"Toxic Assets", the Financial Crisis, and the Bankers

[deepsepia]

Moving this to a new thread 'cuz its only tangentially related to the London riots.

Originally Posted by palo5

Actually, they weren't

Toxic assets were 'securitized' bundles of loans, sliced and diced to make them incomprehensible, given a fraudulent AAA by rating agencies, and sold to anyone who would buy them, including pension funds

The loans to individuals were several steps lower

. . .but they're the basis of these securities

The bottom line was that the credits that failed in the financial crisis were largely loans to people . . . mortgages and consumer loans.

That these loans were bundled doesn't change the issue-- the securitized bundles would have performed fine if the loans and mortgages had paid.

Here's roughly what happened:

risk free return available in the market %2.5 -3.5

actuarial return requirement for pension funds to stay solvent: %7.5 to 8.5

So what happened?

Incomes weren't growing, pension fund contributions weren't growing, baby boom is aging -- in short, we were all getting a little poorer. Workers took out new loans, mortgages, home equity loans, car loans and so on to keep up consumption . . . these loans got bundled into securities, and sold on to institutions, like pension funds for those very workers taking out the loans.

This was a disastrous arrangement, but its not so much the bankers' arrangement as society's

The hard truth is that excepting a "blip" driven by IT productivity in the mid 90s, the West has been losing its competitiveness in the world . . . so we're somewhat less wealthy. And add to that, we're older, living longer, and consuming many more dollars of healthcare.

Those are real trends . . . but no one rang a bell and said "you know, we're a bit less well off than we used to be-- we need to consume a bit less", instead, the central banks kept pumping money into the system, governments kept cutting taxes, and folks kept their standards of living by borrowing.

"Toxic assets" are the result of this malignant process, not the cause.

[beemerider500]

When Alan Greenspan was testifying before a congressional committee about this crisis, he stated that he (and his like-minded followers) always felt that the free-markets would correct any such discrepancies in the financial system. What he didn't think of (and should have known) was that the greedy bastards pushing these pieces of paper around would continue to do it as long as there was money to be had. Even though Wall Street doen't (actually) make anything... they make alot of money. Which is why these creative MBA's came up with this scam.
And, speaking of not making anything... that is what America is becoming. A country that doesn't make anything. Because of a 35% corporate tax rate, companies are leaving the U.S. for cheaper climates. And, if America continues to lose its industial base, it will be a very sad state, indeed. Now, I'm not talking about making software because software doesn't make anything... software is an efficiency tool. I'm talking about making tangible goods like clothing, cars, refrigerators, tractors, planes (etc.).
There has been alot of political rhetoric about stimulating the economy, with emphasis on the creation of small businesses. Well (Mr. politician), I've got news for you... who do you think small businesses rely on? Big companies, that's who! No (MR. news-reporter), I'm not talking about that feel-good (dog & pony show) story about the 60 year-old bookkeeper that lost her job, took a little bit of money and her Grandmother's cookie recipe and made a go-of-it. I'm talking about "durable" goods, things that help out entire regions economically. Do you think that when Ford is putting together a car, they are making the dashbord or engine on site? No, not even in a satellite plant. That kind of thing is done by vendors (suppliers), smaller companies who (in turn) rely on even smaller companies to make particular module that go in to the dashboard, or into the engine. So (Mr. politician), while I agree that small businesses are critically important to the economy, we need to focus on businesses that are making durables, rather than consumables (cookies).
I watch alot of the discovery channel programs and much of what I watch is about World War II, and there is one thing that is certain about America's involvment before and during the conflict. It wasn't because Americans are such better fighters or had such supreme military stratigies... it was logistics (supplies). For every tank that was destroyed, it was relaced with four. For every plane that was downed, it was replaced with six. That is what has made America the world power it is today. The industrial might of the country is what is soooo important and that (my friends) is what is slipping away.
The politicians are explaining it away as "jobs that Americans don't want to do, anyway" and a generation (my generation) of people that went to college (to avoid the draft) and decided that now that I'm a college graduate, "I'm not gonna get my hands dirty for a living". I wonder how many of those out-of-work and homeless college graduates feel about getting their hands dirty for a living now.
The average American has become spoiled (my friends) and some attitudes (and goverment tax rates and give-away programs) need to change before we can start to move forward again. But, at the rate things are going... I'm just hoping I'm alive to see it happen.

[deepsepia]

Originally Posted by beemerider500

When Alan Greenspan was testifying before a congressional committee about this crisis, he stated that he (and his like-minded followers) always felt that the free-markets would correct any such discrepancies in the financial system.

Probably would have been true . . . but in fact his actions were very different.

He intervened to prevent Long Term Capital collapsing in 1998-- we'd probably all be better off today if LTCM had been allowed to go bust, and stuck banks with big losses.

[swamp thing]

The financial collapse is accidental and in no way orchestrated.

[deepsepia]

Originally Posted by swamp thing

The financial collapse is accidental and in no way orchestrated.

agree and disagree. Not orchestrated. But not accidental either . . . the product of a very badly designed set of financial institutions and systems.

We're seeing an analogous situation in Europe today, with the near collapse of the European system. That's not "orchestrated" but it is the result of the bad design of the EU monetary and financial system

[beemerider500]

Originally Posted by deepsepia

Probably would have been true . . . but in fact his actions were very different.

He intervened to prevent Long Term Capital collapsing in 1998-- we'd probably all be better off today if LTCM had been allowed to go bust, and stuck banks with big losses.

You're right, I stand corrected... his feelings I spoke of was from a Frontline program interview dealing with Mortgage derivitives.

[deepsepia]

Originally Posted by beemerider500

You're right, I stand corrected... his feelings I spoke of was from a Frontline program interview dealing with Mortgage derivitives.

I wasn't saying you're wrong -- Greenspan did say exactly that. His error, not yours.

Its Greenspan who had an entirely misplaced faith in financial institutions. He himself later said something to the effect that "I have found a flaw in my model" -- basically in his conception, bankers would never take such egregious risks with capital.

But, in fact, the way the incentives stacked up, they did take huge risks with the shareholders' capital, because the bigger the risks they took, the more they got paid.

[Warren G]

The Dow Jones was down 419 points today. This will only get worse. I personally lay the blame at the teabaggers..we have raised the debt ceiling around 70 times before, without any fanfare. But now, thanks to the badgering of the tea party, it has been brought to the attention of Dow Jones, who have responded by lowering our credit rating.

This has in turn created a panic on Wall Street, where employers are no longer releasing any money, causing even more unemployment and static in corporate spending. Everyone is holding on to their capital, and buying gold. Now Morgan Stanley has jumped in, declaring that although the US can still pay it's bills, it's monetary future is in peril because of political insecurity.

Yeah...we are now being downgraded because these assholes on the Hill can't ever come to an agreement. And this, of course, will cause a second, even greater recession than before. Thanks, assholes.

[beemerider500]

Warren, I agree that the house is on fire, but when do you say "enough, already!" The Tea party electorate is only trying to represent the people that sent them to Congress. Something that some of the other career politicians need to do. If you want to blame somebody, you have to blame the people that are helping pay the bills.
You know, that while there were a lot of events that shaped the prosperity of the early & mid 1990's (fall of the Soviet Union, proliferation of the Internet, low interest rates, etc) one of the large contributing factors was that the congress slashed alot of programs and balanced the budget. (The 1st time they did that since Richard Nixon was in office.)

[deepsepia]

The strange thing about the "present crisis" is that it's not at all clear what to do. You can point to some self evidently dumb folks and bad ideas: but there's no concensus among smart responsible folks either.

We've ended up in a bit of a jam, and prescriptions for what to do look a bit like the old Irish travel directions "if you're going there I wouldn't start from here"