortgages due to adjust upward during the 2008 period, U.S. legislators and the U.S. Treasury Department are taking action. A systematic program to limit or defer interest rate adjustments was implemented to limit the impact. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. Restrictions on lending practices are under consideration. Many lenders have stopped subprime lending or dramatically curtailed it."--


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[rmnunez]

I really don't see how this should be such a big problem. If we figure banks got too greedy and pushed too many mortgages so people qualified too easily resulting in sellers overpricing properties, now that too many borrowers are defaulting and losing their acquisitions in foreclosures, banks will need to charge more interest to cover the growing level of risk. This should make mortgages harder to acquire and as a consequence bring down housing prices.

[Sonart]

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Well I'm pleased that YOU don't see it as a problem, rm... I'm sure we're all gratefully reassured and if you were to simply inform the banking industry of your simple solution, things will right themselves in no time.

Until then, Wall Street Journal weighs in on foreclosure crisis

Fed Offers Banks Loans Amid Crisis

How the Subprime Loan Crisis Is Spreading

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[rmnunez]

For banks and financiers it makes sense to exagerate this a bit, with any luck the Fed will lower interest rates so they can sell their financial services more easily, they might even be able to get some discount loans or emergency bailouts.

But this ought to 'right itself' automatically applying simple supply and demand concepts. The claim is made housing is overpriced and this would have to reflect a strong demand. If its not hard to sell overpriced property, since these are bought with mortages, likely its too easy to get financing. If financing becomes more difficult and harder to qualify for, then there will be fewer buyers and the sellers will need to lower prices.

Just look at the thematic advertisements on this thread, want one of those "Bad Credit Loans"? You can get one and buy a million dollar home in Malibu too, it makes no difference whether you've got derogatory comments in your credit report or a negative rating, no credit history -anyone can get easy financing and the interest isn't that high.

Banks are bargaining on the climbing real estate prices guaranteeing the property will gain value quickly and you (or they if they foreclose) can sell it and cover the financing. If instead we 'burst' the balloon and foreclose on millions, tighten the credit supply and shut down the market, buyers will disappear, they won't be able to get easy financing so there will be fewer of them out there willing to speculate and the sellers will have to lower their prices or wait a lot longer.

[Milton Bradley]

Wow, your right RM, we should just sanction this greed, and bad business practices by overlooking the fundamental causes. Pure genious.

[Sonart]

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Quote by: rmnunez Banks are bargaining on the climbing real estate prices guaranteeing the property will gain value quickly and you (or they if they foreclose) can sell it and cover the financing. If instead we 'burst' the balloon and foreclose on millions, tighten the credit supply and shut down the market, buyers will disappear, they won't be able to get easy financing so there will be fewer of them out there willing to speculate and the sellers will have to lower their prices or wait a lot longer.

Y'think, rm??? You figure that out on your own or from my links. Another term for that is called, "The collapse of the Housing Market".

Too soon to look for housing market bottom -- June 2007

US Housing Crash Continues -- Jan. 2008

"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?

Quote by: Milton Bradley Wow, your right RM, we should just sanction this greed, and bad business practices by overlooking the fundamental causes. Pure genious.

Indeed... the market left to it's own greedy, short-sighted devices is a wonder to behold. Of course, you can always blame the greedy, shortsighted consumers.


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[icurhuman2]

There's no way a U.S. recession can be avoided. The sub-prime debacle is only the most glaring problem confronting business and consumers alike. What should stand out is the incongruous rise in oil price while there's a decline in business, this is usually the other way around as a decline brought on by a recession usually brings down energy prices through demand-destruction. Why is this not happening? The only answer is that oil supply cannot keep up with demand, even with a demand-destroying recession waiting in the wings.
Peak-Oil is here right now! There are no alternative fuels available that can take the place of oil for the mass transport of people, food and consumable product and we're looking into the abyss.
Some small pleasure will be taken when those who can still afford to buy a luxury car will not be able to drive it anywhere as the masses decide that taking pot-shots at drivers relieves the hunger in their bellies for the non-existent food they used to buy from the now non-existent supermarkets.

[Compugasm]

Couldn't it also be argued, that bailing out these "greedy" people and banks, only continues the cycle of greed and stupidity? Stupid and greedy are the only groups identified as needing help with mortgages. If you were too "stupid" to realize you were buying a house you couldn't afford 5yrs ago with an ARM, you shouldn't be allowed to keep your house now. Too bad, move back into an apartment until your situation improves.

Like everything else in real estate, a lot depends on your location.... The only region of the country that saw an increase was the Midwest, where sales jumped by 30.8 percent.

Doesn't that quote basically illustrate that everything is overpriced? What about the "smart" people who chose not to take the risk? Why allow the stupid and greedy to keep their homes?

With fewer new households in the market for a home, it will take that much longer to sell off the backlog of unsold houses.

Again, isn't this affirmation there are few buyers, because the market is overpriced?

If demand from investors for new securities weakens, that could make less money available for new mortgages, further weakening demand for homes.

So if Company A is not buying loans (securities) from Company B, Company B will not have as much to lend to the new buyers? Ok, that makes sense. But how does that equasion "weaken demand for homes"? In fact, as a bank, if you had less money to lend out, then you'd be less willing to risk it on sub-prime borrowers.

So, less money to lend out, seems to automatically take care of greedy lenders, and stupid borrowers. I've come full circle, stupid and greedy should not be bailed out.

[rmnunez]

The market is overpriced because its easy to get the financing. By adjusting the difficulty in getting a mortgage one can reduce the number of buyers and thereby lower the prices.

[Milton Bradley]

Quote by: rmnunez The market is overpriced because its easy to get the financing. By adjusting the difficulty in getting a mortgage one can reduce the number of buyers and thereby lower the prices.

Yeah, that's what banks want, lower prices.

[rmnunez]

No, but banks would prefer lower risk.

So why is Bank of America buying Countrywide?

[Compugasm]

Quote by: rmnunez So why is Bank of America buying Countrywide?

A bank could offset losses with deposits?

For Bank of America, buying Countrywide will gain it a commanding position in mortgages. - Wall Street Journal

[rmnunez]

Well BofA bailed Countrywide out for $2 bil a couple of weeks ago.

[Zeebadee]

Quote by: rmnunez No, but banks would prefer lower risk. So why is Bank of America buying Countrywide?

One reason only: BofA believes that they can make money from the deal.