Economics business.The Sub-prime Crisis. How bad is it?

[Moontanman]

Ok I have on my fire retardant suit so I'll ask this question. Why does interest have to be different for different people? The very people who can least afford it have the highest interest rates. Why couldn't home mortgages have the same interest rates for all home mortgages? Is simply some way to show who is worth more money? I would say that higher interest rates cause people to have to default on their mortgages. Interest rates for all forms of credit should be set. A certain percentage for things like credit cards, a certain rate for auto loans a certain rate for home mortgages and a certain rate for second mortgages. No more trying to make the people who can least afford it pay more. No more breaks for people who could care less. No more buying selling of mortgages or other loan contracts to try to make more money.

[Zythryn]

Ok I have on my fire retardant suit so I'll ask this question. Why does interest have to be different for different people?

That is a good question.

However, I have a good answer (you may not like it though;)).

Interest rates at any given time vary because the risk of the loan is different for different people.

For examply, lets say Bob goes into a bank and asks for a home loan. He has 2 Million dollars in the bank, shows 2 years of W-2 forms showing he has an income of 1 Million a year and has other assets worth 5 Million dollars he puts up for collateral. The bank will give him a very low interest rate as the loan is seen as very very safe.

Bob walks into the bank, he has a $100 savings account, has no proof of income and no assets he can put up as collateral. He is offered a loan, but it will be at a very high interest rate as his loan would be a high risk loan.

It is very unfair that those that need the loans more end up paying more, but the business logic is sound.

[Cedars]

This list is rather telling:

 

FDIC: Failed Bank List

 

Is it? Lets do some math.

 

Your list has 16 failed banks in 2007 -2008

 

From the same website:

 

Chart 4. The title is "Number of U.S. Banks by Size Category"

 

"4,893 banks or savings institutions have more than $100 million in assets; 3,517 have $100 to $500 million; 859 have $500 million to $5 billion; 150 have $5 to $50 billion; and 22 have more than $50 billion."

 

The above is from 2003, the most current info I could find quickly.

 

So are we really going into economic collapse because of 16 banks? I dont think so.

 

So where is the money (700 BILLION) going to?

 

 

Being an expert does not absolve someone of human tendencies like making a mistake, or greed.

 

Being a taxpayer doesnt oblige me to pay for someones free market choices like gambling on that 2nd, 3rd, etc home, the stock market, etc.

 

We have a different situation now. The $700 Bil is obviously a *ton* of money. Why do you think they came up with *that* number?

I have no idea why they are spewing out that number. I have no idea why they are meeting behind closed doors. I have no idea why we must pump money into these various places to ensure the economy doesnt falter.

 

Speaking with another commoner recently, his first reaction was, Hand them the money so they can run with it?? He has no delusions that this is good for the economy of anyone except those wanting to flee.

 

Obviously?

Am I missing something? What about the talk about "Main Street"?

 

What is the substance of the talk about "main street" freeze? Thats the missing piece. They say this will help main street, but there isnt any detail about how this is going to help main street. Typical political grandstanding and once uncle sam signs the check (read swears the politician into office) the talk of "main street" will dissapear as fast as the guys who will be cashing the checks.

 

Main street is boarded up and manufactured in china. Main street is boarded up and manufactured in India, or mexico, or south america. This is the main street they are talking about freeze.

[Moontanman]

That is a good question.

However, I have a good answer (you may not like it though;)).

Interest rates at any given time vary because the risk of the loan is different for different people.

For examply, lets say Bob goes into a bank and asks for a home loan. He has 2 Million dollars in the bank, shows 2 years of W-2 forms showing he has an income of 1 Million a year and has other assets worth 5 Million dollars he puts up for collateral. The bank will give him a very low interest rate as the loan is seen as very very safe.

Bob walks into the bank, he has a $100 savings account, has no proof of income and no assets he can put up as collateral. He is offered a loan, but it will be at a very high interest rate as his loan would be a high risk loan.

It is very unfair that those that need the loans more end up paying more, but the business logic is sound.

 

I know the supposed reason behind some people getting low rates and others getting high rates but I suggest the entire system is not only wrong but it claims high rates are necessary to cover the costs of foreclosure while assuring the foreclosure rates to be higher. Very few banks ever loose money in the home loan market. Most people owe quite a bit less than their house is worth. If a house is foreclosed on the bank can often make a significant profit. My house had a book value of less than a third of what was owed on it when my bank tried to foreclose. No way they could have lost money. As a matter of fact they had tried to get me to take out loans for more money several times because i owed so little on it. but when i got into a bind they were all about taking it away from me. It's a racket that is slanted against the home owner. If everyone received a low rate we would see fewer foreclosures. the difference between 5 or 6 % and 14% is significant in payments. I can see everyone getting a reasonable rate being conductive to less foreclosures and a better housing market for everyone. One of my favorite commercials for car loans is the one where they offer 0% and no down payment to well qualified customers. But some poor smuck who desperately needs a car will have to pay 25% down and 18% or walk. Just like insurance spreads risk across many people a reasonable but not ridiculously low rate could spread the risk across everyone. Even people who are "well qualified" occasionally default.

[Michaelangelica]

What agro?

 

My "put downs" of people? I really am stumped by this one. The only statement I've made that can be construed as such is when I claimed that I didn't think you really understood the situation. I apologized for that as it was an unfair statement.

Thanks for your apology (of your 'put down") my apologies that I missed it

Or perhaps it's my tone? When I'm *debating* with people I certainly take a different tone. It's not meant as hostility.

I think it sad, that because of our adversarial legal system, we also tend to learn to debate in the same style. Unfortunately it is not always the best way to the truth and it is by definition aggressive

There are a lot more debates in Australia where cleverness and humour are used instead of adversarial attacks on the opposition or its ideas. Once upon a time we even had a parliament that did it and was fun to watch..

i am told the French legal system is different and looks to find the truth rather than scoring points or "winning".

 

 

 

I disagree. Credentials are very important. Should we rely on Paris Hilton to fix the economy? How about Brad Pitt?

Could they do any worse?:)

 

 

But what about that quote that you like saying? "When the US sneezes, the world catches a cold".

Yes that is now happening. look at how the world stock markets rise and fall in tandem with NY. However the EU, SE Asia, India and China, possibly even the Arab world; probably have enough economic momentum to keep the world from a 1929 type crash.

it just depends on how many sub-prime mortgages they have in their portfolios !

 

 

"good chance of failing"? How so?

 

Btw, the US economy is already in a recession and it looks like it will be for quite a while regardless of what the "experts" do.

failing= recession

failing because of political disagreement (as now)

failing because I am not sure if everyone is now being completely honest about their SP exposure- Mutual Funds for example that do not have to report to the public.

It seems every day some new disaster comes out of the wool-shed. My dinky local council, for example, just blew $70 millions on SP. God knows why.

Fortunately most Australian banks seems immune. They also have much more in reserves than other countries (What is 'required reserves' in one country say UK or USA or Australia works out to a very different % depending on regulations and how it is calculated)

(Your congress actually said some years ago that they should reform US banking on Australian lines but they didn't of course.)

 

I wasn't trying to make a direct comparison, it was an analogy.

I'm upset aboutthe corruption as well, don't get me wrong. There will be plenty of time to deal with that *after* we try to correct our flight path enough to avoid collision with the ground.

and the lawyers find out who has the money and where in the world they have fled to. It might make a good video game ?

 

There are several economic models which work great! But, on the whole, I understand what you are saying. Economics is Chaos Theory at work.

Yes about 50% of chaos mathematicians work in the stock exchange ( Don't ask me to reference that it is in my head's large "useless information" file)

It's hard to make accurate predictions and verify these through repeated experiments. In this sense, it falls below the standards of "true" science. Nonetheless, I think there are several scientific qualities to economics that should not be dismissed.

My favourite theory is when prices go up demand always falls. Tell Gucci or Chanel that. If economic theory was tempered with a bit of social psychology we may be better off-

 

 

That's not what I'm saying.

I encourage everyone to have an opinion on this and other issues.

Good. I am sorry i mis-understood you.

The point I'm trying to make is that I think the most qualified people should be helping to structure whatever economic "fix" is put in place.

You see there are so many special interest groups and lobbies etc- we are bound to end up with a camel. ("camel is a horse put together by a committee")

I doubt is any pure, wonderful, economic thinking/model will get a look in.

I'm declaring that I am not an expert in economics. I also stated that nobody else here is, for reasons given in my last post. I certainly think it is helpful for everybody to participate in the debate with their own informed opinion.

I studied & read economics for many years (still I would consider myself an amateur) but I became disenchanted with its simplistic models that did not take account of personal/individual/social motivations, feelings and differences.

For example I am picking up a lot of agitation, anger and fear in the various discussions on this topic. Fear of a recession/depression is a certain way of getting us one. Whatever economic checks are in place.

It is probably certain that the crisis is not as bad as we fear it is. The Asian melt down some 10 years or so ago was supposed to send us all to the wall. It didn't, and resulted in a better managed Asian banking system.

Even having said that I would be putting my money, if I had any, in gold or solid Oz Gold stocks.

 

 

 

 

I'm unfamiliar with Norway economics, but I'll look into it.

Well I would be surprised if anyone except Norwegians would be. But it was an interesting, very recent NYT article -probably listed under "Other readings about sub prime"

 

I'm completely in favor of stricter regulations/oversight to prevent this sort of scandal from occurring again. Yet, I don't advocate government intervention beyond that.

Amen

 

Warmest wishes

 

PS

Translation of Michaelangelica's "I am told":-

The guy at the pub, who becomes more and more and more intelligent, perspicacious and perceptive as the night wears on, told me. As yet, I have found no reason to doubt him.;)

[Zythryn]

I know the supposed reason behind some people getting low rates and others getting high rates but I suggest the entire system is not only wrong but it claims high rates are necessary to cover the costs of foreclosure while assuring the foreclosure rates to be higher. Very few banks ever loose money in the home loan market. Most people owe quite a bit less than their house is worth.

I don't doubt this was the case in YOUR situation. However, do you have any data indicating that this typically the case?

The reason for the high rates is not to cover the cost of forclosure, it is to cover the risk that the loan will not be honored. It is also to draw investors.

 

How about this, pretend your income comes through making loans to people. You have money to loan to one person. One person has no verifiable income, the other has more money than they know what to do with. Both offer a 6% interest.

Why would anyone give the loan to the riskier applicant? Sure, the house MAY be worth more than the loan at the time of a default on the loan, but it may not. Why deal with the hassle of fixing up a foreclosed house (most end up in really bad shape) putting it on the market and trying to sell it for a gain?

The higher interest rates also serve the purpose of attracting investors, especially in the current atmosphere where loans are sold to other investors.

 

Don't get me wrong, I agree with you that higher interest rates lead to higher foreclosure rates. But it is not the ONLY reason for this. And with banks and mortgage companies the size they are, they don't look at individuals (which is sad) they look at the numbers and the risk.

[Donk]

In older, simpler, times, property buying worked like this: a group formed a Temporary Building Society. They put some money into the pot and bought land and materials. Some of the group would be craftsmen, putting in their labour rather than cash. They built a house. One of the group occupied it and started paying rent to the group. Everyone continued to put in either cash or labour until everyone had a house. The group was then dissolved.

 

This led on to Permanent Building Societies. The permanent societies accepted savings, paying say 6%, and lent for house purchase at 8%. They were very careful not to lend more than the buyer could afford, and having valued the property would only lend perhaps 75% or 90% of its value. The buyer was unlikely to get into arrears unless his circumstances changed, but if the loan had to be foreclosed, the building society would be almost certain to get the loan paid in full.

 

The rules were harsh and inflexible. You had to jump through a lot of hoops to get a loan. I certainly did :) But everyone knew that the Building Societies were solid investments. All their loans were fully secured against assets. Then the money-market men decided that borrowing pennies to lend thousands was too slow, and started to borrow millions on the open market. The whole thing became a gamble.

 

I've already mentioned stock market dealing here. Stock markets were set up to fund businesses. Long-term investments, with a slow, solid payoff. Again, that wasn't good enough for the money-market men, so they began to borrow millions to invest. Again, the whole thing became a gamble.

 

It seems to me that the much-vaunted "world economic system" that is about to come crashing down is just a giant casino filled with players who have bet more than they can afford. They should have read their own small print about "prices can go down as well as up", but they thought that advice was only for the little people. Why should we protect them from their own folly?

 

The real economy is still going. It's stumbling, yes. People are being careful what they buy, and trying not to use credit. In many cases they can't get credit, because the gamblers are scared to lend. But people are still buying, selling, working, living, loving. Life goes on. A few companies have had to admit that they aren't worth as much as they've been telling people. This has got people wondering whether those companies are worth anything at all, and the share prices have dropped violently. Why don't they just call in the auditors to check debts against assets and give a true figure for the company's worth? The share price would then stabilise around that. Some banks might fold. Most will be ok, but not nearly as successful as they thought.

 

Why do ordinary taxpayers have to prop up a giant casino which, whatever they tried to tell us all those years, has never managed to create wealth, only absorb it.

[questor]

Who is getting hurt by the mess we are in? Is it the sub-prime borrower?

He bought a house he could not pay for. He put down 0%-5%. This is not much money. When his ARM expires, what does he do? He walks away, and rents a house for less than he was paying for the mortgage. He has been a renter most of his life, so nothing much has changed. The house goes to foreclosure. The people who made the loan and sold the package of loans made money. They are not holding worthless paper. The investor who bought the paper loses the most. He is a schoolteacher, fireman, scientist, etc. Now, how could this hapen? Where were our bank examiners and auditors whose job it is to check bank loans as to their worthiness and loan to value ratios? Could it be that some members of congress wanted to give the less fortunate a chance at home ownership and loosened the regulations on lending and encouraged freer credit, perhaps not understanding that all markets FALL as well as RISE?

Could this have been a grand social experiment that we will have to pay for for years to come? Mr. Market has a way of punishing those who feed to long at the trough.

[Moontanman]

Questor do you really believe this racist, elitist BS? Does anyone but rich conservatives live in your world? Do you have a heart or even a reflection when you look in a mirror.

Every time I think I met some one who is an easy win in the "Worst person in the world" contest another contender pops up. Is there anything at all that conservatives don't do better than anyone else? Do conservatives ever make mistakes? Are any of the worlds problems due to conservatives? I feel so dirty and ashamed to be a liberal, I should just go ahead and cross over.

[pgrmdave]

Moontanman - do you really think that it's a good idea to give houses to people who cannot afford them? As to Questor being racist - I see nothing about race in his post, short of the sad fact that due to racism, it is more likely for a poor person in the US to be a minority. His post, in my opinion, highlights some of the basic problems with the sub-prime mortgages. The lenders made money, not just through outrageous loans, but through selling those loans so that they weren't holding them when the borrowers couldn't pay. This should have been regulated better - not everybody should have a home, especially if they cannot afford it. Would you advocate that everybody have a luxury car? Of course not. Why then is it a good thing that credit be so free that poor people are given a chance to own a home that is well outside their price range?

[Moontanman]

Moontanman - do you really think that it's a good idea to give houses to people who cannot afford them? As to Questor being racist - I see nothing about race in his post, short of the sad fact that due to racism, it is more likely for a poor person in the US to be a minority. His post, in my opinion, highlights some of the basic problems with the sub-prime mortgages. The lenders made money, not just through outrageous loans, but through selling those loans so that they weren't holding them when the borrowers couldn't pay. This should have been regulated better - not everybody should have a home, especially if they cannot afford it. Would you advocate that everybody have a luxury car? Of course not. Why then is it a good thing that credit be so free that poor people are given a chance to own a home that is well outside their price range?

 

I never said it was a good idea to give houses to people who cannot afford them I question that the problem was created by liberals who insisted that blacks get equal treatment under the law. Questor consistently squirms his way out of every situation that looks like he might be wrong by assigning guilt for everything bad to liberals. He's about as hard to nail down as jello. He has no real agenda other than to be "correct" and to blame every bad thing in the world on liberals and claim conservatives are the font of all that is good and wise. I am tired of seeing everyone try to wrestle with him, every one is getting dirty and he likes it. I am beginning to think he is Rush Limbaugh in disguise.

[pgrmdave]

Rather than look at questor's unabashed conservative agenda, why not look at his actual ideas? While I do think that his accusations of the liberal for all problems is not respectable, I have seen members make similar accusations toward the conservatives. And once again, in this thread I have not seen him make any claims about race, merely poverty. In fact, he seems to take the typically 'liberal' route of claiming that more regulation of lenders was needed by washington, but that, in an attempt perhaps to help the poor, they lessened regulation, leading to a short upswing in home ownership (and HUGE corporate profits), but long-term problems that we're now feeling.

[questor]

Moon, you may be surprised to know that I do not support George Bush on many of his policies. He, too, was involved in our current financial debacle by supporting de-regulation and the easy credit, lax qualification that brought it about. I am sure many of the crooks who participated in the sub-prime scam call themselves conservative. You seem to think that just because people do not think your way makes them evil. You are only speaking from your own viewpoint, if you have not run a business or been involved in real estate investments you are lacking perspective from that point. I'm not against the less privileged, I would like to see them become more privileged the same way I did.. by earning it. And by the way, my only privileges have been the good fortune to be born in a country where I could become what I wished to be.

[freeztar]

Could it be that some members of congress wanted to give the less fortunate a chance at home ownership and loosened the regulations on lending and encouraged freer credit...

 

I do agree that it was a problem with Congress lessening regulations, but you have it backwards. It was Republicans who championed the bill. I doubt they had the poor in mind, but rather, the rich.

 

Here's some background info on what I'm talking about:

 

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted 1999-11-12, is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

Gramm-Leach-Bliley Act - Wikipedia, the free encyclopedia

 

Economist Robert Kuttner (among others) has criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.[5] Economists Robert Ekelund and Mark Thornton have made similar criticisms, arguing that while "in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance" the Financial Services Modernization Act would have made "perfect sense" as a legitimate act of deregulation, under the present fiat monetary system it "amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly". [6]

Gramm-Leach-Bliley Act - Wikipedia, the free encyclopedia

[Moontanman]

Moon, you may be surprised to know that I do not support George Bush on many of his policies. He, too, was involved in our current financial debacle by supporting de-regulation and the easy credit, lax qualification that brought it about. I am sure many of the crooks who participated in the sub-prime scam call themselves conservative. You seem to think that just because people do not think your way makes them evil. You are only speaking from your own viewpoint, if you have not run a business or been involved in real estate investments you are lacking perspective from that point. I'm not against the less privileged, I would like to see them become more privileged the same way I did.. by earning it. And by the way, my only privileges have been the good fortune to be born in a country where I could become what I wished to be.

 

You are correct Questor, in every one of my posts I have dwelt on saying that anyone who isn't a Liberal is evil. I bow to your superior knowledge of life and liberty. I would love to stick around and have my nose rubbed in even more of the flaws of liberalism but I must figure out a way for my lazy liberal dumb *** to survive this economic situation provided by all the hard working Conservatives who have brought this wonderful economic challenge to fruition. What would we all do without the dog eat dog philosophy of the conservative capitalist. We might have been swept up in the horror of socialism for the masses, instead we get socialism for the rich and powerful. I am so glad this has worked out to their glorious all powerful advantage. Possibly I can make money in the glorious future by finding a conservative who needs his *** kissed on a regular basis.

[pgrmdave]

I must admit, I do not quite understand how the repeal of the Glass-Steagall act contributed to the current credit crisis - could somebody explain it please? How did the increased competition lead to this?

[Essay]

I must admit, I do not quite understand how the repeal of the Glass-Steagall act contributed to the current credit crisis - could somebody explain it please? How did the increased competition lead to this?

I don't know if this is technically correct; but....

 

The "competition" you speak of was within the "creativity" of financial instruments.

Thus a home loan could be leveraged 30-40 times its value in the high-end global market.

 

By distributing the mortgages across a wide range of "bonds," an instrument was created which itself was then traded (and used as collateral for more investments) which then inflated the worth of the financial institutions that were doing this, allowing them to invest wildly in the stock market, inflating that also, which drove their value even higher, etc., etc.

 

One key point that I think Questor might ponder is that these sub-prime loans weren't pushed on poor people to help the poor.

Loans were pushed on anyone who would take one (2nd and 3rd homes, etc.) because home loan mortgages were the

only commodity left in the US economy that had enough capital to keep the pyramid of creative financial competition going. [Ag. is less than 1% of GDP; mining and oil < 2% GDP!]

 

The financial wizards took a program designed to help the poor and ramped it up to frenzy so as to provide capital and liquidity for themselves to keep increasing their competitively creative leverage.

 

~ ;)

 

p.s. This pyramidal house-of-cards accounted for most of the "growth" in our economy; hence the phenomenon of a "jobless recovery."

 

p.p.s. ...and the pension, hedge, and union funds were invested in investments (creative instruments) which were themselves just investment in the (other creative instruments) securitized (split up) mortgages, which were... "over-valued."

It's even more convoluted globally... stock based on bond funds which were themselves based on stock mutual funds which were based on the bonds created by the sub-prime loans ...or even more levels of investing in investments.... :hyper: