My PhD is math and I encourage my students (when I teach) to feel free to ask questions, since they typically block themselves by thinking they're the only one in the room for whom this material is a black hole.
The reality, of course, is that generally everyone breathes a sigh of relief when the question is asked, because they too wanted to ask a similar question and blocked themselves for just the same reasons.
Well, economics is not my forte, and I swear to God I am at least as confused as my students about what the h___ is really happening.
So please forgive the very short piece, but may I cut to the chase and ask you professionals can Obama basically "undo" the bailout, which one submission I recently scanned said was EVEN WORSE than 9/11?
Also, any really solid general outline of this convoluted financial world (at least to me) would be very, very gratefully received.
Bill, No one knows exactly what the problem is other than trust (alternatively risk).Therefore, I can only guess as to which problem to address. I also have no Wall Street background and only know enough to be dangerous, which might be a good thing as I will not be overly technical. Our mortgages have been gathered in blocks, and broken into Credit Instruments, Credit Derivatives and other exotic instruments. These instruments are sold around the world. Since it is virtually, impossible to discern good paper from bad, entire "blocks" of mortgages get valued at the worst case scenario price (Marked to market). Since these instruments get leveraged (sold) thirty times over, the risk is magnified (geometric growth), especially in an environment of depreciating assets that have no determined value and fear is running rampant. In fact less then 10% bad paper is effecting 50 Trillion in Mortgage and Mortgage related investments because it is nearly impossible to "cull from the herd". Fear is driving.
Hey, you have forgotten more than I know about this.
Kato,
I will ponder this and check out your recommended site. Even for us non professionals, it seems like it's time for us to get up to some kind of speed about these desperately serious (and usually TOTALLY unthought about) realities. Suddenly, fairly demanding financial literacy seems to be necessary if we are going to be able to make sense of worldly events.
Thank you very much. Your answer at least pointed me in the right directions as to how to think about this. Wow, it really is a convoluted mess, isn't it?
Bill
Of course, I guess I could always ask Sarah.
by
W. Christopher Epler (Bill) (262 articles, 53 quicklinks, 0 diaries, 643 comments)
on Sunday, October 5, 2008 at 7:27:56 PM
Look at this way...You have a neighbor with a 400,000 house and you know his kid likes to play with matches. So you buy fire insurance on his house for $400, and hand the kid some matches...Not only that, but you tell 30 of your gambler friends to buy insurance on his house.... Mortgage securities are like a form of fire insurance but for mortgage defaults, your 30 buddies are all the banks that also buy insurance on your neighbor's house, and the matches? that is the de-regulation and non-overright of this (credit default swaps) 'insurance', allowing it to be leveraged many times over. Once the fire burns down the house, many people make a bundle...betting on people losing their house, and also making the loans that encourage this, should be a CRIME and severely punished...but no, they just get more money to play with while we begin eating old shoe leather this winter.
by
wxman2001 (1 articles, 0 quicklinks, 14 diaries, 118 comments)
on Monday, October 6, 2008 at 12:32:13 PM
Bill, No one knows exactly what the problem is other than trust (alternatively risk).Therefore, I can only guess as to which problem to address. I also have no Wall Street background and only know enough to be dangerous, which might be a good thing as I will not be overly technical. Our mortgages have been gathered in blocks, and broken into Credit Instruments, Credit Derivatives and other exotic instruments. These instruments are sold around the world. Since it is virtually, impossible to discern good paper from bad, entire "blocks" of mortgages get valued at the worst case scenario price (Marked to market). Since these instruments get leveraged (sold) thirty times over, the risk is magnified (geometric growth), especially in an environment of depreciating assets that have no determined value and fear is running rampant. In fact less then 10% bad paper is effecting 50 Trillion in Mortgage and Mortgage related investments because it is nearly impossible to "cull from the herd". Fear is driving.
You little scamp. You watched 60 Minutes a week or two ago.
That's exactly what they said, but I think you summed it up (no pun) better and more concisely than they did.
I couldn't have done it. Their basic premise was that nobody knows who owns these mortgages, which seems like something out of science fiction.
I mean, really! even Woodward and Bernstein could follow the money.
Wouldn't you think there has to be a paper trail? Mortgages have account numbers. All mine did. And wouldn't those numbers be on invoices, so to speak, when they were bundled and sold to an entity.
And even if the new company changed the numbers, someone should be able to back-track them.
Forensic accountants. The FBI has an entire stable of them. And if they don't have enough, an entire new industry can be started. It would be the beginning of our economic recovery, and then accountants would be transformed from nerd status to super heroes.
by
Sandy Sand (198 articles, 0 quicklinks, 227 diaries, 1548 comments)
on Sunday, October 5, 2008 at 8:16:32 PM
Banks are having trouble proving they actually hold the mortgage contracts when they foreclose on homes, so if you are in trouble, demand that the bank produce the mortgage contract. Those contracts are sold to third parties, tied to Mortgage Obligations, and mortgage obligations to mortgage instruments. Basically a big three card monte game. Probably with archaic recording that provides a nightmare trace situation, which is far from unintentional as it masks the robbery going on. Europe is not happy!
by
kato krause (2 articles, 0 quicklinks, 3 diaries, 199 comments)
on Sunday, October 5, 2008 at 10:22:45 PM
You asked about tracing the document trail. I tried to reply that banks are having trouble producing the first in the string, your mortgage contract. Sorry I got off point
by
kato krause (2 articles, 0 quicklinks, 3 diaries, 199 comments)
on Monday, October 6, 2008 at 7:00:16 AM
My view of matters will generally be based on microeconomics, which studies how a firm will behave in light of its circumstances. Individual balance sheets are quantifiable things. Also conceptually, if you sum together all of the individual (and firm, institution, or organization)'s balance sheets, they should add up to the macroeconomy in aggregate.
Because micro-econ is quantifiable, it suits me with the eyes of a software developer, which I am (and I've written accounting software). In college, I excelled at microeconomics, and I also paid attention through macroeconomics - but I wrinkled my nose at macro.
(The course expressed four different schools of thought as to how the economy works. That tells me they don't have it down to a science. Similar to my philosophy course with four arguments for the existence of God. I really felt that my macro course might as well have been philosophy. Ultimately, there is a leap of faith involved to throw in with any one of four alternative approaches.)
Since I know that balance sheets can be added together (as when a conglomerate publishes consolidated financial statements), I prefer to think of the (macro)economy as an aggregation of everything that's happening to its individual constituent (micro) elements.
Also I am adamant that big boys are supposed to be able to pull up their own socks, and tie their own shoes. That leaves me with no sympathy for the big boys who like to wield more money than God - and they walked into a casino called Wall Street - and now they are cry babies about their gambling debts.
That bailout was beyond stupid, and yes Obama ought to reverse as much of it as he can, as you suggest. (I might suggest that President Nader should reverse as much of it as he can. ;-)
At a microeconomic level, it's just dollars going to the big boys in the casino - and not to individual homeowners like Addie Polk who is newly famous in the news since she shot herself (at age 90) on Wednesday when the eviction sheriffs arrived at her door to enforce her foreclosure.
The Addie Polk story tells us that there is carnage on Main Street. In my last OEN diary, I said:
Predatory loans (adjustable rate mortgages, or ARMs) were given to people with shaky credit, in middle America where everyone's financial circumstances are pressured by contemporary economic challenges.
If they cared to fix the problem they would declare a moratorium on post-reset foreclosures where an owner-occupied house is the basis of an ARM.
It would also be well to declare a moratorium on resets, period. I happen to feel that all credit ought to be fixed-rate, and that there should be no teaser rates or teaser payments that are the advertising gimmicks by which borrowers get sucked into these loans.
To the extent that $700 billion is needed, it should be used to buy the houses and then to refinance them, placing them back in the hands of the owners who occupy them, with fixed-rate mortgages.
This is not my understanding of how the Bailout bill ("the Mug America Act of 2008," as I've nicknamed it) goes. Instead of buying the houses, I understand that they are buying financial instruments such as derivatives.
These are pieces of paper created on Wall Street and traded there. ------------------------------------------------- Your other commenter pointed to the derivative story.
So the thing is this: there is a "real economy" on Main Street, and there is a "speculative economy" on Wall Street. They've bailed out the big boys with Addie Polk's tax money, and left Addie Polk to attempt suicide in her foreclosure. This bailout was like predators (of Washington) protecting predators (of Wall Street).
And Obama and McCain were two of the predators who were in on this; Nader wasn't.
There are more interconnections we could speak of. Individual firms (and us at the microeconomic level) can only think of the inflation rate, interest rates, and the unemployment rate as ambient variables in our environment. But, when you inflate the money supply you invite inflation. (More dollars chasing the same quantity of goods means more dollars per good, or price per item.) Also the trade deficit invites inflation.
Nobody in the Bush administration seems to have even thought about fighting trade deficits, because all of their "free trade" agreements enlarge the trade deficit. (I believe that's something that Bill Clinton didn't understand when he embarked down this road.)
In this administration, they surely aren't managing for the numbers, because major numbers like the budget deficit, the trade deficit, and the price of gasoline have all been going in the wrong direction. It's unfortunate for the American people.
If they cared to slow the growth of the money supply and therefore fight inflation, they would raise interest rates. (That's next on the dance card. So, if you remember 1979 with stagflation, that's where we're likely headed.)
But in another sense, we could announce, "Ladies and gentlemen, capitalism has left the building." I don't think that we should let it go so quickly. The free market means that competitors are always waiting to step in and to pick up any lost accounts.
The correct thing to do was to let the derivative tsunami hit Wall Street. Main Street existed, and knew how to conduct its business, long before derivatives became a growth industry on Wall Street.
Another key part of capitalism is the sanctity of private property. (Some would argue that taxation always violates it, but I'm okay about taxation where there is a transaction. When there is no transaction - as with property taxes - then I agree that private property is violated.) It's a basic ground rule that "what's yours is yours, and what's mine is mine." The ability to say that and to have private property is an underpinning of capitalism.
This was a stupid bailout because essentially, the big boys in the casino couldn't cover their gambling debts, and so they stepped outside and mugged other people. In America, the little guy is like a bystander or passerby to the casino; but, Washington's sociopaths would tax Addie Polk to try to reinflate the bubble or keep the music going in their cushy executive suites.
Will they succeed at putting toothpaste back in a tube? No. So they are wasting a trillion dollars on a fool's errand.
We got mugged!
by
John Kusumi (43 articles, 0 quicklinks, 26 diaries, 89 comments)
on Sunday, October 5, 2008 at 8:46:41 PM
This was a swindle, pure and simple. And now I don't mind being on the record calling Barack Obama a sociopath. And - I used to think the American people would do well if they defeated their Senator and re-elected their Congressman. But now, it is clear to me that the average American should defeat BOTH their Senator and their Congressman. We need to clean house, and sweep out of office these predators and swindlers who have each other's backs.
by
John Kusumi (43 articles, 0 quicklinks, 26 diaries, 89 comments)
on Sunday, October 5, 2008 at 9:06:42 PM
Talk about food for thought. Many, many thanks, I will do my best to digest it. By the way I loved your metaphors about Las Vegas, etc. They really helped.
Bill
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W. Christopher Epler (Bill) (262 articles, 53 quicklinks, 0 diaries, 643 comments)
on Sunday, October 5, 2008 at 10:56:30 PM
Lots of folks seem to have the misguided notion that "when Obama gets into the White House he is going to fix all these problems." As much as I wish they were right, there is no evidence that he will be able to change anything. We already have a Dem-controlled Congress (by the numbers anyway, not by their record) and it hasn't changed anything. In all likelihood the 2008 election has already been stolen--so we are going to get McCain-Palin. The media is broken, our constitution is broken, our Congress is broken. A new president is not going to change much though McCain will make things even worse. I guess the pain has to become great enough to awaken enough people from their apathy so they will start to demand systemic change. Time for everyone to wake up and smell the coffee. Its going to get a lot worse until average citizens start to participate. Democracy is not a spectator sport.
by
Abraham007 (6 articles, 36 quicklinks, 2 diaries, 54 comments)
on Sunday, October 5, 2008 at 9:06:29 PM
Over and over and over again it comes back to Democracy is not a spectator sport, but for millions of Americans is it still exactly that. If we had only thousands, not millions, of dead weight enablers of the elites, Democracy would save itself. But when the fulcrm is profoundly off center, there is relatively little you can do to lift anything.
That seems to be part of the mystery of greed, i.e., greedheads have their own very functional systems. Evil seems to unify people more than good.
Also this crisis is itself a symptom of vaster forces, e.g., the money cow oil war for the elites in Iraq for which the working class has to sell the farm, plus the satanic tax breaks for the elites. These two forces were inevitably killing America (including the economy) and it was just a matter of time before we began hearing the death rattle of our Constitutional Republic.
We should also never forget that Bush's grandfather, Prescott Bush, also tried to engineer a coup d'etat in America for the fascists. George (or really Cheney, that concentrated filth of the solar system) seems to be on the verge to total success.
by
W. Christopher Epler (Bill) (262 articles, 53 quicklinks, 0 diaries, 643 comments)
on Sunday, October 5, 2008 at 10:45:21 PM
I hope you watched 60 Minutes tonight. If not go to the transcript.
These guys were the biggest bunch of con artists ever. Worse than Brooklyn Bridge sellers.
It sounded like a ponzi or pyramid scheme, as much as I understand them.
It started with guys with your expertise, PhDs in math and of all things physics, who when to Wall Street to devise uber complicate financial formulas, that no one would understand, and my daughter thought she heard were designed to prove one could make money off bad investments.
That shifted to selling the idea that gambling on bad investments, i.e. lousy mortgages would be good investments that were...here comes the best part...
bad investments back up by non-insurance, insurance called Swaps. Why couldn't they call it insurance, because insurance companies are regulated and must have capital to back up their payouts.
My daughter and I watch in separate rooms, and when she came downstairs I asked if she understood the show. She said no, but she really grasped most of it, mind boggling though it might be.
What I recapped is a combo of what she and I grasped from the show.
Now you'll probably tell me you saw 60 Minutes and I didn't have to go through this mine field of complicated stuff to paint a thumb nail sketch.
Maybe I'll better understand it after trying to write about it.
Not only is the idea of selling supposedly smart financial people on the idea of making money on bad investments a mind blower, but the thought that this collapes is based on only six percent of those mortgages being deadbeat debt is nearly unimaginable.
To take a stab at your first question, yeah, I think if Obama is elected he can reverse what Bush and this Congress have done. I've always believed that most problems can be solved, especially the ones we create for ourselves.
Of course, our first problem is getting Obama elected.
Okay. Back to sanity and something I understand. Watching the Angels and Red Sox try to break tie in the 10th inning.
by
Sandy Sand (198 articles, 0 quicklinks, 227 diaries, 1548 comments)
on Sunday, October 5, 2008 at 10:34:42 PM
No, I missed it, Sandy, so your recap was very helpful.
Jesus, what a mess, but an inevitable mess of the Iraq money cow oil war for the elites and the astronomical tax breaks for (guess who?) the elites. You can bleed off only so much green energy from a country, and then the country starts to die.
I wonder what the elites will do if (1.) they successfully steal another election and (2.) and honest to God revolution starts happening in America.
The irony is that ONLY the middle class is restraining a Revolution. The more the middle class goes is the more America will be filled by people singing that "freedom is just another word for nothing to lose" . . . as they mount the barricades.
by
W. Christopher Epler (Bill) (262 articles, 53 quicklinks, 0 diaries, 643 comments)
on Sunday, October 5, 2008 at 10:54:15 PM
I'm not an economist, but a long time ago when I was in high school, I got into a conversation with my father who was a bank VP, and I asked what I thought was a real dumb question: "Dad, if I borrow $10 from you and you charge me 10% interest, where do I get the other $1? Dad, a closet liberal, explained that the $1 didn't really exist and was solely based on the fact that the next Friday I'd get my paycheck and he'd get his dollar back.
You can't get a loan without a job, so actually, the lender is counting on your future earnings in order to repay the loan. Now, what's happened here is that since the realm of "the great communicator, our government has deregulated the financial system to the extent that banks are loaning on future earnings, but jobs are being exported overseas. The US public is the marketplace for world goods and there isn't the future jobs earnings to cover the debt. Ooops!
That can be called a major blunder, but being the cynic that I am, I don't believe that. I do believe that the entire thing is a calculated plan to enslave the public, not only here but worldwide. Look a
