Fed Creates $1 Trillion 'Out of Thin Air"

[Puppycow]

Fed to Buy $1 Trillion in Securities to Aid Economy (http://www.nytimes.com/2009/03/19/business/economy/19fed.html?_r=1&hp)

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.

The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.

Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.

But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.

:covereyes
Looks like the odds that I'm going to lose my bet (http://forums.randi.org/showthread.php?t=132112) increased.

[Oliver]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i&w=1&t=l&a=2

[hamelekim]

It's always a good bet to hold some gold as a hedge against inflation.

Considering the amount of money being printed right now to pay for all of this banking mess, not to mention the military, etc... I can't see gold being a bad thing right now, even if it was just a couple of thousand dollars.

Better safe than sorry imo.

[rjh01]

The government is allowed to print as much money as it likes as long as it does not risk inflation. This can be very difficult to do. The big risk is that there is a recession with inflation.

[charles brough]

I understand the "flooding the system with new money" is a process that goes on between the Treasury Department and the Federal Reserve and consists simply of issuing bonds and notes and then having the other department buying them with the same funds. Anyway,

the whole question is how is all the money contracted and voided when it is no longer need to stimulate the economy? Does anyone really know? Can it be returned and taken out of the system as needed? I think there is every reason to believe that the economy is going to turn around with a bang very soon, and it will be inflationary hell if that money cannot be contracted.

Who knows?

[truethat]

Honestly I'm beginning to wonder if they shouldn't have just let everything fail in a natural way, all of this seems a bit like borrowing from Peter to pay Paul which is how American's found themselves in the mess in the first place.

[hamelekim]

Honestly I'm beginning to wonder if they shouldn't have just let everything fail in a natural way, all of this seems a bit like borrowing from Peter to pay Paul which is how American's found themselves in the mess in the first place.

Exactly.

The argument of many Economists who follow the Austrian school of economics argue exactly this.

That the bailouts are only making the problem worse and that it will only extend the painful period of economic troubles.

Better to just clear out the system asap and get on with the business of making money.

It's going to hurt, sure, but then we never should have allowed businesses to become "too big to fail". It's a failure of government to police the economy and we have seen the result of that.

[Broken Spectrum]

This is an article I wrote on the subject.

The U.S. federal reserve has taken the driver’s seat and has now put us on track to have a head on collision with hyper-inflation, effectively killing the economy, and ruining our currency as they announce plans to pump 1.2 trillion into the economy by buying mortgages and government debt. With less and less buyers hungry for government notes as our deficit climbs to new records every day, the treasury has found itself unable to sell enough notes to cover their credit. U.S. debt has now become a risk that few want to take, as apparent noting that just a few weeks ago, Secretary of State Hillary Clinton rushed to China, urging them to continue buying our debt as prominent figures in the Chinese government are beginning to lose faith in our ability to repay these loans.

In case this all sounds odd to you, it should. Basically, what is happening here, is that the government has begun to print money in order to pay itself, which mind you, is never good. This causes the value of our currency to devalue, which will begin to cause super inflation everywhere. Just about the entire world trades in U.S. Dollars, with most commodities, including oil, being affected. I’m sure that rising gas prices have not escaped anyone, and many are wondering why, given the world wide depression. When more money is printed, the value of the dollar declines, which causes everything that is traded on the dollar to go up in price. If you think about it, the government is helping to increase the transfer of wealth from the U.S. to foreign oil producers. In the end, we have even less money, while these other nations have more of our money.

As the fed creates more money out of basically, thin air, the value of the money that every person here in the U.S. holds is steadily becoming worth less and less. This in turn causes banks to lend less money, slows business development, and increases unemployment as businesses hemorage money beyond their control. This all in turn slows the economy even further, pushing us further towards the next great depression. Now while we’re already struggling in the water, the government has done more to push us out to sea then pull us back to shore.

There is only one way out of this, don’t let anyone tell you otherwise, because they are wrong. We have to begin immediately cutting government spending and begin paying down government debt. Stop the printing of money and begin slowly reducing the amount of “bogus” money in the system in order to help bring stability back. Stop intervening so heavily in the market and allow bad decisions to catch up with those who made them. There are plenty of people willing and ready to pick up the ball where others have dropped it, and by encouraging these poor behaviors by saving the people that made bad decisions, the ability to continue on with stronger, smarter competitors in the market is diminished tremendously.

Please, when you go to the polls the next time, consider heavily what your vote might do to this country. Because if you vote the very same people back into office that have done this, they will surely bring us the rest of the way down. Don’t keep this information to yourself either, let everyone know the problems here and let them know just how important this is. Your future depends on this.

[charles brough]

Honestly I'm beginning to wonder if they shouldn't have just let everything fail in a natural way, all of this seems a bit like borrowing from Peter to pay Paul which is how American's found themselves in the mess in the first place.

I don't think so! We have enough information to get a rather realistic picture of what would happen if we just did nothing and let the global economy undergo total deflation. In the Great Depression here in the States, the country was flooded with destitute people---the homeless---who wandered around and begged for food from door to door. People helped them; but what about now? People would be afraid of them and not helpful. What about the fact that the population has increased and resources have not, that living standards have been declining for a decade or more already and that we already have a huge debt which the government did not have then.

In other words, there would be starvation, rioting and even insurrections. As soon as a hint of more economic decline is in the news, gun ownership shoots up. Of course, it would result in the whole break down of the global economy as well because every nation would throw up trade restrictions to protect their own economies. The US would be blamed for the biggest economic disaster of modern times---and for letting it get worse and worse . . .

Also, to completely deflate, the government would have to allow all the banks to fail and to remove the FDIC protection.

Finally, government tax income would drop, making it impossible to finance the huge government debt without increasing taxes. The worse the economic situation would become, the higher the taxes would be! Can you imagine how much business would like that? To cut government expenses, the gov. would have to eliminate Social Security and Medicare, cut the military down to nothing, and stop all infrastructure improvements and eliminate Unemployment insurance.

So, we would run full circle. The government would be forced to deficit finance on a massive scale---just what it is already doing.

[truethat]

Interesting. I work with the local military base from time to time getting their recruiters off base apartments, ran into one of my tenants last night. He told me that Military is becoming over enrolled at this point. Now that Iraq is almost over the military is a nice little safety house for the soon to be homeless.

[hamelekim]

I don't think so! We have enough information to get a rather realistic picture of what would happen if we just did nothing and let the global economy undergo total deflation. In the Great Depression here in the States, the country was flooded with destitute people---the homeless---who wandered around and begged for food from door to door. People helped them; but what about now? People would be afraid of them and not helpful. What about the fact that the population has increased and resources have not, that living standards have been declining for a decade or more already and that we already have a huge debt which the government did not have then.

In other words, there would be starvation, rioting and even insurrections. As soon as a hint of more economic decline is in the news, gun ownership shoots up. Of course, it would result in the whole break down of the global economy as well because every nation would throw up trade restrictions to protect their own economies. The US would be blamed for the biggest economic disaster of modern times---and for letting it get worse and worse . . .

Also, to completely deflate, the government would have to allow all the banks to fail and to remove the FDIC protection.

Finally, government tax income would drop, making it impossible to finance the huge government debt without increasing taxes. The worse the economic situation would become, the higher the taxes would be! Can you imagine how much business would like that? To cut government expenses, the gov. would have to eliminate Social Security and Medicare, cut the military down to nothing, and stop all infrastructure improvements and eliminate Unemployment insurance.

So, we would run full circle. The government would be forced to deficit finance on a massive scale---just what it is already doing.

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

[Puppycow]

the whole question is how is all the money contracted and voided when it is no longer need to stimulate the economy? Does anyone really know? Can it be returned and taken out of the system as needed? I think there is every reason to believe that the economy is going to turn around with a bang very soon, and it will be inflationary hell if that money cannot be contracted.

Who knows?

It's done by raising interest rates. IIRC in the late 70's or early 80's the Fed raised interest rates to very high levels to get inflation under control. And it worked.

ETA: Historical interest rates (http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt)
High water mark:
06/1981, 19.10

[a_unique_person]

Interesting. I work with the local military base from time to time getting their recruiters off base apartments, ran into one of my tenants last night. He told me that Military is becoming over enrolled at this point. Now that Iraq is almost over the military is a nice little safety house for the soon to be homeless.

Afghanistan doesn't do it for you?

[KoihimeNakamura]

Out of curosity, this wouldn't have been the Air Force, would it?

[KoihimeNakamura]

Fed to Buy $1 Trillion in Securities to Aid Economy (http://www.nytimes.com/2009/03/19/business/economy/19fed.html?_r=1&hp)



:covereyes
Looks like the odds that I'm going to lose my bet (http://forums.randi.org/showthread.php?t=132112) increased.

I'm not too surprised. The economy just hasn't hit bottom yet, that's all.

[balrog666]

I'm not too surprised. The economy just hasn't hit bottom yet, that's all.


It might never hit bottom if you can keep digging the hole deeper and deeper, faster and faster. /Obama-mode

[TraneWreck]

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

Every credible source I've looked at basically agrees that the Great Depression was radically exacerbated by not spending enough. Krugman wanted Obama to double the stimulus bill.

I don't have a problem with money being dumped into the economy. I do, however, have a major problem with giving all of that money to the fools who caused this crisis in the first place.

AIG basically allowed thousands of banks to take out credit default swaps on mortgages they didn't hold. If we bail them out, we're essentially paying off those obligations, which shouldn't exist in the first place.

I think it would be better to dump that money into businesses, corporations, and banks that are either new or have proven ethical behavior.

The money has to be spent, though.

[hamelekim]

Every credible source I've looked at basically agrees that the Great Depression was radically exacerbated by not spending enough. Krugman wanted Obama to double the stimulus bill.

I don't have a problem with money being dumped into the economy. I do, however, have a major problem with giving all of that money to the fools who caused this crisis in the first place.

AIG basically allowed thousands of banks to take out credit default swaps on mortgages they didn't hold. If we bail them out, we're essentially paying off those obligations, which shouldn't exist in the first place.

I think it would be better to dump that money into businesses, corporations, and banks that are either new or have proven ethical behavior.

The money has to be spent, though.

The social and economic environment was different back then. Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.

Printing more money to get people to spend again is only going to create more debt.

We aren't going back to the way things were before all of this happened. People can't go back to that and they won't.

[mhaze]

....There is only one way out of this, don’t let anyone tell you otherwise, because they are wrong. We have to begin immediately cutting government spending and begin paying down government debt. Stop the printing of money and begin slowly reducing the amount of “bogus” money in the system in order to help bring stability back. Stop intervening so heavily in the market and allow bad decisions to catch up with those who made them. There are plenty of people willing and ready to pick up the ball where others have dropped it, and by encouraging these poor behaviors by saving the people that made bad decisions, the ability to continue on with stronger, smarter competitors in the market is diminished tremendously.

Please, when you go to the polls the next time, consider heavily what your vote might do to this country. Because if you vote the very same people back into office that have done this, they will surely bring us the rest of the way down. Don’t keep this information to yourself either, let everyone know the problems here and let them know just how important this is. Your future depends on this.

Yep, you pinned that shinking dollar to the dartboard before it got too small to see.

Bolded "stuff to act on".

[TraneWreck]

The social and economic environment was different back then. Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.

Printing more money to get people to spend again is only going to create more debt.

We aren't going back to the way things were before all of this happened. People can't go back to that and they won't.

That is not at all what's going on with the economy right now.

The driving issue of this economic collapse was irresponsible leveraging of sub-prime mortgages, deregulation that allowed insanely risky behavior to become acceptible, and outright fraud as in Maddoff.

If you read Krugman and other economists who studied the Great Depression, they are all recommending massive stimulus. I agree with this sentiment. FDR's spending programs started to turn the situation around until he became fiscally conservative after his reelection in 1936.

As I said earlier, the Geitner plan just coveres the collective asses of the people who's incompetence and fraud got us in this mess. That being said, we have to invest in massive stimulus to turn the boat around.

[TraneWreck]

There is only one way out of this, don’t let anyone tell you otherwise, because they are wrong. We have to begin immediately cutting government spending and begin paying down government debt. Stop the printing of money and begin slowly reducing the amount of “bogus” money in the system in order to help bring stability back. Stop intervening so heavily in the market and allow bad decisions to catch up with those who made them. There are plenty of people willing and ready to pick up the ball where others have dropped it, and by encouraging these poor behaviors by saving the people that made bad decisions, the ability to continue on with stronger, smarter competitors in the market is diminished tremendously.

This was the argument made in 1936 that caused a severe relapse in the Depression after FDR's spending had begun to bring the economy back.

Every credible economist and Depression historian I've read identifies your plan as the exact worst thing we could do.

[Puppycow]

This was the argument made in 1936 that caused a severe relapse in the Depression after FDR's spending had begun to bring the economy back.

Every credible economist and Depression historian I've read identifies your plan as the exact worst thing we could do.

I agree with you too. And so does Ben Bernanke.

[lomiller]

Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.


Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.


Printing more money to get people to spend again is only going to create more debt.

Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.

[hamelekim]

That is not at all what's going on with the economy right now.

The driving issue of this economic collapse was irresponsible leveraging of sub-prime mortgages, deregulation that allowed insanely risky behavior to become acceptible, and outright fraud as in Maddoff.

If you read Krugman and other economists who studied the Great Depression, they are all recommending massive stimulus. I agree with this sentiment. FDR's spending programs started to turn the situation around until he became fiscally conservative after his reelection in 1936.

As I said earlier, the Geitner plan just coveres the collective asses of the people who's incompetence and fraud got us in this mess. That being said, we have to invest in massive stimulus to turn the boat around.
The over leveraging is the creation of debt. It's money owed to someone else. Too much debt and not enough money to pay that debt.

As for whether or not we need massive stimulus. I guess we will find out in the next year or so if that was the solution.

[hamelekim]

Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.

Because almost all banks around the world where involved in these massive bets that failed.

It's more complex than that, and I still think that personal debt has to play a part in it. We have had negative savings or close to zero in the west for a few years now. People went into debt and now they don't have the money to continue spending without getting further over their heads in debt.

Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.
The banks don't have any money though, or very little if they do. They almost all made bets they couldn't make good on.

My understand is that the banks are hording money because they don't want to lend it out because it would be too risky. They also want to use it to buy up other bad banks and companies.

They should be lending it but they don't know how the other banks are doing so they don't want to lend money to anyone at this point.

Also, don't you think that inflation is a problem when printing all this money? I know they say that there is deflation, but that is only in specific areas. I know that gas and some other basic consumer goods like food have been going up in price, not down. Printing more money would only make these prices increase further, would they not?

Also, didn't the dollar go up because people thought it was a safe haven? It wasn't anything to do with the state of the US economy but a fear of instability.

The dollar had a huge drop the other day because of the plan to print more money.

[mhaze]

Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.



Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.This is very confused thinking. Causes and effectfs are pulled out of thin air to form logical constructs which are wrong.

Can the FED do high interest rates to suppress inflation? Not if the inflation is due to it's having to pay that very interest rate on its obligations, and not if theo money it prints funds government programs.

They are struggling now to keep rates low as long as possible.

[Puppycow]

This is very confused thinking. Causes and effectfs are pulled out of thin air to form logical constructs which are wrong.

Can the FED do high interest rates to suppress inflation? Not if the inflation is due to it's having to pay that very interest rate on its obligations, and not if theo money it prints funds government programs.

They are struggling now to keep rates low as long as possible.

Actually, I think he's got it right and your logical construct is mistaken. Inflation is caused by too much money chasing too few goods, not having to pay interest.

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

[Piggy]

Exactly.

The argument of many Economists who follow the Austrian school of economics argue exactly this.

That the bailouts are only making the problem worse and that it will only extend the painful period of economic troubles.

Better to just clear out the system asap and get on with the business of making money.

It's going to hurt, sure, but then we never should have allowed businesses to become "too big to fail". It's a failure of government to police the economy and we have seen the result of that.

No.

The aftermath of Lehman was enough to scare the living daylights out of everyone and put paid to that notion.

The credit freeze isn't something that snuck up on us slowly. It was (literally) an overnight reaction to Lehman.

The resulting chain reaction has already pushed up the unemployment rate, default rate, and business closings.

If we let the big boys fail, I don't know of any scenario that avoids global depression. It's like Joshua playing Global Thermonuclear War -- all scenarios lead to "lose".

[Piggy]

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

Global depression is not "short term pain".

Granted, that does not make the risk of future inflation go away. It's real, and it's serious.

I've heard folks criticize Obama for spending so much money, then turning around and talking about keeping debt under control. But if you're going to do one, you have to do the other.

I don't know if their strategies will succeed, but right now, borrowing and printing money appears to be necessary.

When your house is on fire, you don't tell the firemen to stay away because you're worried about water damage.

The trick now is to find the "sweet spot" -- how much can we afford to go into the hole now without causing runaway inflation later, and how much pain will people tolerate right now in order to keep down the debt and inflation.

Unfortunately, the current situation is widely misunderstood, and on top of that folks seem to want it both ways -- let's somehow get the economy going without spending any borrowed money or printing new money.

[Piggy]

The social and economic environment was different back then. Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.

Printing more money to get people to spend again is only going to create more debt.

We aren't going back to the way things were before all of this happened. People can't go back to that and they won't.

No, too much debt is not the problem right now.

Too much debt was the problem 2 years ago. Now that situation has blown up.

The problem right now is getting the core of the financial system working again -- unfreezing the credit market, untangling the default swap mess, and so forth.

Until that's done, it's hard to see how we're going to be able to address unemployment, get the trillions of dollars in sidelined money back into the economy, etc.

[mhaze]

Actually, I think he's got it right and your logical construct is mistaken. Inflation is caused by too much money chasing too few goods, not having to pay interest.

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debtYou misunderstand the distinction I make which is relevant to current circumstances. Simply stated, if the expenses of government grows unrestrained and receipts do not cover the expenses, then money is printed to pay those bills. This causes inflation quite obviously and in fact is the cause of major inflations and hyperinflations. As to the relationship of interest to the equation, it should be obvious what would happen to our servicing $11T in debt if interest rate goes to 8%.

If not let's go into that. And by the way, you cannot assert that a ratio - of debt to GDP is relevant, instead of the numerical number, without simultaneously acknowledging the relevance of the other ratio, "Interest" which relates the time value of money.

So in summary, I think that you and lomiller seem to be confusing the classical paradimn of inflation and recession as controlled by FED money supply with the specifics of the current actual problem.

[JihadJane]

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

- Thomas Jefferson

[TraneWreck]

The over leveraging is the creation of debt. It's money owed to someone else. Too much debt and not enough money to pay that debt.

As for whether or not we need massive stimulus. I guess we will find out in the next year or so if that was the solution.

Again, that leveraging was only part of the issue. The real problem is not the debt itself, but the fact that it was leveraged so many times that the debt has no relation to the initial value, be it a mortgage or other financial instrument.

Cutting goverment spending in this scenario will do nothing to deal with the major issues. There are only two real options with regard to these banks and companies that engaged in this nonsense: 1) let them fail 2) somehow pay off those obligations.

Letting them fail would destroy business in a way that I don't think anyone is prepared for. Take just AIG. They insure so many aspect of modern business, from the materials GM uses to build their cars, to construction equipment, to basically every aspect of our lives. Because of their size they're able to insure business transactions that no one else can. Thus, if they are allowed to go bankrupt, all of those activities will not be insured. Without insurance a great many deals will be stopped, businesses will have further difficulty getting loans, and on down the line. Most people have correctly judged that this would be terrible.

So the only remaining option is to bail them out. Again, my problem is not with the concept of a governmnet bailing out a private company, it's with the fact that you're giving the same corrupt and incompetent figures money to essentially pay off gambling debts. I think that money should go to more responsible companies so they can take over AIG's obligations.

Furthermore, the failure of this stimulus plan will not show the concept of stimulus itself to be failure, it will merely show that it was a bad idea to bail out fraud without consequence.

[Piggy]

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

- Thomas Jefferson

There's no record of Jefferson every saying or writing that, and no reason to believe that he did.

And in any case, the issue at hand is not allowing private banks to control the issue of money.

[lomiller]

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
IMO it would have been better to sort by the OECD numbers as it’s more up to date then the CIA factbook numbers. The later doesn’t include 2008, which changes the US ranking quite a bit.

[lomiller]

Simply stated, if the expenses of government grows unrestrained and receipts do not cover the expenses, then money is printed to pay those bills.

Wrong. The US borrows to cover it’s debts, this in itself does not create money. The Fed chooses to buy or sell this government debt, when it buys it now money is created, when it sells it money is taken out of the system.

Because the Fed is an arms length body it’s choice to buy or sell US debt (thus increase the money supply) is based almost entirely on it’s inflation target which is normally 2%. It will, however pump as much money into the US economy as it can and still keep inflation near that target in order to promote economic growth.

[gdnp]

There's no record of Jefferson every saying or writing that, and no reason to believe that he did.

And in any case, the issue at hand is not allowing private banks to control the issue of money.

It would be an unusual statement for someone who died long before the continent had been conquered.

[charles brough]

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

Just how do you think that the government would get enough tax money out of a constantly deflating economy to pay interest on the huge national debt we built up and even pay interest on the huge balance of payments debt we have? We already pay heavy taxes and who would vote for large tax increases as wealth and income continues to slide?

As I said in the last paragraph, the only alternative to bankrupty is inflating. Saying it is better to let the economy collapse is like saying, "if Iran gives us any more trouble, drop a few atomic bombs on them." It is not a viable solution and is not going to happen.

[charles brough]

Wrong. The US borrows to cover it’s debts, this in itself does not create money. The Fed chooses to buy or sell this government debt, when it buys it now money is created, when it sells it money is taken out of the system.

Because the Fed is an arms length body it’s choice to buy or sell US debt (thus increase the money supply) is based almost entirely on it’s inflation target which is normally 2%. It will, however pump as much money into the US economy as it can and still keep inflation near that target in order to promote economic growth.

I think you are in error there. It might be that the Treasury buys back Dept. debt it has already delivered to the Fed. Where do the funds come from with which to do that? Out of thin air.

http://www.chrismartenson.com/crashcourse/chapter-8-fed-money-creation

[lomiller]

hamelekim, I think you are having trouble differentiating between debt and leverage. Because there is always a borrower and a lender net debt is always zero. This means individuals companies and countries can own more then they can afford but there isn’t really such a thing as to much debt across the broader economy. This isn’t to say there won’t be repercussions for owing money, but it isn’t what’s caused the current crisis.

What the current issue is isn’t debt but leverage. US banks have been keeping increasingly smaller reserves of cash relative to the loans they were making in the belief that their loans were going towards assets that could be sold of if the borrower defaulted. They also spread what risk there was around so that even if they couldn’t sell the asset, they only took a steady predictable hit.

Since there was “no risk” in lending someone they believed they could assert more leverage in a effort to keep more of their money working and make higher profits. It also allowed them to lower lending standards because they assumed there was no risk even if the borrowers couldn’t pay the money back. What they didn’t count on was that the lax lending policies driving up housing prices and creating a bubble that popped when enough borrowers went into default to drive down housing prices.

In a declining housing market, the assumption that they could always get their money back by selling the assets of people who defaulted is no longer valid. Because these loans were bundled into securities, however no one knows which loans are to people who will pay it back, and which were simply given out on the assumption they could sell the house if the borrower defaulted. This means the “AAA asset” they are holding as their reserve cannot have it’s real value assessed, and these are basically being given values of pennies on the dollar.

If banks are going to accumulate enough cash and safe assets to get down to more traditional conservative 10:1 leverage without the economy taking a serious hit there needs to be an overall increase in the money supply. Until they are back in the “safe” range they will continue to lend less and accumulate more cash, both of which means there is less cash actually in circulation.

[lomiller]

I think you are in error there. It might be that the Treasury buys back Dept. debt it has already delivered to the Fed. Where do the funds come from with which to do that? Out of thin air.
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When the treasury buys back debt, it does so with tax dollars. It doesn’t matter whether it’s buying this debt from the fed or not. Since the money supply needs to grow, the Fed probably doesn’t buy back debt all that often. The Fed also has the authority to lend to member banks and can create money that way, but again that’s an emergency interment that isn’t used often.

One thing the Fed does buy from the Treasury is paper and coin currency. The amount the Fed owes the treasury for the paper currency in circulation roughly balances the amount of federal debt the Fed holds. At least this was the case before the recent crisis. Perhaps this is what you were thinking of.

[mhaze]

Again, that leveraging was only part of the issue. The real problem is not the debt itself, but the fact that it was leveraged so many times that the debt has no relation to the initial value, be it a mortgage or other financial instrument.

Cutting goverment spending in this scenario will do nothing to deal with the major issues. There are only two real options with regard to these banks and companies that engaged in this nonsense: 1) let them fail 2) somehow pay off those obligations.

Letting them fail would destroy business in a way that I don't think anyone is prepared for. Take just AIG. They insure so many aspect of modern business, from the materials GM uses to build their cars, to construction equipment, to basically every aspect of our lives. Because of their size they're able to insure business transactions that no one else can. Thus, if they are allowed to go bankrupt, all of those activities will not be insured. Without insurance a great many deals will be stopped, businesses will have further difficulty getting loans, and on down the line. Most people have correctly judged that this would be terrible.

So the only remaining option is to bail them out. ....Completely false. AIG has many business units. The one that did credit derivatives is not the one that insures your house or your local metro subway. Bankrupcy allows splitting out the business units, selling some which are profitable, and dissolving the others.

[mhaze]

When the treasury buys back debt, it does so with tax dollars. It doesn’t matter whether it’s buying this debt from the fed or not.

One thing the Fed does buy from the Treasury is paper and coin currency. The amount the Fed owes the treasury for the paper currency in circulation roughly balances the amount of federal debt the Fed holds. At least this was the case before the recent crisis. Perhaps this is what you were thinking of.No, no and no. Paper currency if I recall was either 8 or 80B in total for the US. There is no relation between paper currency and anything other than the amount of paper currency needed by the market forces.

And we are seeing the buying of treasury bills by the Gov., which is no different than borrowing from one credit card to pay another. There are NO TAX DOLLARS INVOLVED!

[mhaze]

Just how do you think that the government would get enough tax money out of a constantly deflating economy to pay interest on the huge national debt we built up and even pay interest on the huge balance of payments debt we have? We already pay heavy taxes and who would vote for large tax increases as wealth and income continues to slide?

As I said in the last paragraph, the only alternative to bankrupty is inflating. Saying it is better to let the economy collapse is like saying, "if Iran gives us any more trouble, drop a few atomic bombs on them." It is not a viable solution and is not going to happen.So you'd prefer the bankrupcy of the American people to the bankrupcy of the American government?

WOW!!!!!

[lomiller]

No, no and no. Paper currency if I recall was either 8 or 80B in total for the US.


When you don’t know something it’s not appropriate to make up a number and stick it in. The Fed’s balance sheet shows a liability of $860 billion in outstanding Federal Reserve notes.


And we are seeing the buying of treasury bills by the Gov.,

We are seeing the buying of treasury bills by the Fed...




There are NO TAX DOLLARS INVOLVED!



well duh, if there were tax dollars involved when the Fed bought federal securities no money would be created, and increasing the money supply was the whole point of the exercise

http://forums.randi.org/picture.php?albumid=82&pictureid=777

[mhaze]

What are you talking about? Earlier you used the phrase "paper money". That is not related to anything except how much money consumers want in paper form. It isn't related to M1, M2, or M3.

It's really just petty cash in the grand scheme.

[JihadJane]

There's no record of Jefferson every saying or writing that, and no reason to believe that he did.

And in any case, the issue at hand is not allowing private banks to control the issue of money.

Perhaps it was his cat.

[Piggy]

Perhaps it was his cat.

:D

It was read into the Congressional record at some point as a quotation from Jefferson. Probably had been circulating for some time prior.

It's very common for spurious quotations to get attributed to public figures like Jefferson, Franklin, Twain, or George Carlin. This one dead-ends at the congressman's words.

And the sentiments don't match up to Jefferson's actual writings.

[gdnp]

:D

It was read into the Congressional record at some point as a quotation from Jefferson. Probably had been circulating for some time prior.

It's very common for spurious quotations to get attributed to public figures like Jefferson, Franklin, Twain, or George Carlin. This one dead-ends at the congressman's words.

And the sentiments don't match up to Jefferson's actual writings.

In the words of Albert Einstein, as quoted in Prometheus's sig, "If you can't think of something relevant to say, just make something up and attribute it to some really smart dead guy."

[lomiller]

What are you talking about? Earlier you used the phrase "paper money". That is not related to anything except how much money consumers want in paper form.

Do you even know what a Federal Reserve Note is?

[mhaze]

Do you even know what a Federal Reserve Note is?Here is your statement which I took exception to.

One thing the Fed does buy from the Treasury is paper and coin currency. The amount the Fed owes the treasury for the paper currency in circulation roughly balances the amount of federal debt the Fed holds.

Why not just fix it, instead of trying to side step? Your statement is flat clearly wrong. The amount of paper currency has NO RELATION TO ANYTHING EXCEPT CONSUMER DEMAND FOR MONEY IN PAPER FORM.

Really, I doubt if transactions involving paper comprise 1% by dollar volume of total transactions. Further velocity of circulation of paper is likely way less than electronic.

[lomiller]

Why not just fix it,

Fix what? My post is correct, the Federal Reserve owes the Treasury $860 billion for outstanding reserve notes AKA bills or paper money. The Federal Reserve in turn owns ~1.2 trillion in US paper that’s up from ~$900 billion last year.

The amount of paper currency has NO RELATION TO ANYTHING EXCEPT CONSUMER DEMAND FOR MONEY IN PAPER FORM.

Then why are you bringing it up? I brought it up in response to charles brough’s belief that the treasury (not the fed) is producing money from thin air and asked him if that is what he was referring to. You in turn claimed there was only “$8 billion or maybe $80 billion” in paper currency in circulation. You were wrong, and now you are simply trying to divert attention from that fact.

[Piggy]

Then why are you bringing it up? I brought it up in response to charles brough’s belief that the treasury (not the fed) is producing money from thin air and asked him if that is what he was referring to. You in turn claimed there was only “$8 billion or maybe $80 billion” in paper currency in circulation. You were wrong, and now you are simply trying to divert attention from that fact.

This conversation seems to be moving in every direction except forward.

It's almost Pythonesque....

"My Aunt Matilda is vacationing seaside in Bolivia."

"But Bolivia is land-locked."

"It if were land-locked, she couldn't be at the beach, and she is, so you're wrong."

"No, I think you've got it wrong. See, look at the map here."

"That map is from 1982."

"Do you think Bolivia has changed its borders?"

"Are you saying countries never change their borders?"

"I'm saying Bolivia hasn't."

"What about the Louisiana Purchase and Manifest Destiny? Would you look at a map made in 1800 and declare that the United States has no west coast?"

"I'm saying either your aunt is vacationing seaside or in Bolivia, but not both."

"Answer my question about Manifest Destiny."

"We were talking about your aunt's vacation."

"Refusal noted."

"Are you sure you heard her right? Maybe she said Columbia."

"So you're calling my aunt a liar?"

"Huh?"

"You said you think she lied to me."

"I just said maybe she said Columbia."

"Why would she say that? Are you accusing her of smuggling drugs?"

"What drugs?"

"You tell me. You're the one who brought it up. I don't see why else you would say she's secretly in Columbia."

"Look, this has nothing to do with drugs."

"So now you deny saying that my aunt went to Columbia."

"I don't know where your aunt is."

"Well if you don't know where she is, you can't sit there and tell me she's not on the Bolivian coast!"

"Bolivia has no coast!"

"And where do you get that idea -- your ancient maps? Who made that map anyway? How do I know it's even accurate?"

"Pick any map you want, Bolivia has no coast."

"I asked you who made that map. Yet another question dodged. :rolleyes:"

"It doesn't matter who made the map."

"So you believe any map you see? How about if I draw you a map on this napkin and put India in North America. I suppose you'd believe that, too. :rolleyes:"

"Why don't you look at your own map, then."

"Why don't you give me a straight answer? You've dodged every question and you've got no evidence that there's no seaside in Bolivia. If Bolivia has no coast, then why I haven't heard about it?"

"How should I know?"

"Another thing you admit to not knowing. But you think you're an expert."

"Tell your Aunt Matilda to bring back some shells for me, ok?"

[gdnp]

This conversation seems to be moving in every direction except forward.

It's almost Pythonesque....

"My Aunt Matilda is vacationing seaside in Bolivia."...


Is this original? I googled it and can't find a reference in Monty Python. If it is, you should be writing comedy, not wasting your time here.

[lomiller]

:lol:

edit what no :lol: smiley?:jaw-dropp

[Piggy]

Is this original? I googled it and can't find a reference in Monty Python. If it is, you should be writing comedy, not wasting your time here.

Yeah, it's original, not Python. I just meant the conversation sometimes had the feel of a Python skit, then gave my own example off the cuff.

I do write (and research) for a living.

So then I come home and write some more. Weird, I know. But hey, I'm a word nerd, what can I say?

[Skeptic Ginger]

While I don't claim much expertise in this area yet, I've been doing some reading and trying to get a broader view of the issues here. In doing so, I've come across Stephen Zarlenga's ideas on monetary reform. They are worth looking at. That doesn't mean I am or am not advocating his ideas. But they are credible. He hasn't been completely dismissed as too fringe or anything. I don't think we can or should go back to the gold standard. But I do think the control of money creation should be in the public and not private hands. I believe that is also what Zarlinga is getting at and his view is that US creation of money (via Fed Reserve credit policies) is currently controlled by the private banking sector.


Economics: A Clandestine Religion Masquarading As A Science; Stephen Zarlenga; [2004] (http://www.cooperativeindividualism.org/zarlenga-stephen_on-economics-as-a-science.html)

Review of Stephen Zarlenga's "The Lost Science of Money"; Edward J. Dodson (http://www.cooperativeindividualism.org/dodson_review_of_zarlenga_on_money.html)


Gold Newsletter interview with Zarlenga (http://www.monetary.org/goldnewsletter.htm)Despite AMI's research conclusions that gold need not and should not play an important role in monetary systems, in May, 2000 The Gold Newsletter published a controversial interview with AMI Director Stephen Zarlenga. The interview was made possible thanks to the rare talent of interviewer Robert Meier to get to the heart of the subject without grating on the sensitivities of their readers, who generally (and sometimes passionately) hold views contrary to those excerpted here:

True to our tradition of presenting both sides of gold - related arguments, we recently conducted the following interview with Mr. Zarlenga, his first interview since making a long-term bearish forecast for gold in 1987. We invite our readers to send us their comments on and/or rebuttals to Mr. Zarlenga's views.


AMI - My [Zarlenga's] Talk at the 2007 Green Party National Convention (http://www.monetary.org/greenpartytalk.html)After a high ranking member of the American Green Party heard my presentation on monetary reform at an AMI Chapter meeting in the midwest, I was invited to make a similar presentation at the national Convention in Reading Pennsylvania on July 12, 2007. I call it Greening The Dollar - Reclaiming our democratic Values Through Monetary Reform



The Significance of Publicly Created Money - Comments on Early Day Motion 323 by an American Financial Expert (http://www.ccmj.org/fsc/040506-zarlenga.htm)


Wiki on Monetary Reform (http://en.wikipedia.org/wiki/Monetary_reform) for some background information.

[six7s]

Yeah, it's original, not Python. I just meant the conversation sometimes had the feel of a Python skit, then gave my own example off the cuff.

I do write (and research) for a living.

So then I come home and write some more. Weird, I know. But hey, I'm a word nerd, what can I say?'Suck it, Brian (http://forums.randi.org/showthread.php?postid=4542297#post4542297)'?

[mhaze]

Yeah, it's original, not Python. I just meant the conversation sometimes had the feel of a Python skit, then gave my own example off the cuff.

I do write (and research) for a living.

So then I come home and write some more. Weird, I know. But hey, I'm a word nerd, what can I say?Well, you done did nail that one.:clap:

[charles brough]

When the treasury buys back debt, it does so with tax dollars. It doesn’t matter whether it’s buying this debt from the fed or not. Since the money supply needs to grow, the Fed probably doesn’t buy back debt all that often. The Fed also has the authority to lend to member banks and can create money that way, but again that’s an emergency interment that isn’t used often.

One thing the Fed does buy from the Treasury is paper and coin currency. The amount the Fed owes the treasury for the paper currency in circulation roughly balances the amount of federal debt the Fed holds. At least this was the case before the recent crisis. Perhaps this is what you were thinking of.

As you just wrote, the government as we have claimed, can and does create money. It has just created one trillion new dollars this way in order to stem the economic slide. It had no choice because the Neo Conservative Republicans have been so critical of Obama's stimulus package when two the Bursh Administration passed and failed that there was no other choice. As you indicate, it is done only in an emergency.

No one claims the government does it for fun!

[mhaze]

While I don't claim much expertise in this area yet, I've been doing some reading and trying to get a broader view of the issues here. In doing so, I've come across Stephen Zarlenga's ideas on monetary reform. They are worth looking at. That doesn't mean I am or am not advocating his ideas. But they are credible. He hasn't been completely dismissed as too fringe or anything. I don't think we can or should go back to the gold standard. But I do think the control of money creation should be in the public and not private hands. .....Yep, we could run the world on Paypal, backed by a value-indexed average of Ebay goods sales, currency independant, and tell the Wall Street Banksters where to go.

Just one example, of course there are many others.

[lomiller]

As you just wrote, the government as we have claimed, can and does create money. It has just created one trillion new dollars this way in order to stem the economic slide. It had no choice because the Neo Conservative Republicans have been so critical of Obama's stimulus package when two the Bursh Administration passed and failed that there was no other choice. As you indicate, it is done only in an emergency.

Again, the Fed creates money. The Fed is an arms length quasi-government agency specifically because that removes it’s day to day operations from direct government control while maintaining a reporting relationship. IOW while the Fed chairman is a government appointee, short of new legislation no government body can dictate his actions.

This freedom is given to him specifically because it removes government meddling in day to day money supply and because it removes the ability for government to pay it’ bills by printing money. When money is “printed” it cannot be used to pay bills and appears on the government balance sheet as a liability. This is essential for accountability, on the government side, while the ability of government to appoint the fed chairman and it need be replace him ensures accountability on the fed side. It’s a good system, the best ever devised for managing a money supply and economy.

The semantics of whether the Fed is “government” aside, what isn’t semantics is that the department of the Treasury cannot expand the money supply. Even with paper currency, which must be physically printed by the treasury they cannot put that money into circulation on their own or dictate to the Fed just how much they will purchase.

With the fact it’s the fed that expands the money established let’s move on to why. The Feds primary job is to insure there is sufficient money in the system to keep it healthy. Since population and economic activity are expected to grow constantly so must the money supply. If the Fed doesn’t “print money” on a regular basis the consequences for the US economy are dire because it would trigger deflation and a long term economic decline. To provide a buffer against the danger of deflation the fed aims for a small but steady amount of inflation. As long as inflation remains near this target they will inject as much money as possible in order to allow economic growth.

The Fed is “printing money” now because the US economy is in danger of slipping into *deflation*. Inflation may or may not be a future risk but deflation is a risk right now, and that risk needs to be dealt with.

[mhaze]

************.

[TraneWreck]

Completely false. AIG has many business units. The one that did credit derivatives is not the one that insures your house or your local metro subway. Bankrupcy allows splitting out the business units, selling some which are profitable, and dissolving the others.

Which brings up the possibility of bailing them out in a more intellegent fashion than just dumping money blindly into the company.

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy. If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew.

I would support a bankrupcy that split the business, allowing the sections that weren't engaging in such questionable behavior to survive, but then you have to somehow enable other comapanies to take over those massive insurance situations. I would support offering the money aimed at AIG to banks and insurers who behaved correctly. Multiple small institutions could cooperatively insure those massive transactions, but that's not how it's done now.

[lomiller]

But I do think the control of money creation should be in the public and not private hands.

There are distinct downsides to both. The problem with direct public control over the money supply is that it’s very easy to play politics with. Practical experience shows that this will almost always happen eventually. Full private control allows private institutions to manipulate or decimate the entire economy to their benefit.

A quasi-public body like the Fed, however, can avid both risks and has been extraordinarily successful. Indeed history has made it amply clear that neither extreme of public vs private works very well, and that’s not just in relation to the Fed it’s for economies in general. Each has it’s strengths and the best success will always mean choosing the best tool for the job.

[mhaze]

Which brings up the possibility of bailing them out in a more intellegent fashion than just dumping money blindly into the company.

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy. If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew.

I would support a bankrupcy that split the business, allowing the sections that weren't engaging in such questionable behavior to survive, but then you have to somehow enable other comapanies to take over those massive insurance situations. I would support offering the money aimed at AIG to banks and insurers who behaved correctly. Multiple small institutions could cooperatively insure those massive transactions, but that's not how it's done now.

I have a suspicion that the "If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew."...

is completely false and a certainty that this is counterproductive to the interests of the people of the world. First, if AIG was split up the parts are not small, but HUGE. What "keeping it together" means is propping up the CD swapsters at the expense of the other - PROFITABLE - divisions.

What keeping AIG out of the bankrupcy courts means is keeping the whole matter private or "secret", instead of exposing all of it to the light of day.
To some extent, proceedings in bankrupcy might be set to not be publicly disclosed but that'd be at the disgression of the court.

Does "Too big to fail" just mean "We can't have all this come out in the open?"

[TraneWreck]

I have a suspicion that the "If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew." is completely false and a certainty that this is counterproductive to the interests of the people of the world.

First, if AIG was split up the parts are not small, but HUGE. What "keeping it together" means is propping up the CD swappsters at the expense of the other - PROFITABLE - divisions.

What keeping AIG out of the bankrupcy courts means is keeping the whole matter private or "secret", instead of exposing all of it to the light of day.
To some extent, proceedings in bankrupcy might be set to not be publicly disclosed but that'd be at the disgression of the court.

Does "Too big to fail" just mean "We can't have all this come out in the open?"

I completely agree that the "too big to fail" is a silly justification for dumping money into your buddies' pockets. I'm just repeating the argument that they give.

I will say, however, that a great deal of business will be stunted if we don't figure out another way to insure massive transactions. I can say with great certainty that the absolute worst way to get this done is by giving the corrupt fools that caused this mess more chips to gamble with.

[lomiller]

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy.

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.

[mhaze]

I completely agree that the "too big to fail" is a silly justification for dumping money into your buddies' pockets. I'm just repeating the argument that they give.

I will say, however, that a great deal of business will be stunted if we don't figure out another way to insure massive transactions. I can say with great certainty that the absolute worst way to get this done is by giving the corrupt fools that caused this mess more chips to gamble with.
I think I indicated there wasn't a problem but let's take an illustration. Split up AIG in and as part of a Chapter 11 bankrupcy filing. Now where does the Metro or the Airline get insurance? From that business unit of AIG, of course. Chapter 11 is not a dissolution of the company, it continues operating. There is a great deal of flexibility in the hands of the bankrupcy judge and of course he desires asset preservation.

Yet currently the CD division of AIG is operating, and vast sums are pouring through it - that's our money. This doesn't benefit us and should be stopped.

Meanwhile there isn't any higher risk of airlines crashing or the subway system being sued than last year.

It's just my opinion, but I think that it is wrong to place as equal, the right of the insured playing financial games in a credit derivative swap and the right of an insured party with an airline or public transportation fleet. I think most judges would see this point of view. These should not be equal rights creditors.

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.See above. Actually the chaos can be stripped out but hasn't been, it's been paid off. But that seems to have just made it hungrier since it's grown bigger, sings "FEED ME".

[Piggy]

************.

Where exactly do you see the error, mhaze?

[TraneWreck]

I think I indicated there wasn't a problem but let's take an illustration. Split up AIG in and as part of a Chapter 11 bankrupcy filing. Now where does the Metro or the Airline get insurance? From that business unit of AIG, of course. Chapter 11 is not a dissolution of the company, it continues operating. There is a great deal of flexibility in the hands of the bankrupcy judge and of course he desires asset preservation.

Yet currently the CD division of AIG is operating, and vast sums are pouring through it - that's our money. This doesn't benefit us and should be stopped.

Meanwhile there isn't any higher risk of airlines crashing or the subway system being sued than last year.

It's just my opinion, but I think that it is wrong to place as equal, the right of the insured playing financial games in a credit derivative swap and the right of an insured party with an airline or public transportation fleet. I think most judges would see this point of view. These should not be equal rights creditors.



That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

If you divide up AIG, they won't have the size and wealth to serve that function, and no one else really can. Thus, they're "too big to fail." Like you, I find that argument silly, but something has to exist to insure those deals, if we want large transactions to continue to take place. I'd be happy with the government doing it straight up, or with them temporarily providing funds for smaller groups to take over that function.

Now one of the huge problems in this current situation is that AIG offered credit default swaps in vast excess to their ability to pay out, should there be a default. So say you take out a mortgage from bank A. Bank a creates a credit default swap (CDS) using AIG to insure that loan. If you default, AIG pays bank A, so that bank essentially eludes risk. Usually an insurer must show they have the ability to pay off that obligation should you fail to keep up with your mortgage payments.

Through various lobbying procedures, banks and insurers convinced the fed to do away with the requirement that insurers show they could cover the (CDS). That allowed AIG and others to essentially give out CDS to banks that didn't hold mortgages. So your mortgage to bank A is insured by AIG, but AIG also has liability to banks B->Z, meaning that if you default on your loan, AIG has to pay the value of that morgage to 26 banks, 25 of which have nothing to do with the loan, save that they gambled on it.

Thus the entire institution of AIG owes billions of dollars they cannot pay. So now they don't have the ability to further insure deals. THe current plan is to just pay off those retarded CDSes.

That's a bad idea, but something has to be done to allow loans to be given and deals made.

[TraneWreck]

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.

This has to be the plan, nothing else makes sense. It's strange to me that the guys Obama put in charge are acting like idiots. They pretend like there's no possible way to distinguish the transactions with real value and those that were essentially blind gambles.

Step one has to be letting the bad deals go bad. Step two has to be using government funds to take over the essential functions that AIGs division would leave unfilled.

But the Obama crew seems to be of the opinion that this was just a rough patch, not that this entire system is broken and perverse. That opinion scares me.

[gdnp]

That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

Why is this a bad thing? How does it hurt me, the consumer, if Company A does not buy Company B? It simply leads to less competition and the creation of another conglomerate that will some day be deemed "too big to fail".

[TraneWreck]

Why is this a bad thing? How does it hurt me, the consumer, if Company A does not buy Company B? It simply leads to less competition and the creation of another conglomerate that will some day be deemed "too big to fail".

I have a certain amount of sympathy for that view, and I am absolutely with you on stopping companies in the future from achieveing the "too big to fail status."

The problem is that we've allowed our economy to grow like a festering tumor and restricting such large transactions will likely lead to the failures of companies and then, in turn, the loss of jobs.

It's a lot like the question surrounding GM. They made crappy, fuel inefficient cars and are now suffering the consequences. I have no sympathy for their business plan, but allowing them to fail will cost the United States something like 2.4 million jobs.

Likewise, if you restrict the ability of one comapany to purchase a failing company, for example, that company just disapears and everyone loses their job.

This crisis has to be approached both from a short and long term perspective. In the long term, I'm right with you. We need to reinvigorate the laws and oversight agencies to keep this nonsense from every happening again. But to bridge to that point, we need to keep the economy, twisted as it is, going.

Things are rough now, but imagine where we'd be with 3x the job loss.

So to answer your question, you as a consumer will be hurt to the extent that the general economy struggles. Perhaps you are in a safe employment situation, but a huge percentage of the country isn't, at this moment.

[mhaze]

That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

If you divide up AIG, they won't have the size and wealth to serve that function, and no one else really can. ....Actually, that's the very point where I disagreed. A pretty good example of this is insurance on satellite launches, by the way.

The very idea that insurance is required as part of a transaction to insure a positive outcome is false.

And a fairly recent concept, historically.

[TraneWreck]

Actually, that's the very point where I disagreed. A pretty good example of this is insurance on satellite launches, by the way.

The very idea that insurance is required as part of a transaction to insure a positive outcome is false.

And a fairly recent concept, historically.

There are two separate questions here: 1) Can large transactions go through without insurance, and 2) Will businesses engage in large transactions without insurance.

I won't argue that the answer to one isn't "yes." But #2 is what's at issue for Geitner and the bailout situation.

I haven't really considered the possibility of sitting these companies down and saying, "hey, tough ****, we can't insure your big transactions anymore. Either go through without an underwritter or don't do it at all." I don't know enough to understand what the ramifications would be for the economy, but for the short term it would seem prudent to reduce risk, rather than increase it by removing insurance.

Again, in the long term I'm not sure we have much disagreement. The sort of excuses used to justify the continued existences of AIG and its bretheren are pathetic. But I agree with the economists who recommend dealing with the immediate crisis before going through with drastic systematic change. In fact, even with the crisis I lean heavily towards avoiding handing money to the charlatans that messed everything up.

I don't know, if you can give me something to read about the possibility of going ahead without groups like AIG I'd be curious to hear another opinion.

[mhaze]

There are two separate questions here: 1) Can large transactions go through without insurance, and 2) Will businesses engage in large transactions without insurance.

I won't argue that the answer to one isn't "yes." But #2 is what's at issue for Geitner and the bailout situation.

I haven't really considered the possibility of sitting these companies down and saying, "hey, tough ****, we can't insure your big transactions anymore. Either go through without an underwritter or don't do it at all." I don't know enough to understand what the ramifications would be for the economy, but for the short term it would seem prudent to reduce risk, rather than increase it by removing insurance.

Again, in the long term I'm not sure we have much disagreement. The sort of excuses used to justify the continued existences of AIG and its bretheren are pathetic. But I agree with the economists who recommend dealing with the immediate crisis before going through with drastic systematic change. In fact, even with the crisis I lean heavily towards avoiding handing money to the charlatans that messed everything up.

I don't know, if you can give me something to read about the possibility of going ahead without groups like AIG I'd be curious to hear another opinion.Risk is NOT reduced by removing insurance, rather it is monetized and a premium (profit) added. Now you somehow must weight the asserted social good of "keeping insuring business as usual" againt the cost of wiping out a large percentage of the acquired savings and retirement funds of hundreds of millions of people?

1...2...3 microseconds- I've done my weighing of alternatives.

[TraneWreck]

Risk is NOT reduced by removing insurance, rather it is monetized and a premium (profit) added. Now you somehow must weight the asserted social good of "keeping insuring business as usual" againt the cost of wiping out a large percentage of the acquired savings and retirement funds of hundreds of millions of people?

1...2...3 microseconds- I've done my weighing of alternatives.

Yes, risk is increased by the removal of insurance. Transaction A: I ship you 3000 widgets by boat, uninsured. Tansaction B: I ship you 3000 widgets by boat, insured for their full value. Let's assume you purchased the insurance. Let's say a hurricane begins to brew in the shipping lanes. Which transaction is riskier for you?

So the question is how we continue to provide insurance if we just allow AIG and like institutions to fail and don't create another process.

And that second part is a false choice. Bailing out the companies and making sure that banks can continue to give out loans is not necessarily done at the expense of people's retirement funds. That's such a massive leap of logic I don't even know what you think is going on.

[gdnp]

Actually risk is lowered by the removal of insurance. What insurance does is disseminate the risk, not reduce it. People will undertake risky projects if they can be insured because the risk of failure to them is lessened.

Thus the problem with mortgage backed securities and credit default swaps. People kept doing risky things because (1) they were highly profitable and (2) they could transfer much of the risk to other people and still make a nice profit.

Mortgage originators would not have made loans to people with no money down and no income check if they were depending on those people to pay them back. But they knew they could sell the mortgage as soon as it closed and collect their origination fee. Now it's someone else's problem. The person who bought the mortgage to securitize wouldn't have done so if they couldn't sell the security. And the hedge funds and banks that bought the security wouldn't have done so if the security didn't have a AAA rating. And the security wouldn't have had a AAA rating if they hadn't been insured by the world's largest insurance company, AIG. Thus the whole risky chain would have not been possible without AIG's insurance: essentially, mortgage lenders would have been forced to lend money only to people who they thought would be able to pay them back.

So once again, insurance causes an overall increase in risk-taking: it allows people to engage in risky behavior that they would avoid if they had no insurance. Which is not usually a bad thing. Risk leads to innovation and advancement.

[applecorped]

Damn money changers.

[Piggy]

So once again, insurance causes an overall increase in risk-taking: it allows people to engage in risky behavior that they would avoid if they had no insurance. Which is not usually a bad thing. Risk leads to innovation and advancement.

Well put!

[mhaze]

Well put!Now let the Gov. rush in and "back guarantee" this worthless junk and we just got manuevered into the bullfight of "moral hazard", led by bought off politicians with eyes wide shut.

[Thunder]

Don't we also "create money out of thin air" by simply selling bonds??

The Chinese buy our bonds...we get money.

[Piggy]

Now let the Gov. rush in and "back guarantee" this worthless junk and we just got manuevered into the bullfight of "moral hazard", led by bought off politicians with eyes wide shut.

Oh, really?

Show me the money.

[Piggy]

Now let the Gov. rush in and "back guarantee" this worthless junk and we just got manuevered into the bullfight of "moral hazard", led by bought off politicians with eyes wide shut.

And btw, this junk isn't as worthless as you think it is.

Prices are now getting into the zone where it makes sense for investors to start picking it up again.

[TraneWreck]

Actually risk is lowered by the removal of insurance. What insurance does is disseminate the risk, not reduce it. People will undertake risky projects if they can be insured because the risk of failure to them is lessened.

Thus the problem with mortgage backed securities and credit default swaps. People kept doing risky things because (1) they were highly profitable and (2) they could transfer much of the risk to other people and still make a nice profit.

Mortgage originators would not have made loans to people with no money down and no income check if they were depending on those people to pay them back. But they knew they could sell the mortgage as soon as it closed and collect their origination fee. Now it's someone else's problem. The person who bought the mortgage to securitize wouldn't have done so if they couldn't sell the security. And the hedge funds and banks that bought the security wouldn't have done so if the security didn't have a AAA rating. And the security wouldn't have had a AAA rating if they hadn't been insured by the world's largest insurance company, AIG. Thus the whole risky chain would have not been possible without AIG's insurance: essentially, mortgage lenders would have been forced to lend money only to people who they thought would be able to pay them back.

So once again, insurance causes an overall increase in risk-taking: it allows people to engage in risky behavior that they would avoid if they had no insurance. Which is not usually a bad thing. Risk leads to innovation and advancement.

There's something like an equivocation with the word "risk" going on here. You have to be clear about who bears what responsibility. From the perspective of someone engaging in a transaction, paying for insurance limits your potential losses, or risk. But insurance can also lead you to take more chances, or risk.

Those are two separate concepts. Here you're discussing the idea of taking chances beyond what is reasonable. I was discussing the idea of limiting losses. Ideally (or practically for the most part) no insurer would underwrite extraordinary chance. But as we know, the financial industry engaged in wide-spread fraud.

One interesting thing they would do is package a risky mortgage with other financial instruments like car loans or credit card debt. You pool it all together and the odds that some of it will be payed back is fairly high. This is how they finagled those AAA ratings. Then it's relatively easy to get insurance when you have a AAA rating, then the leveraging...etc.

And the basis for handing out those sub-prime mortgages was that housing prices would raise infinitely. Thus, even if a client couldn't keep up with payments, you could always refinance. This was a silly gamble that had little to do with the concept of insurance. If it were simply the case that they gave houses to people who couldn't pay (another canard as the leading cause of foreclosure is health care costs--meaning many of the people could initially pay, but something intervened), then no one would have allowed them to leverage against the initial mortgage. There was a bizarre adherence to the idea of infinite refinancing.

But the presence of insurance itself shouldn't cause imprudent behavior because those underwriters wouldn't offer coverage for something so uncertain. There are plenty of things that are too risky to be insured, and the weird financial schemes should have been among them. But all of that fraud allowed the insurers and risk takers to essentially be complicit in a plot to create money.

[mhaze]

And btw, this junk isn't as worthless as you think it is.

Prices are now getting into the zone where it makes sense for investors to start picking it up again.Sorry for being unclear, stock market cannot be worthless junk except perhaps for zombie companies.

"Worthless Junk" is CD swap style junk issued by AIG and subsequently paid off by the taxpayers thru the US Gov's beneficence...
....One interesting thing they would do is package a risky mortgage with other financial instruments like car loans or credit card debt. You pool it all together and the odds that some of it will be payed back is fairly high. This is how they finagled those AAA ratings. Then it's relatively easy to get insurance when you have a AAA rating, then the leveraging...etc.

And the basis for handing out those sub-prime mortgages was that housing prices would raise infinitely..... However (IIRC) the $324B bill signed by Bush 7-2-2008 fully brought all subprime into a gov-insured loan quality level. Thus those derivative instruments which were not fraudulent from then forward should have been quality instruments.

Now go figure.

[Piggy]

But the presence of insurance itself shouldn't cause imprudent behavior because those underwriters wouldn't offer coverage for something so uncertain.

I think you and gdnp are on the same page here.

Note that he doesn't equate risky with imprudent.

[Piggy]

Sorry for being unclear, stock market cannot be worthless junk except perhaps for zombie companies.

"Worthless Junk" is CD swap style junk issued by AIG and subsequently paid off by the taxpayers thru the US Gov's beneficence...

No, I know what you're saying.

Or thought I did... I believe you're referring to CDOs not CDSs.

But yeah, I meant what I said. The so-called "toxic assets" are not nearly so toxic anymore, now that the valuations have deflated.

The swap mess is a whole nother can of worms.

[TraneWreck]

I think you and gdnp are on the same page here.

Note that he doesn't equate risky with imprudent.

Well there are a number of questions on the table. AIG's behavior with respect to the credit default swaps was imprudent and possibly legally fraudulent.

There's supposed to be a relationship between the degree of risk taken and the amount you pay for insurance. I can't think of an example (maybe you guys can) where someone has a simple project, but once they receive insurance they go ape-****.

In fact, if you are taking unecessary or wild risks, the insurance companies will point this out and refuse to pay. So I'm not exactly sure how insurance itself will lead to riskier behavior.

[Piggy]

Well there are a number of questions on the table. AIG's behavior with respect to the credit default swaps was imprudent and possibly legally fraudulent.

There's supposed to be a relationship between the degree of risk taken and the amount you pay for insurance. I can't think of an example (maybe you guys can) where someone has a simple project, but once they receive insurance they go ape-****.

In fact, if you are taking unecessary or wild risks, the insurance companies will point this out and refuse to pay. So I'm not exactly sure how insurance itself will lead to riskier behavior.

I'll leave it to gdnp to hash this out w/ you, but I still think y'all are using slightly different language to come around to basically the same point.

Cheers.

[gdnp]

There's something like an equivocation with the word "risk" going on here. You have to be clear about who bears what responsibility. From the perspective of someone engaging in a transaction, paying for insurance limits your potential losses, or risk. But insurance can also lead you to take more chances, or risk.

Those are two separate concepts. Here you're discussing the idea of taking chances beyond what is reasonable. I was discussing the idea of limiting losses. Ideally (or practically for the most part) no insurer would underwrite extraordinary chance. But as we know, the financial industry engaged in wide-spread fraud.
Do we know this? Who, so far, has been charged, tried, and convicted of this fraud?

And the basis for handing out those sub-prime mortgages was that housing prices would raise infinitely. Thus, even if a client couldn't keep up with payments, you could always refinance. This was a silly gamble that had little to do with the concept of insurance. If it were simply the case that they gave houses to people who couldn't pay (another canard as the leading cause of foreclosure is health care costs--meaning many of the people could initially pay, but something intervened), then no one would have allowed them to leverage against the initial mortgage. There was a bizarre adherence to the idea of infinite refinancing.I put the major blame with the actuaries and the bond rating agencies that did not correctly assess the risk. They gave AAA ratings to things that depended on the continuation of an unprecedented run of housing price increases? I would have thought that the question "what will happen to the value of this bond if housing prices drop?" would have been pretty basic.

But the presence of insurance itself shouldn't cause imprudent behavior because those underwriters wouldn't offer coverage for something so uncertain. But this is exactly what they did. If they had only insured reasonable bets, they wouldn't have lost $65 billion last quarter, would they? Which raises two possibilities. Either they miscalculated the risk, or they knew the risk and chose to ignore it because their own personal benefit through pay and bonuses was paramount, not the long term health of the company.

There are plenty of things that are too risky to be insured, and the weird financial schemes should have been among them. But all of that fraud allowed the insurers and risk takers to essentially be complicit in a plot to create money.

I'm still not convinced that this was outright fraud, or if it was who was guilty. The mortgage originators? The companies that hired them? The investment banks? The bond ratings agencies? AIG? Was it the worker bees or at the highest levels?

[TraneWreck]

Do we know this? Who, so far, has been charged, tried, and convicted of this fraud?


As we've seen so often in these last 8 years, criminal fraud will be hard to prove because the actors can always plead incompetence. And for a number of their shady acts they got the ok of the fed (the go ahead to create credit default swaps with out cash on hand, for example).

Hopefully some of the major players will go down, but I'm not holding my breath.


I put the major blame with the actuaries and the bond rating agencies that did not correctly assess the risk. They gave AAA ratings to things that depended on the continuation of an unprecedented run of housing price increases? I would have thought that the question "what will happen to the value of this bond if housing prices drop?" would have been pretty basic.


No kidding, that's one of the all-time stupid moves. It seems that those actuaries were working in concert with the lenders and leveragers. It was like one gigantic blood orgy.


But this is exactly what they did. If they had only insured reasonable bets, they wouldn't have lost $65 billion last quarter, would they? Which raises two possibilities. Either they miscalculated the risk, or they knew the risk and chose to ignore it because their own personal benefit through pay and bonuses was paramount, not the long term health of the company.


I'm agreeing with you there. That was the source of the problem: the way we assumed things were supposed to work was subverted years ago. And with the complete elimination of oversight, no one was around to say, "hey, stop that."


I'm still not convinced that this was outright fraud, or if it was who was guilty. The mortgage originators? The companies that hired them? The investment banks? The bond ratings agencies? AIG? Was it the worker bees or at the highest levels?

The difficulty with the fraud charge is proving the appropriate mental state of the actors. But as we've seen with Maddof and that Stanford dude who bought the cricket team, a great many of the players were baldly fraudulent. It will be interesting to see what was stupidity and what was criminal.

I think the only place we have any real disagreement lies in how to go forward in the short term. In the long run I think you're right about what needs to be reorganized, but I'm taking my lead from Krugman and other economists who recommend making sure we free up credit and easie the short term pain before we start cleaning house. But that's not the same as just writing blank checks to the idiots who never bothered to consider what would happen when housing prices fell.

[gdnp]

I think the only place we have any real disagreement lies in how to go forward in the short term. In the long run I think you're right about what needs to be reorganized, but I'm taking my lead from Krugman and other economists who recommend making sure we free up credit and easie the short term pain before we start cleaning house. But that's not the same as just writing blank checks to the idiots who never bothered to consider what would happen when housing prices fell.

I'm not even sure we have much disagreement there. I lean towards Rubini's opinion that the banks should be nationalized, cleaned up, and reprivatized. I suspect it may still come to that.

Hell, the price of Citigroup stock right now is about the same as the price of using one of their ATMs if you aren't a customer. ;)

[mhaze]

Do we know this? Who, so far, has been charged, tried, and convicted of this fraud?
I put the major blame with the actuaries and the bond rating agencies that did not correctly assess the risk. They gave AAA ratings to things that depended on the continuation of an unprecedented run of housing price increases? I would have thought that the question "what will happen to the value of this bond if housing prices drop?" would have been pretty basic.

But this is exactly what they did. If they had only insured reasonable bets, they wouldn't have lost $65 billion last quarter, would they? Which raises two possibilities. Either they miscalculated the risk, or they knew the risk and chose to ignore it because their own personal benefit through pay and bonuses was paramount, not the long term health of the company.



I'm still not convinced that this was outright fraud, or if it was who was guilty. The mortgage originators? The companies that hired them? The investment banks? The bond ratings agencies? AIG? Was it the worker bees or at the highest levels?As I understand it, (prepare to cringe) top tier offerings like from Lehman, AIG AUTOMATICALLY GOT STAMPED "AAA".

As for criminality, detailed examination of the company in receivership, Chapter 11, would have revealed what was there. They didn't want that, so what we are unsure about is of their choosing. Give it about 2 years to unravel in the normal legal process with interrogatories, stalls, supeanas.

Bankrupcy would have opened the entire rat's nest in December...

[gdnp]

As I understand it, (prepare to cringe) top tier offerings like from Lehman, AIG AUTOMATICALLY GOT STAMPED "AAA".

As for criminality, detailed examination of the company in receivership, Chapter 11, would have revealed what was there. They didn't want that, so what we are unsure about is of their choosing. Give it about 2 years to unravel in the normal legal process with interrogatories, stalls, supeanas.

Bankrupcy would have opened the entire rat's nest in December...

Lehman went bankrupt a year ago and is in the process of being liquidated. And so far we have found...

[mhaze]

Lehman went bankrupt a year ago and is in the process of being liquidated. And so far we have found...I referred to my second paragraph "company in receivership" as AIG, if not clear.

But your analogy is worth pondering. Consider:


It's okay for Lehman fall
It's not okay for AIG to collapse

Where would Columbo look?:)

[drkitten]

And btw, this junk isn't as worthless as you think it is.

Prices are now getting into the zone where it makes sense for investors to start picking it up again.


Yeah, and I should take your unsupported word for this WHY?

Is there anyone else out there who believes that this junk isn't totally worthless? Aside from Warren Buffet, I mean? Since, after all, it's obvious that he knows less about the market than the Chicken Littles wandering around terrified of falling sky....

[TraneWreck]

I'm not even sure we have much disagreement there. I lean towards Rubini's opinion that the banks should be nationalized, cleaned up, and reprivatized. I suspect it may still come to that.

Hell, the price of Citigroup stock right now is about the same as the price of using one of their ATMs if you aren't a customer. ;)

I can't tell you how happy it would make me to nationalize those failing institutions, fire all the goofballs that caused this mess, and put smart, ethical people in their positions for 1/100 of the salary.

Then we could all watch as the cleaned up institution worked fine without execs taking home $20 million salaries.

[drkitten]

I can't tell you how happy it would make me to nationalize those failing institutions, fire all the goofballs that caused this mess, and put smart, ethical people in their positions for 1/100 of the salary.

Then we could all watch as the cleaned up institution worked fine without execs taking home $20 million salaries.

That's the problem. I'm not sure how many "smart, ethical people" with the relevant experience would be willing to take the job at 1/100 the salary. Or to put it another way, I'm not sure I'd believe that anyone willing to take the job at that price was actually that smart or ethical.

Driving a bank isn't like driving a lawn mower; it's not the sort of thing any neighborhood fifteen year old can do. And the consequences of a mistake are a lot worse than simply a badly mown lawn.

[TraneWreck]

That's the problem. I'm not sure how many "smart, ethical people" with the relevant experience would be willing to take the job at 1/100 the salary. Or to put it another way, I'm not sure I'd believe that anyone willing to take the job at that price was actually that smart or ethical.

Driving a bank isn't like driving a lawn mower; it's not the sort of thing any neighborhood fifteen year old can do. And the consequences of a mistake are a lot worse than simply a badly mown lawn.

Oh, I bet you could easily come up with a host of talented young folks ready to jump into those positions. Now that every ivy league grad can't immediately go into investment banking, there's a whole bunch of people on the east coast looking for an avenue to express their skills.

I can also tell you that a great many lawyers have been downsized over the past few years. This may not be the best pool to draw ethical applicants from, but I know a number of my classmates who would be more than qualified to take those positions for the same amount of money they make lawyering in Chicago (which I promise you is a more difficult position).

Incidentally, this is why all the talk about "going Galt" will never amount to anything. People in those positions know damn well that there are tons of people willing to jump into their positions for significantly less compensation.

The competence will be the easy part, but i'll agree with you that the ethics might be difficult to come by.

[Piggy]

Yeah, and I should take your unsupported word for this WHY?

Is there anyone else out there who believes that this junk isn't totally worthless? Aside from Warren Buffet, I mean? Since, after all, it's obvious that he knows less about the market than the Chicken Littles wandering around terrified of falling sky....

Yeah, there are folks sniffing around at it. The thing about the bundling is that you're gonna get a certain percentage defaulting, but not all of it. There's a sweet spot on the price for this stuff. As long as the revenue from the sound portion, combined with the discount price, adds up to a good enough potential for long-term value, you'll find folks who are willing to take the risk.

I think we're at that point now. We'll see how it plays out.

I like the plan to introduce a market valuation on this stuff rather than having the feds peg a price, which would have to be arbitrary in the final analysis.

[drkitten]

Oh, I bet you could easily come up with a host of talented young folks ready to jump into those positions. Now that every ivy league grad can't immediately go into investment banking, there's a whole bunch of people on the east coast looking for an avenue to express their skills.

I can also tell you that a great many lawyers have been downsized over the past few years. This may not be the best pool to draw ethical applicants from,

Screw "ethical."

What makes you think a lawyer is qualified to run a bank?

People who want a lawyer to run their bank deserve to have a banker defend them in court. Entirely different skill set.

Why don't the lawyers go into neurosurgery instead? Or work for NASA as rocket scientists? Or maybe get a gig as underwear models?

Similarly, I'm not sure I really want a still-wet-behind-the-ears newly-minted Harvard MBA running Citigroup, any more than I want a freshly-scrubbed Lt. Niedermeyer on the Joint Chiefs of Staff.

[TraneWreck]

Screw "ethical."

What makes you think a lawyer is qualified to run a bank?

People who want a lawyer to run their bank deserve to have a banker defend them in court. Entirely different skill set.

Why don't the lawyers go into neurosurgery instead? Or work for NASA as rocket scientists? Or maybe get a gig as underwear models?

Similarly, I'm not sure I really want a still-wet-behind-the-ears newly-minted Harvard MBA running Citigroup, any more than I want a freshly-scrubbed Lt. Niedermeyer on the Joint Chiefs of Staff.

Because a significant percentage of lawyers went through JD-MBA programs, worked in banks before law school, work for banks as lawyers, and generally have a great deal of experience in a number of subjects relevant to banking.

And litigation is only one aspect of being a lawyer. A number of corporations will send up and coming people to law school for a variety of reasons. But a lot of transactional legal jobs are directly applicable to banking.

Unlike the medical profession, much of the knowledge and many of the skills relevant to being a lawyer are broadly applicable through the business world. Mergers and Acquisitions, Corporate structure, tax, securities, commercial paper, etc.

A good percentage of the bar exam deals directly with banking issues.

[charles brough]

So you'd prefer the bankrupcy of the American people to the bankrupcy of the American government? WOW!!!!!

You are setting up an arbitrary line between the government and the people as if you were comparing shovels with apples. The government is ours, our way of organizing to get things done for our own welfare. It does what we determine. If we elect the wrong people, it is our own fault. We have to have someone there representing us. Don't you like the Constitutional government we have?
If it goes bankrupt, it is the American public that becomes bankrupt, not some alien entity.

[drkitten]

Because a significant percentage of lawyers went through JD-MBA programs, worked in banks before law school, work for banks as lawyers, and generally have a great deal of experience in a number of subjects relevant to banking.

Lt. Neidermeyer went through a commission program and has worked for the military, and has a great deal of experience in a number of subjects relevant to the military. I assume you therefore have no objection to him serving on the Joint Chiefs?

[TraneWreck]

Lt. Neidermeyer went through a commission program and has worked for the military, and has a great deal of experience in a number of subjects relevant to the military. I assume you therefore have no objection to him serving on the Joint Chiefs?

Now you're just being silly. Obviously you have to deal with individual applicants, you aren't qualified to head a bank because you're a lawyer, a great many lawyers happen to be qualified to lead a bank.

This point is so silly I shouldn't need to reply.

Incidentally, I bet a quick check of major bank executives would reveal a sizeable percentage of folks with law degrees.

[gdnp]

Yeah, there are folks sniffing around at it. The thing about the bundling is that you're gonna get a certain percentage defaulting, but not all of it. There's a sweet spot on the price for this stuff. As long as the revenue from the sound portion, combined with the discount price, adds up to a good enough potential for long-term value, you'll find folks who are willing to take the risk.

I think we're at that point now. We'll see how it plays out.

I like the plan to introduce a market valuation on this stuff rather than having the feds peg a price, which would have to be arbitrary in the final analysis.

In my mind these things are intrinsically impossible to evaluate given the fragility of the world economy. We are still not sure how deep the current recession/depression will be, whether inflation or deflation will be the problem 2 or 3 or 10 years down the road, whether unemployment will peak at 9% or 15%. The default rates on the underlying mortgages thus becomes impossible to predict with any degree of accuracy, making the securities impossible to value except as highly risky junk.

[drkitten]

Now you're just being silly. Obviously you have to deal with individual applicants, you aren't qualified to head a bank because you're a lawyer, a great many lawyers happen to be qualified to lead a bank.

And I disagree.

If nothing else,.... if there are so many lawyers out there qualified to run a bank (and willing to do so for 1/100 of the usual salary), why aren't they doing so?


Incidentally, I bet a quick check of major bank executives would reveal a sizeable percentage of folks with law degrees.

I'm sure it would. That doesn't mean that a sizeable percentage of folks with law degrees are qualified to be a major bank executive. ("This point is so silly I shouldn't need to reply.")

Most finance MBAs aren't qualified even for mid-level money running positions. Beyond the simple academic credentials, the experience is key. And that's experience that lawyers, almost by definition, do not have, because they've been busy being lawyers.

I fear you greatly underestimate the amount and value of specialist knowledge in banking.

[mhaze]

Now you're just being silly. Obviously you have to deal with individual applicants, you aren't qualified to head a bank because you're a lawyer, a great many lawyers happen to be qualified to lead a bank.

This point is so silly I shouldn't need to reply.

Incidentally, I bet a quick check of major bank executives would reveal a sizeable percentage of folks with law degrees.Your point is equally silly. The degree doesn't matter, 10-20 years after graduation. It is the many years of experience that do. Thus if by lawyer you mean "those who have been practicing law for the last 10-20 years", your assertion is false. They are not qualified to run banks.

That's the problem. I'm not sure how many "smart, ethical people" with the relevant experience would be willing to take the job at 1/100 the salary. Or to put it another way, I'm not sure I'd believe that anyone willing to take the job at that price was actually that smart or ethical.

Driving a bank isn't like driving a lawn mower; it's not the sort of thing any neighborhood fifteen year old can do. And the consequences of a mistake are a lot worse than simply a badly mown lawn.I think this is not a problem. We could go take 500 presidents of small regional banks tommorrow, ask them to help and run the big ones. Then the ones that refuse, offer then 10x the initial pay offer and hire them on the spot.

Don't forget that salary or bonus to these individuals goes back into the local economy, which is kind of part of what is supposed to help pull out of a recession, as I recall.

[TraneWreck]

And I disagree.

If nothing else,.... if there are so many lawyers out there qualified to run a bank (and willing to do so for 1/100 of the usual salary), why aren't they doing so?


I don't even know how to respond to this. I would say probably because a corporate board of directors that's granting itself $10 million salaries and millions more in bonuses wouldn't want to hire a guy for say, 200k, that made them unecessary.


I'm sure it would. That doesn't mean that a sizeable percentage of folks with law degrees are qualified to be a major bank executive. ("This point is so silly I shouldn't need to reply.")


THis is quite literally what I said. To refresh your memory, "you aren't qualified to head a bank because you're a lawyer, a great many lawyers happen to be qualified to lead a bank."

So you repeat back to me exactly what I said and pretend like it's something clever you came up with, interesting.


Most finance MBAs aren't qualified even for mid-level money running positions. Beyond the simple academic credentials, the experience is key. And that's experience that lawyers, almost by definition, do not have, because they've been busy being lawyers.


You clearly have no idea what lawyers actually do, as evidenced by the comment above and this, "People who want a lawyer to run their bank deserve to have a banker defend them in court. Entirely different skill set."

Either you don't understand the concept of transactional law or you're trying to be funny. Regardless of the choice, it's a silly, absurd point.

When a bank agrees to a credit default swap with an insurer, who do you think writes the deal? When a contract is made, who do you think writes that contract? When a more complicated financial instrument is created, who do you think they approach to make sure it's done correctly?

Lawyers participate in every aspect of banking. Every deal, every mortgage, and every security goes through a lawyer. There is no aspect of banking that a lawyer in that field wouldn't be experienced to handle.


I fear you greatly underestimate the amount and value of specialist knowledge in banking.

Please, introduce me to the aspect of banking that doesn't require someone with experience in the law to at least oversee.

[TraneWreck]

Your point is equally silly. The degree doesn't matter, 10-20 years after graduation. It is the many years of experience that do. Thus if by lawyer you mean "those who have been practicing law for the last 10-20 years", your assertion is false. They are not qualified to run banks.

No, it's your interpretation of my point that's silly. Obviously the population of lawyers qualified for the job will include those who have worked with banks or related financial institutions.

But nice job of turning a relatively simple point into a ridiculous straw man. let me refresh your memory as to what I wrote earlier, "Because a significant percentage of lawyers went through JD-MBA programs, worked in banks before law school, work for banks as lawyers, and generally have a great deal of experience in a number of subjects relevant to banking."

Relevant education + experience.

You're making the same error as drkitten, transactional lawyers in practice will be engaged in every aspect of a bank's operation.


I think this is not a problem. We could go take 500 presidents of small regional banks tommorrow, ask them to help and run the big ones. Then the ones that refuse, offer then 10x the initial pay offer and hire them on the spot.

Don't forget that salary or bonus to these individuals goes back into the local economy, which is kind of part of what is supposed to help pull out of a recession, as I recall.

This is another good possibility. Promote people who have kept their banks clean through the last couple decades.

[drkitten]

You clearly have no idea what lawyers actually do, as evidenced by the comment above and this, "People who want a lawyer to run their bank deserve to have a banker defend them in court. Entirely different skill set."

Either you don't understand the concept of transactional law or you're trying to be funny. Regardless of the choice, it's a silly, absurd point.

When a bank agrees to a credit default swap with an insurer, who do you think writes the deal?

I think it's you who has no idea what bankers do.

The banker is the one who decides what deal to make. The lawyer writes it up, as directed by the banker.

My lawyer wrote the contract for the house I bought; he certainly didn't tell me which house to buy or even whether it was a good investment. My lawyer wrote my will, but didn't tell me who should get the record collection or the antique watch that used to belong to my great-grandfather.


Please, introduce me to the aspect of banking that doesn't require someone with experience in the law to at least oversee.

You have it exactly backwards. NO part of banking requires a lawyer to "oversee"; oversight is a function of the banking experts. There is also no part of a hospital that doesn't involve lawyers in some way(which is why every deal a hospital makes is written by a lawyer) -- but the key business is medical, not legal.

A lawyer is no more qualified to "oversee" a bank than is one of the tellers.

[drkitten]

No, it's your interpretation of my point that's silly. Obviously the population of lawyers qualified for the job will include those who have worked with banks or related financial institutions.

But nice job of turning a relatively simple point into a ridiculous straw man. let me refresh your memory as to what I wrote earlier, "Because a significant percentage of lawyers went through JD-MBA programs, worked in banks before law school, work for banks as lawyers, and generally have a great deal of experience in a number of subjects relevant to banking."

Relevant education + experience.

Except that working for a bank "as lawyers" isn't relevant to a money-running job.

[charles brough]

Perhaps we should change the title to this thread "lawyer vs. banker" posts.

Myself, I did not think of bankers as needing a law degree, but it seems to make sense that the higher up the banker moves in the heirarchy, the more legal expertise he had would be useful. I do know that some if not all corporations and probably banks do have a legal department. So, perhaps, each banker need not be a lawyer.

Perhaps much of the dispute rests on underlying thinking that lawyers are crooked. Well, there is a certain amount of justification for that view! . . .

[drkitten]

Myself, I did not think of bankers as needing a law degree, but it seems to make sense that the higher up the banker moves in the heirarchy, the more legal expertise he had would be useful. [ I do know that some if not all corporations and probably banks do have a legal department. So, perhaps, each banker need not be a lawyer.

That's not the question.

The question is whether being a lawyer can magically substitute for the thirty years of money running experience you don't have because you were too busy working as a lawyer.

The fact that TraneWreck thinks it can is probably the strongest argument I could make for the preservation of the existing system.

[TraneWreck]

I think it's you who has no idea what bankers do.

The banker is the one who decides what deal to make. The lawyer writes it up, as directed by the banker.

My lawyer wrote the contract for the house I bought; he certainly didn't tell me which house to buy or even whether it was a good investment. My lawyer wrote my will, but didn't tell me who should get the record collection or the antique watch that used to belong to my great-grandfather.


At this point you have to see the absolute folly of your stance. Of course the lawyer is doing as directed. But that work gives the lawyer a massive amount of experience with the ways and means of bank business. If you were looking for someone to promote to a decision making position, you would pick the person who has involved themselves in the major functions of the business.

That's like saying, "we can't promote this Colonel to General because he's just been following the orders of the General." That's how a hierarchical structure operates. But within the context of the job given to them, lawyers have a significant amount of decision making.


You have it exactly backwards. NO part of banking requires a lawyer to "oversee"; oversight is a function of the banking experts. There is also no part of a hospital that doesn't involve lawyers in some way(which is why every deal a hospital makes is written by a lawyer) -- but the key business is medical, not legal.

A lawyer is no more qualified to "oversee" a bank than is one of the tellers.

This is honestly astonishing. Every deal made by a bank will go through a lawyer to insure that the bank doesn't leave itself open to liability or run afoul of the law.

As for the hospital, I would say a lawyer who has worked with hospital administration would be a perfect person to eventually take over the business aspects of that institution. Who better to direct than someone intimately familiar with all the legality surrounding any potential course of action?

[TraneWreck]

That's not the question.

The question is whether being a lawyer can magically substitute for the thirty years of money running experience you don't have because you were too busy working as a lawyer.

The fact that TraneWreck thinks it can is probably the strongest argument I could make for the preservation of the existing system.

THis is such a foolish summation of the point at hand. Now I understand why you're having so much difficulty.

When you work as a lawyer in a bank you are dealing with the specific financial functions of that institution. You learn the laws surrounding all of the financial instruments and the various ways to create them. When an executive makes a deal of any kind, he will go to a lawyer to make sure it's done properly. If you know how to do the work of the executive properly when directed, it's an easy step up to making the decision in the first place.

I would love to hear you explain what it is that a bank executive does that a lawyer working in that field wouldn't know how to do.

[drkitten]

At this point you have to see the absolute folly of your stance. Of course the lawyer is doing as directed. But that work gives the lawyer a massive amount of experience with the ways and means of bank business.

No more than doing as the hospital administrator directs gives the lawyer a massive amount of experience with neurosurgery.


As for the hospital, I would say a lawyer who has worked with hospital administration would be a perfect person to eventually take over the business aspects of that institution. Who better to direct than someone intimately familiar with all the legality surrounding any potential course of action?

A doctor or other medical professional.

We've done that experiment. Which is why most hospital administrators are MD's.

[drkitten]

When you work as a lawyer in a bank you are dealing with the specific financial functions of that institution.

Do you really think that if you repeat a wrong statement often enough it will become right?



I would love to hear you explain what it is that a bank executive does that a lawyer working in that field wouldn't know how to do.

Run the money.

[TraneWreck]

No more than doing as the hospital administrator directs gives the lawyer a massive amount of experience with neurosurgery.


But the job of hospital administrator doesn't require you to be able to engage in neurosurgery. I looked up the requirements for applicants to the job and it says a BA or BS with a masters in medical administration as a nice, but not necessary qualification.

So yes, someone with a law degree who had been working in a hospital would be more than qualified to take that position.


A doctor or other medical professional.

We've done that experiment. Which is why most hospital administrators are MD's.

Here is the board of executives for Northwestern Memorial in Chicago:

http://www.nmh.org/nmh/aboutus/organizationleaders.htm

Not a single one of them have an MD. They all have bachelors and a masters.

Here's an article about the fellow the University of Chicago named as president of Weiss Memorial Hospital:

http://www.uchospitals.edu/news/1999/19990913-cucci-weiss.html

No MD here.

Now, admittedly, none of these folks have law degrees either, but this is simply information to reject your bizarre premise that you have to have experience with the subject matter in order to serve as an administrator.

I couldn't find a single administrator with the ability to perform neorosurgery.


Edit: This is interesting, the governing board of directors for the Cook County hospital system has 11 members, 2 with MDs and 1 with a JD.

http://www.cookcountygov.com/taxonomy/HealthHospitals/CCHHS_BoardMgt.pdf

[boloboffin]

Actually, I think he's got it right and your logical construct is mistaken. Inflation is caused by too much money chasing too few goods, not having to pay interest.

But isn't part of our problem that we have a tremendous inventory overhang from when the housing market collapsed?

And is there another way to create new money, other than "out of thin air"? I don't want to sound like a Paultard here, but the financial system really is bubble all the way down. It's the ability of the financial system to maintain momentum that keeps the whole thing afloat, and right now nothing's moving.

/gross oversimplification

[TraneWreck]

Run the money.

What does that entail, according to you?

[Piggy]

In my mind these things are intrinsically impossible to evaluate given the fragility of the world economy. We are still not sure how deep the current recession/depression will be, whether inflation or deflation will be the problem 2 or 3 or 10 years down the road, whether unemployment will peak at 9% or 15%. The default rates on the underlying mortgages thus becomes impossible to predict with any degree of accuracy, making the securities impossible to value except as highly risky junk.

Well, it's certainly true that we don't know the true valuation, because we can't. No argument there.

But regardless, we're at the point now where we're forced to peg them at some value or other.

By marketizing the valuation process, we get a "wisdom of crowds" effect -- similar to the remarkably accurate presidential prediction markets, for example -- which pools the collective smarts and is much more likely to end up correctly evaluating them than any top-down approach.

So given that it has to be done, I think it's the best way of going about it.

[drkitten]

What does that entail, according to you?

Evaluate the profitability and risk of proposed investments, in very broad terms.

You can see just how broad those terms are when you look at how the bankers themselves have divided up that pie. One of the participants in this board, for example, is (IIRC) a specialist in foreign currency transactions (trying to decide if the risk involved in trading British pounds for Mexican pesos is acceptable); she's neither qualified or experienced in evaluating commercial loans. A specialist in commercial loans wouldn't be qualified to examine bond transactions, and neither would be qualified to evaluate equities.

Even in as narrow a field as equities, people specialize; there are people out there who specialize in looking at utilities, at retail stocks, at "technology," at health care, and so forth.

A stock analyst who specializes in computer and technology stocks is generally not qualified to analyze utility stocks. Neither is typically capable of evaluating a residential mortgage.

But your suggestion is that a lawyer, who specializes "the law relevant to banks," can do all three?

I lack scope within the forum rules to fully characterize the utter wrongness of your suggestion.

[drkitten]

http://www.uchospitals.edu/news/1999/19990913-cucci-weiss.html[/url]

No MD here.

Now, admittedly, none of these folks have law degrees either, but this is simply information to reject your bizarre premise that you have to have experience with the subject matter in order to serve as an administrator.

Edward Cucci, 54, of Lincolnshire, Illinois, has more than 25 years of experience in hospital administration. He earned his undergraduate degree from North Park College in 1968, completed a master's degree in teaching from Northeastern Illinois University in 1971 while working at Augustana Hospital in Chicago and Evanston Hospital in Evanston, Illinois, then earned a master's degree in healthcare and hospital administration from the University of Minnesota in 1974.

Nope, no subject matter expertise here. No one with a masters degree in health care could possibly be a medical professional. Why, any paralegal could accomplish as much.

Fire all the doctors! Let the lawyers take over, since lawyers are demonstrably omniscient!

[TraneWreck]

Edward Cucci, 54, of Lincolnshire, Illinois, has more than 25 years of experience in hospital administration. He earned his undergraduate degree from North Park College in 1968, completed a master's degree in teaching from Northeastern Illinois University in 1971 while working at Augustana Hospital in Chicago and Evanston Hospital in Evanston, Illinois, then earned a master's degree in healthcare and hospital administration from the University of Minnesota in 1974.

Nope, no subject matter expertise here. No one with a masters degree in health care could possibly be a medical professional. Why, any paralegal could accomplish as much.

Fire all the doctors! Let the lawyers take over, since lawyers are demonstrably omniscient!

But he's not a doctor. That's the point. You claimed they all had MDs, you were wrong.

And yes, I would expect the very head of a renoun hospital to have a great deal of experience in administration. But administration, you will notice, is a profession that has nothing to do with being a doctor.

[Piggy]

Would y'all consider splitting this debate off into a new thread?

Just a thought.

[drkitten]

But he's not a doctor. That's the point. You claimed they all had MDs, you were wrong.

No, I claimed they were all MDs or healthcare professionals.

Which he most definitely is.



And yes, I would expect the very head of a renoun hospital to have a great deal of experience in administration.

But I will go further. I expect him to have a great deal of experience in medical administration. I wouldn't expect a legal administrator to have that experience.

But administration, you will notice, is a profession that has nothing to do with being a doctor.

I don't notice that at all. He's not a generic administrator -- he's a health care administrator, which has a great deal to do with being a doctor.

[TraneWreck]

Evaluate the profitability and risk of proposed investments, in very broad terms.

You can see just how broad those terms are when you look at how the bankers themselves have divided up that pie. One of the participants in this board, for example, is (IIRC) a specialist in foreign currency transactions (trying to decide if the risk involved in trading British pounds for Mexican pesos is acceptable); she's neither qualified or experienced in evaluating commercial loans. A specialist in commercial loans wouldn't be qualified to examine bond transactions, and neither would be qualified to evaluate equities.

Even in as narrow a field as equities, people specialize; there are people out there who specialize in looking at utilities, at retail stocks, at "technology," at health care, and so forth.

A stock analyst who specializes in computer and technology stocks is generally not qualified to analyze utility stocks. Neither is typically capable of evaluating a residential mortgage.

But your suggestion is that a lawyer, who specializes "the law relevant to banks," can do all three?

I lack scope within the forum rules to fully characterize the utter wrongness of your suggestion.

Well this is an even stranger argument. You have basically pointed out that no one is qualified to direct a bank because someone involved in tech stocks is not capable of dealing with mortgages. This is also a massive misunderstanding of what a bank executive's actual duties are.

But just like a hospital administrator doesn't need to know how to perform open heart surgery, directing the bank and administrating its internal functions is not the same as giving stock advice.

The administrators and boards of directors take advice from the people with experience in specific subject matters. Why does knowledge of a particular type of stock give you any ability to run to functions of a bank? In fact, the highest functions of a business (mergers and acquisition, details concerning the corporate structure, obligations to shareholders...etc) will be much more familiar to someone with corporate law experience than people "running money."

And furthermore, one essential aspect of evaluating "the profitability and risk of proposed investments, in very broad terms" is knowledge of the legal landscape. Regulations and restrictions are at least as important as the ability to "guage the market," which it's clear no one currently in charge of the banks can do anyway.

[drkitten]

Well this is an even stranger argument. You have basically pointed out that no one is qualified to direct a bank because someone involved in tech stocks is not capable of dealing with mortgages. This is also a massive misunderstanding of what a bank executive's actual duties are.

And here's your fundamental problem.

You can't distinguish between "administration" and doing the actual work of the organization.

Here's your original quote (post #99, highlights mine)

I can't tell you how happy it would make me to nationalize those failing institutions, fire all the goofballs that caused this mess, and put smart, ethical people in their positions for 1/100 of the salary.

You're firing "all the goofballs" who caused the mess, including the specialists involved in assessing risks of CDAs and whatnot.

And replacing them with unqualified lawyers.

And you think that's okay, because since lawyers are qualified to sit on the board of directors, and therefore they're qualified to run the money.


The administrators and boards of directors take advice from the people with experience in specific subject matters.

Whom you've just fired and replaced with legal expertise.

[TraneWreck]

No, I claimed they were all MDs or healthcare professionals.

Which he most definitely is.

But I will go further. I expect him to have a great deal of experience in medical administration. I wouldn't expect a legal administrator to have that experience.


First of all, a legal administrator is a sort of business expert that deals with massive law firms. It's not necessary to be a lawyer to work that job.

But the major point is that you become a "health care professional" by getting a bachelor's degree and going to work in the medical profession. Thus someone with a law degree who went to work in the medical profession would be more qualified than someone with just a bachelor's.

Once again, the act of administration is separate from the subject matter being administrated.


I don't notice that at all. He's not a generic administrator -- he's a health care administrator, which has a great deal to do with being a doctor.

There is no skill unique to being a doctor that is remotely applicable to being an administrator. You don't need knowledge of anatomy, the ability to perform surgery, or familiarity with X-ray and MRI machines.

You may need knowledge of how business relates to the uniqueness of the medical profession. This would include concepts like malpractice liability, the odd laws surrounding perscription drugs, enhanced duties concerning medical ethics, and insurance issues.

But once again, the interesting point is that a lawyer working for a hospital will be more intimately familiar with each of those issues than anyone else.

So why aren't lawyers administrators? It appears that there's no reason for a lawyer to take a pay cut:

According to this chart (I can't verify it's accuracy):

http://www.payscale.com/research/US/Job=Hospital_Administrator/Salary/by_Degree

Hospital administrators make about $75k on average. The average lawyer working for a hospital makes about $84k (http://www.payscale.com/research/US/Job=Attorney_%2F_Lawyer/Salary)

So there's no real benefit for someone with a law degree to move into that position. This is different than saying they couldn't do that job.

And finally, you can keep looking through boards of directors for hospitals throughout the country, but there are plenty of JDs on those boards. And again, to be clear, I'm not arguing that lawyers make the best administrators as a rule, or are even qualified for those positions at a higher rate, I'm saying that a lawyer with the right experience will have expertise that would make them useful in those positions.

[TraneWreck]

You're firing "all the goofballs" who caused the mess, including the specialists involved in assessing risks of CDAs and whatnot.

And replacing them with unqualified lawyers.

And you think that's okay, because since lawyers are qualified to sit on the board of directors, and therefore they're qualified to run the money.


Whom you've just fired and replaced with legal expertise.

Haha, nice try.

First of all, if the goofballs in question include subject matter experts, then obviously they will have to be replaced by someone with the requisite skills. I will agree that the pool of available candidates will not likely include lawyers (though there are plenty of people on wall street who used to be lawyers).

But I was, of course, refering to the executives behind this mess. To the extent that I implied otherwise, I apologize. The Boards of Directors and executive positions could be filled by transactional lawyers with years of experience in finance, corporate law, and other banking-related functions.

And maybe most importantly, I identified lawyers as one potential group that could fill the vacancy left by the removal of the boards of directors we're currently bailing out. There are plenty of others, but you seem to have a problem with lawyers, which is cool, but it doesn't allow you to suspend reason.

[TraneWreck]

And here's your fundamental problem.

You can't distinguish between "administration" and doing the actual work of the organization.


I don't believe I am. I'm merely pointing out that you don't need to be able to remove a kidney to be a hospital administrator.

[mhaze]

....but you seem to have a problem with lawyers, which is cool, but it doesn't allow you to suspend reason.Given that the animal house called Congress rather exclusively is laswyers, why would a reasonable person want in multiplicity the stench of such a pig farm?

[TraneWreck]

Given that the animal house called Congress rather exclusively is laswyers, why would a reasonable person want in multiplicity the stench of such a pig farm?

For the honey-baked ham?

[gdnp]

Well, it's certainly true that we don't know the true valuation, because we can't. No argument there.

But regardless, we're at the point now where we're forced to peg them at some value or other.

By marketizing the valuation process, we get a "wisdom of crowds" effect -- similar to the remarkably accurate presidential prediction markets, for example -- which pools the collective smarts and is much more likely to end up correctly evaluating them than any top-down approach.

So given that it has to be done, I think it's the best way of going about it.

I agree. I'm afraid, however, that until the economy stabilizes the crowds will have little wisdom.

[mhaze]

I agree. I'm afraid, however, that until the economy stabilizes the crowds will have little wisdom.(Not disagreeing with your or Piggy's comment but trying to clarify).

There are only three prices: What the seller wants, what the buyer wants, and what a transaction actually occurs for.

What you are seeing is a myopic and market irrational, egotistical focus on the first of these.

[gdnp]

If the seller wants a million and the buyer will only pay $500,000, then no transaction occurs. The market collapses.

People focus, for example, on the fall in housing prices. What they ignore if the even more dramatic fall in housing sales. What the buyer is willing to pay and what the seller wants to part with his property no longer match, and thus no deal happens.

The same is largely true with the credit markets. The banks don't want to lend money at the interest rates that the shaky borrowers will pay, and the borrowers don't want to borrow money at the rates at which the banks are willing to lend. Thus you end up with a frozen market where little money gets lent.

[mhaze]

If the seller wants a million and the buyer will only pay $500,000, then no transaction occurs. The market collapses.

People focus, for example, on the fall in housing prices. What they ignore if the even more dramatic fall in housing sales. What the buyer is willing to pay and what the seller wants to part with his property no longer match, and thus no deal happens.

The same is largely true with the credit markets. The banks don't want to lend money at the interest rates that the shaky borrowers will pay, and the borrowers don't want to borrow money at the rates at which the banks are willing to lend. Thus you end up with a frozen market where little money gets lent.This is why bankrupcy and foreclosure mechanisms are good, they allow for corrections when needed. Say that a company will not part with A B C for offered prices, but cannot maintain with existing cash flow. It files bankrupcy, and the court commences operating the company for the benefit of the creditors. A B C are sold. There is discretion not to, such as if the creditors vote to wait until they are priced adequately.

It doesn't matter what the company owning A B C thinks or wants.

You've brought up several examples, of course. But there is and can be no such thing as "a market collapsing" without government holding, supporting, restricting or otherwise monkeying with the market mechanism.

Incidentally, the most common example of this is when a consumer owes more than the value of an asset, so he cannot sell it and feels he must continue making the payment (due to not being able to stomach the loss on liquidation). But this is only putting off the inevitable often with worse effects. EG "Let's hold on to A B C and wait for the market to recover".

HA.

[TraneWreck]

This is why bankrupcy and foreclosure mechanisms are good, they allow for corrections when needed. Say that a company will not part with A B C for offered prices, but cannot maintain with existing cash flow. It files bankrupcy, and the court commences operating the company for the benefit of the creditors. A B C are sold. There is discretion not to, such as if the creditors vote to wait until they are priced adequately.
the payment (due to not being able to stomach the loss on liquida
It doesn't matter what the company owning A B C thinks or wants.


This is usually true, but right now that doesn't work. Banks and other financial institutions have leveraged the value of those mortgages so many times that foreclusure essentially makes 95% of the wealth surrounding a mortgage instantly disapear.

When $30 million of borrowed and leveraged money are based on a $300,000 house, forclosure doesn't really help.

[mhaze]

This is usually true, but right now that doesn't work. Banks and other financial institutions have leveraged the value of those mortgages so many times that foreclusure essentially makes 95% of the wealth surrounding a mortgage instantly disapear.

When $30 million of borrowed and leveraged money are based on a $300,000 house, forclosure doesn't really help.I'm afraid that you have just proved me right. When by legal or illegal means, $30M is supported solely by a $300K morgage (I don't know this is an accurate ratio but nothing would surprise me) then more than every you need the clarity of opening the books up in a legal process and selling the assets at market value to the market. The resulting money is real, and is divided up between the creditors. This is the process of "liquidation". You agree the $30M cannot be propped up, that is irrational.

As Martha Stewart before her jail cell: "It's a good thing".

[TraneWreck]

I'm afraid that you have just proved me right. When by legal or illegal means, $30M is supported solely by a $300K morgage (I don't know this is an accurate ratio but nothing would surprise me) then more than every you need the clarity of opening the books up in a legal process and selling the assets at market value to the market. The resulting money is real, and is divided up between the creditors. This is the process of "liquidation". You agree the $30M cannot be propped up, that is irrational.

As Martha Stewart before her jail cell: "It's a good thing".

I absolutely agree with this. I was advancing two points: first, an explanation of the government's position, that we have to bailout without condition, and second, I argued that when you do what you suggest above, the government has to temporarily provide those lost services.

I think we're basically in agreement save for the immediate need of government money in the economy.

My only point was that if you go through a bankrupcy preceeding, the companies really will go under. There's no way to even remotely cover that debt in a more standard manner.

[mhaze]

I absolutely agree with this. I was advancing two points: first, an explanation of the government's position, that we have to bailout without condition, and second, I argued that when you do what you suggest above, the government has to temporarily provide those lost services.

I think we're basically in agreement save for the immediate need of government money in the economy.

My only point was that if you go through a bankrupcy preceeding, the companies really will go under. There's no way to even remotely cover that debt in a more standard manner.You said,

When $30 million of borrowed and leveraged money are based on a $300,000 house, forclosure doesn't really help

If so, how could fraud-illegalities-NOT be involved?

So are we bailing fraudsters?

[TraneWreck]

You said,

When $30 million of borrowed and leveraged money are based on a $300,000 house, forclosure doesn't really help

If so, how could fraud-illegalities-NOT be involved?

So are we bailing fraudsters?

I'm not sure what else to say.

We can allow bankruptcies to go forward and foreclosures to happen and provide no government funds to pick up the functions of the failed businesses. Every economist I've been able to find views this as a terrible idea.

Option two, government funds are used to help us through the crisis.

Now within option two we can either bailout the fraudsters you mentioned above, or those funds can go to banks without toxic assests, we can temporarily nationalize failed institutions, or the government can step in and provide those services themselves.

I think all the fraud should be punished. It turns out that's not what Geitner and Obama are going to do, I think they're making a mistake.

But it would also be a mistake to assume foreclosure and bankruptcy would take care of the credit market freezes and other issues.

[MattC]

You said,

When $30 million of borrowed and leveraged money are based on a $300,000 house, forclosure doesn't really help

If so, how could fraud-illegalities-NOT be involved?

So are we bailing fraudsters?

Have you some speedy way of weeding out the fraudulent transactions and the persons behind them from the vast web of misery the financial system has become? Bear well in mind that people suffer the longer you take to do this.

~ Matt

[mhaze]

Have you some speedy way of weeding out the fraudulent transactions and the persons behind them from the vast web of misery the financial system has become? Bear well in mind that people suffer the longer you take to do this.

~ MattThat's a broad question. I understand the difficulty of it, but it is also of concern that attribution of cause may be misdirected, for various reasons, say some fraulent, some political.

Here is where I've got a problem - Bush paid 325B in July 2008 to correct the subprime problem, essentially making subprime AAA+. That should have trickled through all the tranches and derivatives based on morgages and stabilized their values. But in fact the various institutions began to fail in October and have continued to topple like dominos since. This tells me that the financial instruments which have questionable value are not based on subprime morgages. In turn the continued attribution of cause to subprime is in error (not necessarily fraudsters, could be just stupidity).

Granted there may have been new waves of morgages souring. But all jumbo morgages were protected from default by "PMI" in any case. Did all PMI suppliers fall? I've heard no word of that, and everyone I know is still paying a PMI premium...

So looking strictly at the issue Trane brought up, $30M in bank equity being propped up by a $300K morgage, I think that we could say that if this was actually occurring and given the facts as I laid them out, yes, you could go in and show fraud.

Tranches made up allegedly 30M in value cannot be based on 300K morgage unless there is fraud. A simple example is the same morgage being listed 100 times, when it should be listed only once.

Again, you've posed a broad question, and we more or less agree on that. But a solution method out of the mess which leaves the stones unturned is unsatisfactory, and that's what we have currently.

[oggiesnr]

Tranches made up allegedly 30M in value cannot be based on 300K morgage unless there is fraud. A simple example is the same morgage being listed 100 times, when it should be listed only once.



Not quite. I use the security of that mortgage to take out another loan and in turn the lender uses my loan as security for another one and there's no problem as the original loan is now part of a package of AAA loans and so the merry-go-round continues until someone defaults and people start looking at the asset value that it's all based on. At that point lots of loans get called in and mayhem ensues as the insurer hasn't made provision for this happening but just taken the premium.

Steve

[mhaze]

Not quite. I use the security of that mortgage to take out another loan and in turn the lender uses my loan as security for another one and there's no problem as the original loan is now part of a package of AAA loans and so the merry-go-round continues until someone defaults and people start looking at the asset value that it's all based on. At that point lots of loans get called in and mayhem ensues as the insurer hasn't made provision for this happening but just taken the premium.

SteveOkay, how is there not fraud?

300k morgage at 8% (M) sold from A to B, A gets say 270k and does whatever with it - not relevent, that's fractional reserve.

B, morgage processor, folds M in tranche Z1, says z1 pays 8% and M is only equity.

C buys Z1 for $3M.

B is guilty of fraud. Z1 paid 0.8% at 3M valuation.

No? Yes? What did I miss?

Where is a house of cards without liars?

[Piggy]

What did I miss?

That it's all legal. If there's no law against it, well, there you go.

[mhaze]

Show the method of constructing the afore mentioned scam by which it falls outside the law.

[Piggy]

Show the method of constructing the afore mentioned scam by which it falls outside the law.

Well, since I'm claiming it doesn't fall outside the law, you're asking the wrong person.

[mhaze]

Well, since I'm claiming it doesn't fall outside the law, you're asking the wrong person.Ok, but I meant falling outside of fraud law, etc. Sorry I was confusing.

So show how these activities are legal, then. Where is the loophole?

[Piggy]

Ok, but I meant falling outside of fraud law, etc. Sorry I was confusing.

So show how these activities are legal, then. Where is the loophole?

Loophole in what?

Which law do you think has been violated and by whom?

I mean, there may be some illegal activity in there somewhere, but in the grand scheme of things, considering 35-to-1 leverage was legal, even more leverage was legal if you got insurance, the insurance companies were allowed to leverage out the wazoo, exotic financial instruments were legal, the CDO market was largely unregulated, the CDS market was pretty much entirely unregulated... I just don't see what the criminal activity was that you're implying.

Maybe I'm missing something.

[oggiesnr]

The only possibly questionable parts of the whole deal is whether the credit agencies should have looked harder at the colateral before they rated the packages AAA but as they were all insured it fell within their guidelines so could rubber stamp them so to speak and whether the insurance companies should have looked harder and ensured they had the assets to cover their liabilities. Not so much illegal as stupid.

Steve

[Puppycow]

But isn't part of our problem that we have a tremendous inventory overhang from when the housing market collapsed?

And is there another way to create new money, other than "out of thin air"? I don't want to sound like a Paultard here, but the financial system really is bubble all the way down. It's the ability of the financial system to maintain momentum that keeps the whole thing afloat, and right now nothing's moving.

/gross oversimplification

Sorry I didn't notice this when you posted it.

Um, for the first question, yes. This is why the price of housing has collapsed. Too many houses on the market, so more sellers than buyers. Although houses are excluded from consumer inflation, they are nonetheless a good subject to inflation and deflation like any other good and are a part of whole picture of the real economy. So when house prices fall, it acts like deflation.

As to the second, question, I suppose we could go back to gold, but I don't think that's a good idea. Better to have the Fed target the ideal inflation range of about 2-3%. Add money (by lowering interest rates) if it falls below 2% and take money out (by raising interest rates) if it rises above 3% (simplification). This is an extraordinary situation because even with interest rates at 0%, there is still deflation. So the next step is quant easing.

[charles brough]

Not quite. I use the security of that mortgage to take out another loan and in turn the lender uses my loan as security for another one and there's no problem as the original loan is now part of a package of AAA loans and so the merry-go-round continues until someone defaults and people start looking at the asset value that it's all based on. At that point lots of loans get called in and mayhem ensues as the insurer hasn't made provision for this happening but just taken the premium.Steve

A good description. It is legal unless the government passes liegislation that will prevent it.

It has happened often in history . . .nothing new. In the Dutch Tulip craze, the price of tulips, of all things, skyrocketed and became an immense speculative competition. Finally, the bubble burst and prices of them collapsed, throwing the whole economy into turmoil.

In the Johan Law Inflation, paper money was tied in value to the price of land. Land prices rose, so the government printed more money because the increased value of the land warrented it. So, land prices rose further, thus justifiying even more printing of money. Prices flew through the roof and then collapsed, leaving a depression.

In the South sea Bubble, the bubble burst when the immense promise of wealth from the South Sea empire disappeared.

[mhaze]

Loophole in what?

Which law do you think has been violated and by whom?

I mean, there may be some illegal activity in there somewhere, but in the grand scheme of things, considering 35-to-1 leverage was legal, even more leverage was legal if you got insurance, the insurance companies were allowed to leverage out the wazoo, exotic financial instruments were legal, the CDO market was largely unregulated, the CDS market was pretty much entirely unregulated... I just don't see what the criminal activity was that you're implying.

Maybe I'm missing something.In either the assertions of income from the instrument or it's asset basis.

Example. $3M Derivative is sold based on 300K morgage (10-1 leverage). Morgage is based on 30K down payment (10-1 leverage, 8% return).

Return is 0.08 x 30K = about 24,000 interest per year.

$3M derivitive will not sell if it is advertized that it only yields 24,000 per year. The $3M investment needs to show a likely profit of $240,000.

How could such a yield have been asserted without lying? Now back up to the $3M valuation. The valuation must be based, as in bonds, based on the discounted present value of the future income stream at the required current yield. Thus we know that the $3M "investment" was in fact said to yield $240,000. Which is a lie. Now suppose that it was asserted the derivative had shown a historical income stream of $240,000, so you have a "safe investment". In our hypothetical here we show that the income is only $24,000. So anybody who asserted $240,000 was pulling cash from new equity to keep the ball rolling - that's called a ponzi scheme. Again illegal.

Overstating the asset base behind the 3M, lying about the income stream, faking the income stream - all illegal...

Maybe this is clearer.

[oggiesnr]

How could such a yield have been asserted without lying? Now back up to the $3M valuation. The valuation must be based, as in bonds, based on the discounted present value of the future income stream at the required current yield. Thus we know that the $3M "investment" was in fact said to yield $240,000. Which is a lie. Now suppose that it was asserted the derivative had shown a historical income stream of $240,000, so you have a "safe investment". In our hypothetical here we show that the income is only $24,000. So anybody who asserted $240,000 was pulling cash from new equity to keep the ball rolling - that's called a ponzi scheme. Again illegal.

Overstating the asset base behind the 3M, lying about the income stream, faking the income stream - all illegal...



The point is it didn't go from $300,000 to $30m in one jump. It did it in a series of small steps each of which appeared to make sense when you looked at the step immediately behind it. Problem is that when a step near the bottom fails all those above it are in danger of failing as well. When the bottom step was a sub-prime mortgage then there is nothing there.

But it is not a case of one entity inflating the value, the whole lot churned through the system and through many hands each banking on getting their 10%+ return. There was no new equity or investors as in the classic Ponzi scam, these were big players churning the same basic debt through the system in more and more obtuse ways.

In effect all that money was airware, it existed only on balance sheets and inside computers. The catch is that we, the taxpayer, are now turning that airware into real cash for them.

Steve

[mhaze]

The point is it didn't go from $300,000 to $30m in one jump. It did it in a series of small steps each of which appeared to make sense when you looked at the step immediately behind it. Problem is that when a step near the bottom fails all those above it are in danger of failing as well. When the bottom step was a sub-prime mortgage then there is nothing there. .....Wrong. Subprimes were fully fixed 7-08 by Bush with over 300B. I used an example of jacking value from 300K to 3M to show the problem.

Now I understand what you've said is the common perception, but I believe that when you follow the money, you have to encounter one or more of the three types of illegal behavior I laid out.

Or the classic 4th case: Listing the same asset down more than once.


I'm not saying you are not right - I just haven't seem this argument laid out clearly to show that it doesn't contain fundamentally illegal activity, and I'm having difficulty contriving a way to run the scam without such. Put yourself in the shoes of the scammer, and tell me how you do it without breaking laws.

[TraneWreck]

Wrong. Subprimes were fully fixed 7-08 by Bush with over 300B. I used an example of jacking value from 300K to 3M to show the problem.


I think what he means is that there were plenty of intermediary steps in the leveraging. So you start with a 300k mortgage, sell that to another institution that uses it as collateral to borrow $1 million, and so on, until you've done that 30x.

Part of the problem was that the Fed helped make a lot of those steps legal.


Now I understand what you've said is the common perception, but I believe that when you follow the money, you have to encounter one or more of the three types of illegal behavior I laid out.

Or the classic 4th case: Listing the same asset down more than once.


I'm not saying you are not right - I just haven't seem this argument laid out clearly to show that it doesn't contain fundamentally illegal activity, and I'm having difficulty contriving a way to run the scam without such. Put yourself in the shoes of the scammer, and tell me how you do it without breaking laws.

Part of the difficulty is that the process was 1 part deregulation, 1 part lax oversight, 1 part wholesale fraud, and 20 parts sheer stupid gambling. We talked about this a little before, but insurance institutions never would gamble on those credit default swaps in a vaccuum, it required complicity throughout the financial system all based on the bet that housing prices would go up forever (incidentally, they're still dropping).

So I agree with you 100% that there was fraud and illegal activity on every level, but it's sometimes difficult to distinguish from abject stupidity. I'm hoping that Obama is just trying to stabalize the system before going after all that criminality, but my fear is that it will all be ignored and swept under the rug with the rich-person defense, "mistakes were made in the past but we have to focus on the future...blah, blah, blah..."

[Piggy]

Put yourself in the shoes of the scammer, and tell me how you do it without breaking laws.

You're presuming that there was a scam. I don't think there was, at least not at the core of the meltdown.

When you allow exorbitant leverage, then allow folks to extend that leverage even farther by using insurance, don't require the insurance to be backed by liquid assets, allow the securitizing of debt, and allow the securitized debt to then count as an asset base for further leverage, throw in default swaps on all that securitized debt to essentially shackle everyone's legs together, and you have a formula for a global financial meltdown once the underlying bubble (housing) bursts.

Everyone at every point is doing something legal.

It's the system they're in that can't help but produce a house of cards, if each person is acting in their own interest, or in the interest of their company or shareholders.

[Piggy]

So I agree with you 100% that there was fraud and illegal activity on every level

I don't, except for deceptive practices at the bottom of the chain in loan origination.

It might turn out to be true that there was lots of fraud going on, like Madoff and Stanford, but that simply made things worse.

It could have happened without any fraud at all, under the circumstances.

[oggiesnr]

I think what he means is that there were plenty of intermediary steps in the leveraging. So you start with a 300k mortgage, sell that to another institution that uses it as collateral to borrow $1 million, and so on, until you've done that 30x.



That is the point I was making.

As far as sub-prime being fixed I think the jury is still out.

Steve

[mhaze]

I think what he means is that there were plenty of intermediary steps in the leveraging. So you start with a 300k mortgage, sell that to another institution that uses it as collateral to borrow $1 million, and so on, until you've done that 30x.....That just plain does not work. Not when the intermediate documents are examined, then you find one or more of the illegalities earlier mentioned.

So the defense in court would be what, 30 guys lined up in a row claiming ignorance?

I'd love to see that.

Repeating:

To create a bubble using leveraged instrument basd on morgages requires lying about the income stream since that determine value of the instrument. Several times repeated.

Not focusing on the asset behind, that is, the morgage(s).

So how much did each of these 30 merchants claim their package was worth, and based on what?

[TraneWreck]

[QUOTE=Piggy;4570579]I don't, except for deceptive practices at the bottom of the chain in loan origination.
QUOTE]

I think that's the key, though. So, for example, they were paying people in FLorida to sign their names to mortgages without ever intending to give them property. Stuff like this went on at a staggering rate.

But every step of the leveraging pyramid you have to claim that the people were either perpetuating the fraud and profiting off of it, or were insanely stupid.

If you're purchasing one of these morgage backed securities, wouldn't check into the underlying mortgage? In order to give those instruments AAA ratings, wouldn't you want to figure out the employment situation of the person all that money depended on?

Giving those assets AAA ratings is either fraud or that process has zero conditions and therefore no meaning, which seems increasingly likely.

[mhaze]

Here is something I wrote on 9/23/08.Some of the numbers may have changed. I'm not sure we know/have been told much more than was possible to deduce on 9/23/08.




We already bailed subprime.

Period.

Looking at several sources, total default in subprime:

(1) Subprime defaults = 1.3T x 25% = 325B.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

That number in default maybe presumed to be sold at a 20% loss, or 40% to take a wild number. The total economic loss to those who bought packages, derivative products, etc, containing a clear or hidden component of the subprimes then is

(2) 20-40% of (1.3T/4) = 65-130B.

Below cites $300B bailout already in place.

The Housing and Economic Recovery Act of 2008 (Pub.L. 110-289 (http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ289.110), H.R. 3221 (http://thomas.loc.gov/cgi-bin/bdquery/z?d110:H.R.3221:)) designed primarily to address the subprime mortgage crisis (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis), was passed by the United States Congress (http://en.wikipedia.org/wiki/United_States_Congress) on July 24 (http://en.wikipedia.org/wiki/July_24), 2008 (http://en.wikipedia.org/wiki/2008) and signed by President George W. Bush (http://en.wikipedia.org/wiki/President_George_W._Bush) on July 30 (http://en.wikipedia.org/wiki/July_30), 2008 (http://en.wikipedia.org/wiki/2008). It authorizes the Federal Housing Administration (http://en.wikipedia.org/wiki/Federal_Housing_Administration) to guarantee up to $300 billion in new 30-year fixed rate mortgages for subprime (http://en.wikipedia.org/wiki/Subprime) borrowers if lenders write-down principal loan balances to 90 percent of current appraisal value. It's intended to restore confidence in Fannie Mae (http://en.wikipedia.org/wiki/Fannie_Mae) and Freddie Mac (http://en.wikipedia.org/wiki/Freddie_Mac) by strengthening regulations and injecting capital into the two large U.S. suppliers of mortgage funding. States will be authorized to refinance subprime loans using mortgage revenue bonds. It also establishes the Federal Housing Finance Agency (http://en.wikipedia.org/wiki/Federal_Housing_Finance_Agency) (FHFA) out of the Federal Housing Finance Board (http://en.wikipedia.org/wiki/Federal_Housing_Finance_Board) (FHFB) and Office of Federal Housing Enterprise Oversight (http://en.wikipedia.org/wiki/Office_of_Federal_Housing_Enterprise_Oversight) (OFHEO).
http://en.wikipedia.org/wiki/Housing_and_Economic_Recovery_Act_of_2008

Why are the numbers in the bailout discussion of Sept. 23, 2008 10-20 times higher than the actual subprime losses of 65-130B?

Perhaps it represents massive inflation of the value of derivative products as they moved down a successive chain of buyers. But then at the point where a taxpayer bailout occurs it represents, well, basically stealing. The bailout is of imaginary value in the financial market, not a bailout of the actual taxpayers in their subprime housing whatsoever.

After a subprime crash, there should be a market correction in overpriced values. A home that was worth $1M at the peak of the bubble is found to be worth $800 and then $721K as the bubble continues. It might be argued that additional layers of loans "move into the subprime category" as the debt to equity ratios change. It is rational that someone owing $800K with value at $721K might walk away from their morgage. This is a healthy part of the process of correction. A government attempt to shore up values only keeps these people in their morgages longer, and an attempt to extend loan guarantees to these subprime borrowers is effectively an attempt to keep them from walking away from their morgage. In other words, these are efforts to keep overpriced income streams of morgage payments moving to the financial industry - the morgage servicing companies.

If the government "helps us out" at a cost of $1 trillion for a $65-130B base problem, they sure are not doing a very good job of spending our money.

Are the efforts by the government efforts protect the financial health of whole skyscrapers of fools in suits, instead of the average guy on the street?

[Piggy]

Repeating:

To create a bubble using leveraged instrument basd on morgages requires lying about the income stream since that determine value of the instrument. Several times repeated.

Repeating: No, it doesn't, when it's all perfectly legal.

[Piggy]

Giving those assets AAA ratings is either fraud or that process has zero conditions and therefore no meaning, which seems increasingly likely.

Yeah, the collusion of the ratings agencies is outrageous. Not sure if it was fraudulent. Might be. We'll see.

I'm glad M.Lynch tanked. Wish they'd been scattered to the winds after colluding with Enron to create those paper companies to hide losses. That should have been the end of them and it's a scandal that it wasn't.

[oggiesnr]

The problem is that they didn't go to the base. They didn't go to Joe Doe and pay his mortgage (the $325bn part of the problem). They tried to fix at bank level where the leveraging had already kicked in.

Steve

[mhaze]

Repeating: No, it doesn't, when it's all perfectly legal.Repeating vague phrases doesn't make them true. Actually that's only circuituous reasoning.

How can it be done legally?
"It's not illegal because it's legal".

I've asked for a specific method that this could be done legally, being unable personally to come up with it without some in the chain looking at jailtime, and showed several examples of why this seemed to be so.

[soylent]

Repeating vague phrases doesn't make them true. Actually that's only circuituous reasoning.

Before the housing bubble reached its peak, foreclosing on a home meant that you took possession of an asset that is both fairly liquid and worth more today than when the mortgage was issued. MBSs and CDOs came with 400-page booklets of incredibly terse reading; almost nobody who bought these things payed any attention to the detailed internal workings so it required no fraud to just roll the recovered cash from selling the forclosed home back into the revenue stream of these instruments.

Most of the prime borrowers and many of the early sub-prime borrowers were infact fine. Lending standards deteriorated over time in order to find ever more new borrowers and attempt to satisfy the insatiable appetite for these securities. If you didn't pay much attention these assets didn't appear to be bad investments at the time they were sold and didn't become really toxic until well after the housing bubble went pop.

[mhaze]

Before the housing bubble reached its peak, foreclosing on a home meant that you took possession of an asset that is both fairly liquid and worth more today than when the mortgage was issued. MBSs and CDOs came with 400-page booklets of incredibly terse reading; almost nobody who bought these things payed any attention to the detailed internal workings so it required no fraud to just roll the recovered cash from selling the forclosed home back into the revenue stream of these instruments......

Let's examine that using our prior example. Investment instrument $3M is purchased, actual asset value is one $300,000 house. Market requires yield is 24,000 per year in reality using the market required 8% number. Quick sale of the property after foreclosure, legal expenses, accrued morgage payments not made, repairs, etc let's say 250,000.

So if you sold this instrument with a subprime (IIRC 3% chance of foreclosure) you had the following expectation of income. We'll consider foreclosure in the second year for simplicity:

Year 1: $24,000

And each following year is one of these realities:

2A. Year 2 - n (foreclosure) $250,000 at 3% probability followed by years with no income

2B. Year 2 - n $24,000 at 97% probability

The net present value of this instrument taking 2A and 2B into account is less than if the 24,000/year stream continued for the 30 years. You just cashed out of a 3M investment with a loss of $2,726,000....

Now, how is it considered the salesman presented this deal? How did he present the 8% income stream without criminality? There is no component here where "something is made from nothing".

[Piggy]

Repeating vague phrases doesn't make them true. Actually that's only circuituous reasoning.

How can it be done legally?
"It's not illegal because it's legal".

I've asked for a specific method that this could be done legally, being unable personally to come up with it without some in the chain looking at jailtime, and showed several examples of why this seemed to be so.

No, you need to cite the law that's being broken and by whom and at what point in the chain.

I've already explained how it can be done. I've outlined how the circuit worked. None of that is illegal, AFAIK.

If you think a law was broken, then cite it.

It's like you're asking me to prove that it's legal for me to mow my lawn. There's no law I can cite which says it's legal for me to mow my lawn. It's legal b/c there's no law against it.

Again, if you think a law has been broken, then explain which one and by whom and with what action.

Sometimes, mhaze, you are so unbelievably illogical I don't know how you learned to type.

[Piggy]

Most of the prime borrowers and many of the early sub-prime borrowers were infact fine. Lending standards deteriorated over time in order to find ever more new borrowers and attempt to satisfy the insatiable appetite for these securities. If you didn't pay much attention these assets didn't appear to be bad investments at the time they were sold and didn't become really toxic until well after the housing bubble went pop.

Exactly. This wasn't the product of lawbreaking. It was the product of a system that created a bubble. You can't point to any specific link in the chain and say, "That was illegal".

Granted, there was probably a lot of fraud going on. There always is when there's lots of money to be made.

But the bubble is explicable by examining what was allowed, not by looking for some illegal activity going on behind the curtain.

[mhaze]

No, you need to cite the law that's being broken and by whom and at what point in the chain.

I've already explained how it can be done. I've outlined how the circuit worked. None of that is illegal, AFAIK.

If you think a law was broken, then cite it.

It's like you're asking me to prove that it's legal for me to mow my lawn. There's no law I can cite which says it's legal for me to mow my lawn. It's legal b/c there's no law against it.

Again, if you think a law has been broken, then explain which one and by whom and with what action.

Sometimes, mhaze, you are so unbelievably illogical I don't know how you learned to type.You refer to this:When you allow exorbitant leverage, then allow folks to extend that leverage even farther by using insurance, don't require the insurance to be backed by liquid assets, allow the securitizing of debt, and allow the securitized debt to then count as an asset base for further leverage, throw in default swaps on all that securitized debt to essentially shackle everyone's legs together, and you have a formula for a global financial meltdown once the underlying bubble (housing) bursts.
Your first sentence, jumbo loans with PMI have allowed low payments for a long time - say 20 years. Nothing new in that except maybe consumers discovered it in larger numbers. A morgage(debt) is an asset and always has been to a bank. Securitize $100k of it, so what? Yes it is an asset and can be loaned against.

Morgages a bank is a storefront for only, they always went out and were packaged.

Where's the multiplier or pyramider? I don't see it legally so far. That takes us to this:

throw in default swaps on all that securitized debt

But you seem to think there was legal "creation of money" all the way back down the chain, not just at the last step?

[Piggy]

But you seem to think there was legal "creation of money" all the way back down the chain, not just at the last step?

The problem was that there was no creation of money. There was just compounding of risk, which depended on future payments, which depended on continued economic expansion.

For any one loan, that expectation might not have been unreasonable -- and no matter how high the risk, there was always some chance that the person taking out the loan could pay it off... heck, maybe they'd win the Lotto.

But system-wide, all added up, there was no way in God's green earth it could have all been made good.

IMO, allowing insurers to back so many deals with so few liquid assets of their own should have been illegal. But it wasn't. :(

ETA: My apologies for the crack at the end of my other post there. Bad day, frustrated, took it out on you. I'm sorry.

[mhaze]

The problem was that there was no creation of money. There was just compounding of risk, which depended on future payments, which depended on continued economic expansion.

For any one loan, that expectation might not have been unreasonable -- and no matter how high the risk, there was always some chance that the person taking out the loan could pay it off... heck, maybe they'd win the Lotto.

But system-wide, all added up, there was no way in God's green earth it could have all been made good.

IMO, allowing insurers to back so many deals with so few liquid assets of their own should have been illegal. But it wasn't. :(

ETA: My apologies for the crack at the end of my other post there. Bad day, frustrated, took it out on you. I'm sorry.

Sure, understood. Total subprime market was 1.3T and by 05-2008 25% defaulted. A $325B mess. These already had insurance (PMI) , but more layers of "weird" insurance were likely sprinkled on the securities to sweeten them up. Value of morgage backed securities is set by the interest rate the market demands and estimation of risk.

Securities aggregate value cannot change more than $325B without a change in demanded interet rate and or risk estimation. Total securities value cannot exceed 1.3T if rate of return on securities is equal to rate of return on morgages. (subprimes only here).

"Expansion of money supply" and or fraud in so doing is not the same or a product of leverage. It is the situation where based on 1.3T of morgages you somehow have >10T of morgage backed securities (they did), which is why we are having this discussion. But the >10T of the products were only so valued because they were alleged to have an income stream supporting that valuation. Who said it came from where?

Follow the money.

http://en.wikipedia.org/wiki/Mortgage_backed_security
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

[Piggy]

"Expansion of money supply" and or fraud in so doing is not the same or a product of leverage. It is the situation where based on 1.3T of morgages you somehow have >10T of morgage backed securities (they did), which is why we are having this discussion.

That's not the way I see it.

I think the specific practice you're referring to here is securitizing on potential.

In other words, I have $100M, and I figure w/ my legal leverage on that plus the extra leverage I can get by buying insurance, I could potentially lend $5B. But the loan market is so saturated, I have no buyers at the moment.

So I bundle and slice, and sell off the $5B in loans which I have the potential to make, and as soon as I do, and the payments start coming in, the buyers of those tranches will receive payments.

Once again, it's betting on other people's future potential to earn and pay... only this time, the people are hypothetical. There's no creation of money, just a gamble on future economic growth allowing more loans to be made and paid.

My understanding is that this was legal, in that there was no law specifically against it.

I could be wrong, but so far, in all my reading on this, I haven't come across anyone citing any such law.

[mhaze]

The ability to be loaned money is not an asset on the balance sheet.


Before borrowing, you have neither the asset or the liability.
After having borrowed, you have say for real estate, a morgage and a house on the balance sheet.

These cancel each other out more or less if values are equal.

I'm not questioning the classic nature of a speculative bubble in pricing and asset value, or the human tendency to be fooled by such a thing. Further, in the above example, for every loan that the perp takes out, he could pad his asset list further by overstating values.

But you are now saying that he could pad the asset list with imaginary value without any cash, buildings, etc. This would indeed be "creating money". It would as far as I am aware be way, way outside the allowed bounds of GAP (generally accepted accounting principles) and thus would not withstand any accountant's audit. Now I understand well the implications of going from this to a securities issue and raking in the cash, likely without SEC oversight.

But where is the income stream that supports the value? None. So you answer that this is along the lines of an IPO? Now this is way outside the bounds of allowed "fiduciary agent investments", which would disallow any pension funds or banks who hold others' money, and who must make conservative investment decisions, from getting into such a deal because it is de facto risky. The fiduciary agent if taken to court (and they should be) would not fare well with his claim "But they said it was insured!".

I am not aware of any offerings of this sort in the market in question where it was said "We just started this up, have no current profits to show you, but expect a lot of profit, and estimate it at 8% (or 12%)". It seems that if such an offer was placed, the competitive prices bid would be a tiny fraction of the face value due to the obvious risk.

So are you implying that betting on the future when insurance against future losses is in place does in fact fall within the allowable range of activity of a fiduciary agent?

I hope not, yet my view on it would put thousands in jail.

[Piggy]

But you are now saying that he could pad the asset list with imaginary value without any cash, buildings, etc. This would indeed be "creating money". It would as far as I am aware be way, way outside the allowed bounds of GAP (generally accepted accounting principles) and thus would not withstand any accountant's audit.

Well, that question comes down to how you "mark" such an asset.

The loan you hold is an asset, just like a bond is -- one day you'll get something from it, unless there's a default. If you don't allow institutions to count loans, even risky loans, as some sort of asset, then their balance sheets become deceptively low.

The question is, how much is it worth?

Your choices are "mark to market" (the value you could get if you had to liquidate right now) and "mark to model" (the value you predict you'll get based on your projections over time).

Enron used mark-to-model to inflate its books. It created high-risk ventures and then predicted outlandish profits from them and treated those profits as if they were assets, thereby hiding their actual (real and current) losses by padding the books with "assets" which were nothing more than figures picked out of the air.

So what we have now is a standard mark-to-market valuation. The banks are protesting this b/c they say it forces them to undervalue their holdings, given that some portion of those holdings certainly do represent higher realized value over time.

But no one wants to re-open the floodgates of mark-to-model.

I would be interested to know how the securitized-against-potential assets were valued. [ETA: I'd guess that the value was marked at the insured amount, which one would assume could be realized in case of default -- but of course the insurance companies did not have the assets to back all of their insured securities if everything went in the tank, which it did.]

Anyway, yes, you have to have some means of allowing a held loan to be counted as an asset.

Once you do that, you necessarily allow banks to generate further loans against that asset base. If you did not, then banks would stop making loans.

So once again, we see that the problem was not in this or that part of the system -- it was in the collective consequences of what the entire system was allowed to do.

[Piggy]

So are you implying that betting on the future when insurance against future losses is in place does in fact fall within the allowable range of activity of a fiduciary agent?

Yes.

[mhaze]

Yes.I strongly disagree but this would be a point of state law, not federal. If my IRA or 401K had been lost or marginalized in such a scheme I'd immediately bring a case of action against the fiduciary agent, given the circumstances as above described. No hesitation whatsoever.

It wasn't in such hands because I took it out of the hands of the line of guys in suits in skyscrapers some ten years ago.

[Piggy]

I strongly disagree but this would be a point of state law, not federal.

But wait a minute... where do you see the illegal activity?

All investing is betting on the future.

For a fiduciary to "bet on the future" with the added guarantee of "insurance against future losses"... how can that possibly be a breach of fiduciary responsibility?

Maybe I'm misunderstanding you here.

[mhaze]

But wait a minute... where do you see the illegal activity?

All investing is betting on the future.

For a fiduciary to "bet on the future" with the added guarantee of "insurance against future losses"... how can that possibly be a breach of fiduciary responsibility?

Maybe I'm misunderstanding you here.Then wouldn't any IPO investment + "insurance" be "safe and secure?"

But they are not, and they are expected honestly to yield NO dividend or other income stream with few exceptions based on the nature of the business. You are trying to claim that "insurance" yields "safe and sound" with respect to income stream, where there is no underlying asset.

If I understand correctly.

By the way googling Deriv + lawsuits showed essentially a target rich environment.

[Puppycow]

Here we go again:

What the Fed did and why: supporting the recovery and sustaining price stability (http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html?hpid=topnews) By Ben S. Bernanke

[Puppycow]

Will a paltry $600 billion be enough though?

Fed’s More Aggressive Move May Not Go Far Enough (http://www.nytimes.com/2010/11/04/business/04leonhardt.html?_r=1&hp)

[soylent]

You're presuming that there was a scam. I don't think there was, at least not at the core of the meltdown.

Fraud was at the core of the financial crisis. William K. Black's presents this better than I ever could. He was a senior regulator who helped clean up the S&Ls and shut the frauds down while they were still reporting fraudulent record profits.

He presented his case in brief at the financial crisis inquiry commission:
http://www.fcic.gov/hearings/pdfs/2010-0921-William-Black.pdf

[Piggy]

Fraud was at the core of the financial crisis.

It will certainly make an interesting case.

[daenku32]

Krugman says it's not going to do much, so there. My hive mind is made.

[oddball]

It's too much debt that is the problem right now.

Several cable networks have refused to air the following ad, from Citizens Against Government Waste:

http://www.youtube.com/watch?v=OTSQozWP-rM

[Piggy]

Several cable networks have refused to air the following ad, from Citizens Against Government Waste

I'm not surprised. All it does is to take an argument against US gov't policies and put it in the mouth of someone we're supposed to fear. Bad form.

[Piggy]

You are trying to claim that "insurance" yields "safe and sound" with respect to income stream, where there is no underlying asset.

No, not at all. Balancing the bet on the future isn't problematic in itself, that's all. But betting on anything you know to be worthless, with someone else's money who you're legally required to be safeguarding, certainly is problematic.

It's not the hedge that matters, it's the understanding of the underlying risk, and the representation you've made of that risk.