Here comes the other economic shoe dropping...

[Atheist-Lite]

DOW plummets 200 points. http://www.cnbc.com/id/43508046

Jobless picture grows worse: http://www.cnbc.com/id/43507567 [of course, that's Bush's fault...the alleged 2.1 million jobs created are Obama's doing, but the unemployment increases are Bush's fault...]

Don't it give you a maxed out fright when you know your at the very top of the rollar coaster and the thing starts to inch downwards?

[Cormac]

I'm doing a Graduate Diploma in Financial Services Law at the moment. Mitchell speaks a lot of truth here. (Although he doesn't really understand why, I'd bet).

[Cormac]

That's a pile of bullshit if I ever heard one.

Nothing bad has happened? Talk about the record numbers of people in mortgage default. Talk about the record number of people who have lost their homes to foreclosure. Talk about the 9.9% unemployment rate in the US and the 10.6% in Ireland and the 17% in Spain....the 8.8% in France...and the 8.3% (and rising) unemployment rate in the European Union overall.

Talk about the record losses in people's U.S. 401k Plans and IRA's (or equivalent retirement savings accounts in other countries). People lost 30%, 40% and 50% - and more - of their savings due to the stock plunges. Talk about the people who have had to take record numbers of loans and early withdrawals from those plans, and suffer penalties.

Nothing real has happened? It's all just paper bets between big bankers? What a load of ignorant shit that was.

No, that wasn't his point.

At the root of the problem were these core issues:

1. Banks pushed the limits of so-called "Risk Management" and the level of Capital that they were required to hold against loans* issued was pared away until it was ridicullously low. To put this in the context of a normal household - banks were allowed to lend out up to nearly 100% of the money held on deposit, which is like a person borrowing nearly 100% of the value of their home, and then borrowing more on their credit cards, personal loans, car loans, home improvement loans, etc. Banks became "leveraged" up the wazoo.

2. Banks engaged heavily in trading of derivative products, which became, over time, more and more removed from any real product. What was happening was a great deal of trade in "Risk" or as these products are commonly known - securities. Due to leveraging (where the same product was used on multiple occasions as security on different loans simultaneously, or where money borrowed was used as security against subsequent borrowings, and so on**), these became massively inflated in value, unrelated to any true real-world product.

3. The institutions, the rating agencies, and their sales networks colluded in fraudulent activity. (Driving volume mortgages through, based on dodgy security, so that they could be packaged up and sold. This would show big profits for a bank, which delivered performance related bonuses for everyone). Even the result of this could have been fairly manageable, had there not been a complete collapse of confidence.

4. The axe came down as these balloons were massively inflated. The fact was largely that at the tipping point, nothing happened, and nothing was lost. What really happened was that the banks realised that all other institutions behaved in the same way, and suddenly lost confidence. All of a sudden, vapourware loans were called in, and people realised they'd no real security. Money got locked into the system, and couldn't move. Liquidity in banks (their ability to move money) collapsed, and consequently, banks became decapitalised.

Theoretically, a couple of extra zeroes here and there could have stopped it all in its tracks. (To a degree, this is what the governments are doing - by providing capital and liquidity to the banks, and by printing money).

[Cormac]

He was talking about what caused it, not what it caused.

Actually, he explicitly, literally, was talking about what it caused. He's saying it didn't really cause anything. It's just a load of wanker bankers making bad bets. Nothing caught fire.

No, that isn't it.

He was referring to the huge volume of derivative products that are traded - many of which are on extremely shaky legal ground (because of the fact that they are international in character, and the legal environment changes radically from one jurisdiction to another). THESE products often are exactly like banks making bets with each other bank and forth, and building up huge edifices of related bets one on top of another - expanding the exposure all the way up. At the root of these won't necessarily be found ANY real product. This is because the entire thing could be sitting on top of a contract - such as an insurance policy.

[Cormac]

YOU want to blame Obama for all of that!!!

How much was the debt when Obama took office?

How much was the debt when Bush took office?

My idiot brother once said, with much relish, "Obama's Recession!" I explained to him the parameters for calling recession. He didn't understand them.

He got the looks in my family. I had to settle for the brains.

Poverty all round then?

[Cormac]

[quote="Coito ergo sum"

If eliminating jobs, driving capital out of the United States, and increasing credit card costs is your idea of "fixing" things, then yes.

Note - the bill doesn't address the mortgage lender issues that were a big part of what caused the financial mess in the first place, and the Democrats blocked any reform of FannieMae and FreddieMac which were a big reason why subprime and high risk mortgage lending got out of control.

The bill increases banks’ costs by restricting the ability of banks to enter into contracts charging retailers for the convenience of using credit or debit cards to collect payment from customers. When Australia did this credit card holders suffered, as banks passed on the increased costs to them by hiking annual fees and getting rid of cash-back, rebate, and rewards programs. Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.

The bill would also give government officials the ability to nationalize businesses that they "claim" are at risk of failing — and block meaningful judicial review of such seizures by shareholders.[/quote]


What is your analysis of what happened with FreddieMac and FannieMae, and the systemic failures in the mortgage market?

[Cormac]

That's a pile of bullshit if I ever heard one.

Nothing bad has happened? Talk about the record numbers of people in mortgage default. Talk about the record number of people who have lost their homes to foreclosure. Talk about the 9.9% unemployment rate in the US and the 10.6% in Ireland and the 17% in Spain....the 8.8% in France...and the 8.3% (and rising) unemployment rate in the European Union overall.

Talk about the record losses in people's U.S. 401k Plans and IRA's (or equivalent retirement savings accounts in other countries). People lost 30%, 40% and 50% - and more - of their savings due to the stock plunges. Talk about the people who have had to take record numbers of loans and early withdrawals from those plans, and suffer penalties.

Nothing real has happened? It's all just paper bets between big bankers? What a load of ignorant shit that was.

I'd disagree with you here. I mean, clearly, the system is fucked - but the people who have been kicked out of their homes - the houses are still standing, so there's no real reason why they shouldn't live in them.

Except that the banks sell them and then other people live in them. They generally don't sit their empty.

Unemployment is only a problem because the system we currently have, requires people to be employed to be able to survive - but the majority of work is now automated, done with machines (or unfortunately, by exploited third world people). The whole point of technology is to make things easier - why don't we accept that and get everyone working two days a week?

That doesn't mean that nothing has really gone wrong.

Nothing bad has physically happened (apart from as consequences of this mess), it's just an unstable out-dated system is shaking itself to pieces, while the farm land and factories are more efficient than ever.

Well, feel free to propose a system that works.

At the moment, most of the houses repossessed do actually sit empty. This is because there is fuck all of a market to sell them into at the moment, unless they're sold for an incredible discount. In which case the bank can't make any money back.

[Coito ergo sum]

What is your analysis of what happened with FreddieMac and FannieMae, and the systemic failures in the mortgage market?

In the US, the government through a variety of methods, direct and indirect, caused lenders to make loans to people who couldn't afford to pay, and under terms that did not provide enough equity to soak up a downturn. When people went underwater, they did what was financially reasonable to them - dumped the properties - and when people lost jobs, they couldn't afford the homes anymore, and the cycle sped up.

Then bundling mortgages and selling and reselling them through a variety of junk investment forms caused a house of cards to be built that amount to a monumental fraud scheme which wasn't illegal because the government backed it.

[Coito ergo sum]

The number of Americans filing claims for unemployment benefits barely fell last week, a government report showed on Thursday, suggesting the labor market was struggling to regain momentum.

http://www.cnbc.com/id/43590162

The economy sucks, and what has been done about it hasn't worked.

[Cormac]

Moody’s Reiterates U.S. Spending Risks Credit Rating (Update1) http://www.bloomberg.com/apps/news?pid= ... 1YD_O3PXz4 The U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce projected record budget deficits, according to Moody’s Investors Service Inc.

You realise of course that Moodys and other rating agencies are a core part of why the global market tanked?

It works like this:

Bank A wants to lend, let us say, mortgages.
Bank A has no spare Capital to lend, but it has, say 8 million on the books. Under Basel II, they may be able to borrow up to 200 million against that 8 million.
Moodys gives Bank A a credit rating, based on the risk profiles provided to Moodys, in addition to supporting detail (these risk measures are the same as those criticised by Taleb).
Bank B relies on Bank A's credit rating, and duly lends them 200 million.
Bank A (whose CEO is calculated on "profits" earned), turns to the bank branches and broker networks, and kicks off a big mortgage campaign.
Bank A may sell ordinary mortgages (in which case the average default rate is less than 4% - a cost built into the model, and spread across all mortgage buyers) or
Bank A may sell sub-prime mortgages (in which case the average default rate is less than 10% - a cost built into themodel, and spread across all sub-prime mortgage buyers - which iswhy they are more expensive).
Brokers and Branches are incentivised on volume of throughput - the more they sell, the more they get in commission/bonus
Bank A underwriters sit behind a screen, using a checklist and an automated risk calculator to approve/reject applications. (Very little human knowledge applied).
Bank A begins to get a rapid stream of mortgages through.
Bank A CEO is incentivised on profit, and wants to use the 200 million again. So, he takes all the mortgages sold in a month, and bundles them up as a Securitised (aka Collateralised) Mortgage Book Think of it like this: A large loan, spread across hundreds of individual people, all on the hook to pay 2 or 3% per year for 20-40 years. Very attractive to pension funds.
Bank A CEO wants to sell it, but needs to get a credit rating on it before he can do so. So he turns around to Moodys, who gave him the rating to borrow the money in the first instance.
Moodys give a top rating to the security. They have to, because they gave Bank A a stop rating in the first instance. If they drop the rating, they call their own credibility into question.
Bank A CEO now has another 200 million (plus substantial profit from the sale of the Securitisation) to relend into the market. His bonus is looking good.

Cycle continues:

Theoretically, this is perfectly fine. It is good for the public, theoretically.

A mortgage security should be incredibly secure:

1. It is based on a physical asset, of which, in general, there is an overall shortage. (Saving World Wars, famines, and catastrophic epidemics and local oversupply from time to time)
2. A person or two people are contractually bound to repay the entire sum, plus an equivalent sum over about 20-40 years.
3. The mortgagors (borrowers) earn more than enough to cover the repayments, even if there is an interest rate increase.
3. The mortgage must be covered by a life assurance policy

So, for this tripartate security to fail:

1. The property market must collapse, putting the mortgages into negative equity, for an extended period of time.
2. The Mortgagors (borrowers) must lose their jobs or experience substantial income reduction
3. The Mortgagors must fail to die/be incapacitated.

This is as strong a security you can get. Surely all of these things couldn't happen together?

But they did.

It started with the manner in which the chain was motivated - volume above all. The temptation for brokers to falsify application forms and supplementary documents was huge - particularly for sub-prime mortgages. There was fraud on a wide scale, right on the high street. The CEO was incentivised to ignore this - he or she didn't care, because by the end of the month, it would be the problem of some pension fund - the bank will have fresh money to lend then and the pension will be stuck with dud securities of indeterminate value/risk. The ratings agency was incentivised by keeping their nose clean.

They filled up the market with securities, the true risk profile of which was unknown. Therefore, the stopped buying and selling them from each other. What was worse, because they didn't know who had gaping holes in their Capital, they didn't know to whom they could lend "safely". Interbank loans crawled to a halt. Without inter-bank loans, there is no liquidity. Without liquidity, there is no lending. Without lending, very few people can buy property. Without lending, business cashflow is decimated. Without cash flow, jobs are lost.

Therefore the sub-prime property market slumped. People lost their jobs, and their incomes faltered. Therefore, at a time when the banks would have liked to repossess and sell to recover some badly needed capital, they could not do so.

This was a vicious and contagious circle. That lending behaviour was not just confined to mortgages.

The consequence of all of that hit the wider world, and created the chaos that we see today.

[Cormac]

Not if you want to help the economy, which the tax cuts did, in fact, do.

Of course, it depends on what you think an economy is.

If you think an economy is a delicate structure of confidence and motivation, then you will realise that tax cuts do indeed stimulate an economy.

If you think an economy is an infinite piggy bank out of which you can draw an infinite amount of money for so-called social "services", then you might have a different view. This kind of view usually goes along with the notion that everything belongs to the state.

In the end though, taxpayers produce the money that the state spends. There is a limit to how much tax you can impose on people, before any motivation they have to work evaporates. This is nonsensical.

The consequence of higher taxation is not just that the tax is sucked out of the economy, until it is inefficiently spent by the state, it is that people's behaviour changes. They start to save more, and possibly excessively.

For example, in Ireland today, the average saving rate is nearly 12% of income. This is a record high, and it is a direct response to potential tax increases. It means that probably upwards of 8% which would otherwise have been spent on the high street - keeping jobs going, is no longer being spent

.

[Cormac]

Tax the rich!

Some customers heated over indoor 'tan tax,' which was part of health-care law

Because only the rich go to tanning salons...

One way to bolster the economy is to raise prices by 10%. Higher prices make people buy more goods and services.

Only the rich go to tanning salons what are you on about.

Raise prices by 10% and you think people will buy more, what fucking planet do you live on?

Pen - haven't you ever noticed where tanning salons are located.

If rich people want a tan, they go to their gaff in a hot country.

[Coito ergo sum]

Tax the rich!

Some customers heated over indoor 'tan tax,' which was part of health-care law

Because only the rich go to tanning salons...

One way to bolster the economy is to raise prices by 10%. Higher prices make people buy more goods and services.

Only the rich go to tanning salons what are you on about.

Raise prices by 10% and you think people will buy more, what fucking planet do you live on?

Pen - haven't you ever noticed where tanning salons are located.

If rich people want a tan, they go to their gaff in a hot country.

For the record, I was being facetious about only the rich going to tanning salons. The tanning salon tax was imposed by people who said it was a tax on the rich. That's why I was making a sarcastic statement about it.

[Cormac]

Tax the rich!

Some customers heated over indoor 'tan tax,' which was part of health-care law

Because only the rich go to tanning salons...

One way to bolster the economy is to raise prices by 10%. Higher prices make people buy more goods and services.

Only the rich go to tanning salons what are you on about.

Raise prices by 10% and you think people will buy more, what fucking planet do you live on?

Pen - haven't you ever noticed where tanning salons are located.

If rich people want a tan, they go to their gaff in a hot country.

For the record, I was being facetious about only the rich going to tanning salons. The tanning salon tax was imposed by people who said it was a tax on the rich. That's why I was making a sarcastic statement about it.

I didn't even pick up on that - I was just responding to Pen!

[Coito ergo sum]

The number of new people filing jobless claims fell more than expected over the past week while the private sector created jobs at a far faster pace than anticipated, separate reports showed Thursday. Though still stubbornly high, weekly jobless claims dropped 11,000 to 418,000 over the past week, more than an expected 3,000 drop.

http://www.cnbc.com/id/43667039

O.k....so, to get this straight...the weekly tally for new unemployment claims was 429,000 last week. This week, some dick predicted that it would fall to about 426,000. It actually fell to 418,000. What's that? Good news?

Jobless claims fell a few thousand more than some asshole who we don't know anything about thought it would after throwing darts at a dart board! Yay!