Tuesday, September 30, 2008

On The Financial Meltdown

I copied the following post from a data management forum, but I thought it was very interesting and worth sharing:

Regrettably, we're all focused on the mortgage holder that's stuck or behind, or whatever.

That's NOT what this is about. They are the instruments that brought this into existence, and lenders, banks, etc, may have caused it, but that's not the point.

Here's a close to home example. Liz just bought that house for $290K. Mike bought a Cape about 9 years ago for $120. That's 2.5 times price increase in under 10 years. Liz's house has about $50K worth of improvements, so that, in theory brings it down to about $240. Just 2x Mike's house...

The mortgage on the house was $313K. There were ZERO payments for 12 months prior to the sale. The interest rate was 10.45%. So, just straight interest, there was $33K in lost interest. So, the "true" debt was about $350K. The mortgage holder got $265 after all expense of the sale were deducted. So, the mortgage holder lost $85K.

Likely, the mortgage holder took that mortgage and bundled with a bunch of others and sold them to a bank. That bank was to use the future interest to pay interest on deposits, etc.

Because the home owner defaulted, the bank's customers were not able to get paid... So the bank had to take the owed interest out of reserves.... Multiply that by some quantity, and then the bank goes under.... etc. Multiply that by whatever and you have the dimensions of the problem.

If the bank needs money, then it cannot lend. That means that farmers cannot get advance on crops, business cannot buy equipment on credit against further sales, and all that....

Vapor lock takes over....

"We" are all what this is about. The businesses that we use, services that we get, and all that depend very much on credit from large banks. Because of this mess, the whole flow of money could come close to stopping.

So, what we, regrettably need to keep focused on is that if this doesn't get fixed we all suffer.

16 comments:

Anonymous said...

Funny, I kinda get the impression that this is about throwing good money after bad. This isn't the first time in the last couple of months that the American taxpayer has been asked to 'bail-out' financial institutions. Yet, this strategy doesn't seem to be working. Each time a bail-out is performed to 'save' the market, we find it is shortly in desperate need of more public assistance. Insanity is often described as performing the same act over and over while expecting a different result.

derF

BAWDYSCOT said...

Couldn't agree more, derF. Bear Stearns should have been allowed to tank. The bigger the bubble the louder the (pop). Bank of America, anyone?

Anonymous said...

well, that would make the Saudis squeal. Wouldn't it?

derF

BAWDYSCOT said...

I am just not sure this house of cards will keep standing. We may be able to escape the short term, but all it takes is one little misstep(which may already be in the works or worked)and life as we know it may be survival of the fittest for real, God dogma be damned, prayer will be as worthless as the dollar. Then we will see just how powerful the office of President of the United States really is. My guess is whoever wins this place in history will wish his predecessors had been more humble.

coreydbarbarian said...

the way i see it, dubya cried wolf too many times and lost the trust of the village. then, true to form, his solution was "gimme absolute power, with no accountability, RIGHT NOW."

i heard the interest rate that banks charge to loan to other banks jumped from 2.5% to 6.9% yesterday. that's sort of serious.

i also heard that there is a list of 120 banking institutions that they expect to tank within 12 months. that's not quite as serious, unless they try to bail 'em all out.

i guess what i'm driving at is that banks failing and the dow diving are relatively incosequential; when banks stop loaning to each other, factories go out of business and people lose their jobs, homes, savings, etc. that will be the true crisis.

also, imho, a bailout bill without some meaningful reform in regulation will only make this mess worse than it already is. bush's initial proposal would have pushed the crisis down the road a bit. say, into the next presidency, where it's someone elses problem. the current bill is a little bit better, but still inadequate in the long run, simply because it lacks the regulatory reform required. if your car is leaking so much fluid that you need to stop ever couple miles to add oil, it might just be better in the long term to invest in a rebuild. or sumthin'.

coreydbarbarian said...

this is a moment in our history where a well-informed public would be useful.

BAWDYSCOT said...

The feds had all the regulations they needed to avoid this...crisis. They don't need more; they need to do their fucking jobs. That's what they get paid for.

csm said...

The bill that passed in the Senate today is much better: higher FDIC limit, oversight board, ownership shares of rescued banks, etc.

It'll be interesting to see what the House does with it.

Anonymous said...

The information I have indicates that Paulson sits on the proposed oversight board. This seems this seems a serious error in my judgment. To hand the oversight responsibilities to those who the oversight is suppose to restrain seems a recipe for disaster. I don't want any of those waffles.

derF

Anony Mouse said...

As Bawdyscot stated, we have all the regulation needed. The vast majority of economist I have read who are not a politician believes this bailout is a bad idea. I tend to agree with their assessment. Let consolidations, buy outs and bankruptcy clear the mess and turn Freddie and Fannie over to the financial institutions. One less entity for the congress to corrupt.

Of course this plan is packed with over 100 billion dollars in pork spending to entice the HR to pass this bill. Same old Washington.

I may actually watch the debates tonight. I like both of these candidates for different reasons. If Biden can duck the sniper fire and study up of FDR and the 1929 stock market crash, he'll be alright.
I had to get that in since the media blasted Hilary for that but then say little about Joe's embellishments. I think Palin ought to ask the moderator for autographed copy of her book on Obama. That could bring some good laughs.

Thomas said...

Don't forget is is patriotic to pay more taxes, Hillary should have been the Veep and his own attack machine campaign adds are terrible.

csm said...

Sigh... Republican attack bullshit and talking points galore again.

Ifill's book, titled “The Breakthrough: Politics and Race in the Age of Obama” is about African-Americans in politics, and not only Obama. I guess his name in the title confused you.

The right-wing fools out there making Ifill's upcoming book an issue, are blathering idiots. The AP ran a story on July 23 quoting Gwen Ifill and identifying her as “senior correspondent with PBS’ the Newshour with Jim Lehrer and author of “The Breakthrough: Politics in the age of Obama” slated for publication early next year.” That AP story was even posted on — is still posted on — the website of the ultraconservative Washington Times. The two campaigns formally agreed on the debate after their negotiators had agreed on the moderators — Gwen Ifill included — on August 7th. Being suspicious of her now is just showing their incompetence, yet again.

Regarding taxes, yet, it IS patriotic to pay your fair share of taxes to support the infrastructure and the common good. The right likes to carp about the tax-and-spend Dems, but that is MUCH, MUCH BETTER than the borrow-and-spend Reps. Ya gotta pay for W's drunken orgy of spending some time, folks.

csm said...

Hey derF. I agree that the overseen should not be on the oversight board. It should be improved... probably will be improved over time if more Dems get elected. But at least there is now SOME oversight; which is better than what was originally there, which was this (verbatim):

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Anony Mouse said...

The fact you have a hard time with someone poking a little fun with Ifill only shows you might see some truth in the accusation. Imagine it is a Fox correspondent and then look at your reaction.
Actually, for Palin she stated publically she has no problem with the moderator and to top it off, I think it will help Palin. The public will be watching Ifill closely.

I do plead guilty; when I see Obama’s name on a book I assume it has something to do with him. I’m sure it will do much better if he actually wins. Just an assumption.

So the Democratic Party defines patriotism by paying more taxes while the Republicans define it with pins and pledges? I think you both are mad. Politicians taking pay cuts, using Medicare, shrinking government and using public transportation has a patriotic ring. Higher taxes (we pay some of the highest) are exactly why more jobs are going overseas and in this economy - disastrous. Not much patriotic about that.

If the Democratic Party gets MORE control we can expect more of this:

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

One party unchecked is exactly what we don’t need.

Thomas, I could only remember a few of the Biden Gaffes. I fine Biden refreshing because of the gaffes. He actually says what he thinks even if it may be wrong.

csm said...

Based on OECD findings the USA is not even in the top ten most highly taxed countries.

Saying the Democratic party defines patriotism as paying more taxes is inane. But coming from you, no surprise there. It is not definitional at all. But paying your fair share of taxes is indeed patriotic. Without it, our country does not stay afloat. We can argue about what that "fair share" should be, but if we argue about it being a patriotic act, then everyone stop paying taxes and then see how we support the troops. (Had to get the troops in there so right wingers would understand.)

Regarding Ifill, if the McCain camp had a problem with her, then they should have voiced it back when it could be changed. Instead they used it as a pre-excuse for Palin's performance if she failed. She didn't (she didn't answer questions, but only reasonable people who pay attention noticed that, so most will think she did just fine).

BAWDYSCOT said...

Yeah, and most of those countries with higher tax rates are European and are much better places to live, with all the free health care, and powerful labour unions and non-existent militaries...except if you are POOR AND MUSLIM!

Yeah, we should certainly pattern ourselves after those bastions of goodness.

At least there are some here who don't mind if we have a few million Latinos looking for a better life, which by the way, that number is getting smaller because our federally (un)controlled economy is going in the toilet, looks like the right-wingers have finally figured how to get rid of them, or maybe it was God's will.