Money market problems

[Gwizz]

Money market was the safest place to bank your money, often at a small loss when inflation is added in.

It seems that the failure of Lehman Brothers Company brought forth the information that some Money Market money was being used to leverage risky investments.  Not all investment companies, used money market accounts in this way.

I read that this adds about a 3.0% loss.  But since Money market money normally does not keep up with inflation this about doubles the loss for the average saver or retiree if their investment company was involved. 

You might want to share a tear for Al Gore.  His carbon company was banked with the now defunct Lehman Brothers.

I wonder if he had advance warning like other big wigs have had and was able to pull his funds out before the fall.

On another bit of interesting information, Obama was involved with receiving funds from the Freddie Mac and Ginnie Mae financial debacle.  Only one Senator was more involved.  (Chris Dodd)  I believe Dodd is the Democratic Senator that is the chairman of the committee that make the rules for financial groups in the US.

I've heard from several sources now that about 2 years ago McCain and Bush both tried at different times, to put the brakes on this problem but were voted down by the Democrats.  I'm sure the Democrats will now blame Bush. 

I have a feeling that our financial problems in this country will continue to accelerate.

[Hawk]

We haven't seen the worst of the economic decline in this country yet. It's going to get a lot worse before it gets better, if it ever gets better.

[djf01]

I'm sure the Democrats will now blame Bush. 

And they'd be right too!

What we are seeing in the US at the moment is an unwinding of credit multiplier.  It's is triggered by an asset bubble bust (1929 stockmarket, 2007 sub-prime home loans), but once underway it gets a life of it's own.  This is how the great depression started.

Some of the US's current financial problems are due to structure issues with the US system of governance (3 pillars with the President appointing the executive) generally makes for loose fiscal policy.

But where Bush & the Republicans are culpable are:

1) Bush Tax cuts and the Iraq War.

I think it was clear to almost everyone that the Bush tax cuts were unsustainable, and even though they were appropriate for a short time after 9/11.  All that money directed at high income earners (who save/invest their tax windfall rather than spend it at Walmart, so no headline inflation increases), wound up driving asset prices: specifically house & equities, and driving down fixed interest yields. 

Had the US not prosecuted the Iraq war, the Bush tax cuts would probably have been affordable.  But instead, the revenue base was reduced while the structural government spending was greatly increased (the very reason  economists and business argue *against* big government).

2) The handling of the current crisis by the Fed (& a lesser extent the White House) makes Hurricane Katrina rescue look like it was run by the IOC (or Swiss Railways, to give this thread some relevence to this board).

During the start of the crisis, I think they probably acted appropriately.  The Fed is not there to support people in home loans they can't afford, nor boutique lenders to housing estate developers.

They handled the Bear Sterns' failure by doing the absolute minimum they needed to do.  Instead of bailing them  out with public finance, they organised a private equity takeover at firesale prices.  (Hardly the thing to inspire confidence in the remainder of the financial system)

And since then, they have been simply been inadequate or woefully inadequate.

Fannie & Freddie were always candidates to get into trouble in this environment.  Their charter - as defined by the US government - *forces* them to operate primarily in the home loan market.  What was needed was the Fed  (or the White House) to come out and say "they are *not* currently in trouble, but if they ever were to, we *will* step in and lend them whatever money they need to continue to meet their charters". 

But that didn't happened.  They let things fester until they did get into trouble, and *then* bailed them out with an equity injection (I could be wrong on that).

That bank in California?  There was a run on it because it was *rumored* to have a high sub-prime exposure.  No financial institution - no matter how prudently run - can survive a run.  The Fed let it fail, then took it over.  Not sure if all depositors are going to get their money back, or just up to the insurance limit.

And now the AIG "bailout", where to prevent a catastrophic collapse, the Fed has taken 80% of the equity (at firesale prices).  But even so, all investors in this institution are going to take a big haircut.  And because AIG is so big, almost everyone - even Buffet - is going to take a hit.  And it's declining/deflationary equity prices - fueled by continued fear about sub-prime - that got AIG into trouble in the first place.

In short, the Fed have acted like speculative bottom feeders trying to make a quick buck rather than a central bank trying to maintain confidence and integrity in the financial system.  Rather than put a floor under the current deflationary cycle, they've been cherry picking who to "save" (buy buying in at rock bottom prices) and who to let fail.

The way central banks are *supposed* to work is to lend money (provide debt finance) to banks and other financial institutions which are suddenly faced with the withdrawal of their own privately acquired debt finance.  This is usually done quietly, though sometimes very publicly -  to prevent exacerbating the problem they are trying to solve.

In fairness to the people at the Fed, they don't really have the authority to act any more decisively than they have.  They need Cabinet approval to do any more, so either that is being denied, or it is not even being recommended.  And their ability to act has been compromised by the fact they have used much of their borrowing power to fund the Iraq War/Bush Tax cuts - take your pick.

This problem has been going on for more than a year now.  Anyone with a basic understanding of financial systems can see the problem.  And given the level of independence - or lack there of - with which the fed operates in these circumstances, I think Bush & his cabinet deserve every brick thrown at them for their handling of sub-prime so far.

And the big risk is this: first it's people who can't pay back their mortgages (who should probably have never had them in the first place), then it's those who loaned them the money.  Then it's those who bought too much of that sold on dodgey debt.  Then it's those who bought debt from those who bought debt from ... etc.  ie First it's the borrower who is foreclosed on.  Then it's their finance company.  Then it's finance company's backers.  Then it's the merchant bank that arranged the deal, then it's the merchant bank's financers (general banking sector), then it's everybody who relied on bank finance - ie everybody.  As leverage starts to unwind and total debt and equity capital contracts, it's the more leveraged outfits that feel the heat first and fail.  But in failing, they further reduce the amount of capital available and so the next most leveraged business fails & so on & so on. 

All that said, Bush isn't going to be there much longer.  And as for how the two prospective replacement candidates intend to deal with this:

Obama: Absolutely no idea.  (A faster withdrawal from Iraq - whatever you think of the security implications - will boost confidence in the US's ability to bring it's structural government deficit under control - but it's really a peripheral issue from a financial perspective)

McCain: Not sure.  To his credit, he opposed the Bush tax cuts (though from 2001 to 2003 there were a reasonable policy - so the reason for his opposition is a but sus).  But he has been reported in the Aussie media making some particularly unhelpful and insightful comments about it all being the fault of corporate crooks on Wall St and they can expect jail time if there are more failures.  (I don't know if he really said that- or if he did whether he meant it or not).  But given that the biggest problem is everyone is fearful about what problems everyone else may or may not be sitting on, talk of jail time for making a an investment that - through no fault of your own - fails - is hardly helping restore confidence and allow the markets to do their job properly.

[Hawk]

From what I understand, in a way you're right DJ, and in a way you're wrong.

McCanin and Palin both want to blame Wall Street, but where we really need to point the finger is the illegal activities of the original mortgage lenders, those that set up the loans without the proper credit history and income statements.

That was brought on by the whiners that were complaining that those that couldn't afford to buy a house weren't given a chance to buy a house. So Congress passed a law that said those that can't afford to buy a house should be given every opportunity to buy a house.

To his credit though, McCain and a few others did try to warn the Feds about Fannie and Freddie 10 years ago, but no one would listen. They just let the canker fester. It was mainly folks like Christopher Dodd and Frank Barney (and others, both Democrat and Republican, but mainly Democrat - something like 51 -12) that fought to not put a stop to Fannie and Freddie's investment techniques, that were out of context with the reason those companies were set up to begin with.

Can the finger also be pointed to Bush? Most definitely, to some degree. The Democratic Congress put bills in front of him that he shouldn't have signed, but did.

We can't negate any blame on the current Congress as well as the recent past Democratic White House.

Yes, the war in Iraq was a screwed up mess initially, but you know the saying; "In for a penny! In for a pound". Once it got started there really was no good way out, not and keep America safe.

It was kind of a catch 22. Damned if you do and damned if you don't, but in spite of the initial screw up, it did turn for the better, well - under the circumstances anyway, thanks in great part to finally putting a General in there with some actual interest in turning the mess around. You know who I'm talking about; Petraeus the Betrayer.

By the Feds bailing out all these big companies, all that's doing is postponing the inevitable, which is the economic fall of the US. It's going to happen. The problem is it's now going to take longer.

It kind of stands to reason that in order to pick ones-self up, you have to fall first. That's the only thing that's going to help the US economy is to finally fall flat on it's face.

Weed out the problem childs' and let true Capitalism prevail. With the Feds constantly sticking their nose in where it doesn't belong, Capitalism will be a dead horse.

I'm afraid to say that one way the US will be able to finally achieve the inevitable result of all this financial fiasco is to give the folks here a taste of Socialism. Only with that will they understand what they really could have had. You know, "You don't know what you've got 'till it's gone.".

Just my two cents anyway.  ;)

[djf01]

McCanin and Palin both want to blame Wall Street, but where we really need to point the finger is the illegal activities of the original mortgage lenders, those that set up the loans without the proper credit history and income statements.

It's debatable whether or not the activities of the original mortgage lenders was illegal or not.  It's not a question of whether appropriate credit checks were run or not.  As I understand it, these additional risks were disclosed, hence the name sub-prime.

The trigger for this crisis was huge new housing estates financed almost entirely by sub-prime loans.  As interest rates rose, most of the fixed interest loans matured at the same time (when re-financing costs were double).  So a large portion of people in the estate can't afford to re-finance and end up in foreclosure.  This drives down the price of the remaining properties, and they can't re-finance either (the original collateral isn't worth enough anymore), so *everyone* in the estate gets foreclosed upon, and the estate gets abandoned.

Sub-prime loans were priced assuming the risk of a higher possible rate of default, where the financier is at greater risk of having to foreclose and sell the property, and lose say 10% of the value of the loan in doing so.  And if they assume 10% of sub-prime borrowers did this a year, then a 1% premium is about right. 

The issuers of these loans did the prudent thing, and securities these loans and sold them right around the world.

But .... in certain places, the risk of default climbed from 10% to 100%, and there collateral of the loan crashed, so the risk of loss has climbed from 1% to near 100%.

Essentially because the loans were traded on the basis that the risks were independent of one another, whereas in fact, the risks coalesced.

Once these risks of sub-prime were appreciated, the price of refinancing *all* sub-prime loans increased, even those in perfectly good neighbourhoods where there is no coalescence of risk.  So these borrowers end up being foreclosed on too, greatly suppressing the value of the collateral, and greatly depreciating the value of the sub-prime loans.

The vast majority of sub-prime loans were reasonably correctly assessed for risk.  But this is what happens when the credit multipiler unwinds.  Borrowers at the less than prime end of the spectrum have their finance withdrawn first.  And the fact your finance is withdrawn instantly turns you from being viable to not viable.

If there was any criminal activity here - and I doubt it - it is in the way the failed sub-prime loans were securitised and re-sold, without disclosing the additional risks associated with all the loans being in the same place and maturing at the same time.  But it more likely this is flaw with the securitisation model that simply wasn't anticipated.

These sorts of balls-ups happen all the time.  But in this case, it's *triggered* a full blown credit crunch.  I stress triggered, because this is a well studied and well understood phenomenon.

The US has lost 3 of it's big 5 investment banks in the last few months.  And the others are at risk too.  And they have failed because debt funding for them has been withdrawn (or at least made very expensive).  And that has occurred essentially because of the risk that this might occur. 

Leeman Brothers, and Merryl were most definitely not Enron.  They were some of the pillars of the US financial system.

And if it really is true McCain & co are going to punish Wall St for this then heaven help the world if these clowns are elected.  The outcome of this sort of activity will be that *no-one* will lend money to any Wall St institution, they will *all* fail, taking most of corporate America - who will also see their financing withdrawn - with it.

Yes, the war in Iraq was a screwed up mess initially, but you know the saying; "In for a penny! In for a pound". Once it got started there really was no good way out, not and keep America safe.

The strategic success or otherwise of the Iraq adventure is not really the point.  It's the *cost* of it.  And that's not really the issue either, its' the cost in relation to how it's funded.  It every American were required to pay a war levy to fund it, then you

might not be in the mess you are now (for all sorts of reasons!)

As it is, the Fed's ability to respond to sub-prime has been compromised by the use of this capability to fund off shore military action.

Weed out the problem childs' and let true Capitalism prevail. With the Feds constantly sticking their nose in where it doesn't belong, Capitalism will be a dead horse.

Complete and catastrophic implosions used to be a regular feature of of capitalist economies.  The market mechanisms can go into reverse, and instead of becoming a mechanism of capital allocation, it becomes a mechanism of capital withdrawal. 

And yes, many of the world's more disastrous ideas (like communism) stem from the historic failures of capitalist systems.

Since the 1890s and 1930s, how this occurs has been well documented, and the means of preventing are pretty well understood.

The problem children of Sub-Prime were weeded out long ago.  It's well beyond that now.

But I think Hawkie's comment on the Feds sticking there nose in highlights the problems of ideological triumphing over pragmatic thinking that have beset this ( and depressingly the next if McCain's comments are anything to go by) Republican administration.

[Hawk]

Ya' know, I used to think Obama would be the one to bring this country to it's knees the fastest, but now it's debatable.

I think we're looking at falling to a new low; a combination of the depression of the 20's, the inflation of the late 70's, and the same effect of the fall of Russia in the late 80's.

Maybe then we can start picking ourselves up, dusting our britches off, and getting back to the business of reorganizing. It's either that or a full blown revolution, and I just don't think the citizens here have the kahunas for that. They're just to apathetic and dependent for the most part.

BTW! Insightful post DJ.

[Gwizz]

I used to think Obama would be the one to bring this country to it's knees the fastest, but now it's debatable.

Hawk, We seemed to have crossed paths someplace.

At first I though Obama would be a good person to shake up the corruption in our government even if I couldn't figure out what he stood for. Then I did my research.

Trained by corrupt Chicago politicians.  He has almost no experience. But claims to.

Did basely nothing in the Senate but claims he did.

Easily takes either side when he make promises depending upon who he is talking to.

Unable to debate without a TelePrompTer.  Even stumbles while reading the TelePrompTer as if he didn't write the message.  A good speaker but talks like he is talking to dumbies.

I don't think he is as smart as is claimed. His university history seems less than stellar.

He is a follower, I believe controlled, but loves to be in the spotlight.

Wants to be president of the world, a New world government prodigy. 

Funded by Muslim countries.  Failed to keep proper records.  Secretive on his funding sources.

Possibly not a qualified citizen of the US to even run for President.

Now if even half of the above is true, he could spell disaster for the US.

 

At first I was strongly opposed to McCain.  But now not so much.

I felt he was too liberal, even though he was close to center on the liberal side.

I felt he was controlled, but his pick of Palin went against what the elitist's wanted.

I felt he was too much of a rebel, but now understand he was just being his own person.

His mannerisms seemed strange.  His old injuries was causing this and he never made excuses.

He doesn't like being in the spot light, seems ill at ease.  He is not the best public speaker.

He believes in the rights of the unborn. He seems to want to curb corruptness in Government.

He tried to warn against the coming economic problems.  No one would listen.

Overall I think I like the chap and with Palin's experience in the fight against corruption,

they may just be the team we need.

Obama's team is sure running scared.  Have you noticed how the news media is turning away from Obama.

[maddog]

Trained by corrupt Chicago politicians.  He has almost no experience. But claims to.

Not eveyone in Chicago is corrupt and political training does not mean that you yourself are corrupt if the people who trained you are corrupt.

Did basely nothing in the Senate but claims he did.

Untrue. He co-sponsored several bills. Did what Sanators do.

Easily takes either side when he make promises depending upon who he is talking to.

I won't try to dispute this as I haven't seen it yet. Links?

Unable to debate without a TelePrompTer.  Even stumbles while reading the TelePrompTer as if he didn't write the message.  A good speaker but talks like he is talking to dumbies. (dummies?)

Teleprompters are for speeches, not debates. He is an amazing speaker. There hasn't been a debate yet but there will be.

I don't think he is as smart as is claimed.

Unfortunately we don't have a way to messure his intelligence or McCain's for that matter.

His university history seems less than stellar.

Neither is mine. I wouldn't judge on this. The stuff I wrote when I was getting my degree is very embarrassing to me today. At least he went and can speak. Which is very unlike our current President who seems to speak his own dialect. Remember, he doesn't have to be an Eisenstein.

He is a follower, I believe controlled, but loves to be in the spotlight.

Doubtful. If he didn't love the spotlight he wouldn't be able to be President. If he is elected, he will become the leader of the Democratic Party, so the control thing would be the other way around.

Wants to be president of the world, a New world government prodigy.

No, He wants to be a world leader.

Funded by Muslim countries.

Untrue.

Failed to keep proper records. Secretive on his funding sources.

Anything wrong with this will come out.

Possibly not a qualified citizen of the US to even run for President.

Untrue. The Fed wouldn't have let him run if it were true. Remember, when you throw your hat in the ring you have to file papers with the FEC showing that you are qualified as per the Constitution.

Now if even half of the above is true, he could spell disaster for the US.

I don't think so. It would reverse the disaster we're in right now. It can't get much worse.

Gwizz,

I think you have found a lot of bad information. Would you post some links to your research? I suspect you have been manipulated (swift boated?) by the hard right.

--Ray.

[Hawk]

It can't get much worse.

--Ray.

Yes it can, and it will no matter which one wins.

[maddog]

Yes it can, and it will no matter which one wins.

Oh Hawk! You're so negative. :)

--Ray.

[Gwizz]

I knew the democrats would try to blame Bush for this 30 year old banking problem.

The democrats have had their hands all over this program for years.

So, they wanted to give houses to those who can't afford the loans, didn't they.

Now, it will cost the tax payers about one trillion dollars to totally fix this Socialistic program.

This problem started under Carter with controls that didn't work, Suffered more hits under Clinton as more controls were added. It still wasn't working and when banks could not meet the new liberal quotas, liberal managers were appointed to run this social program.  These managers were offered bonuses that amounted to 10s of millions of dollars, if they increased their inventory of loans for people who couldn't afford these loans.  They bought up risky and junk loans, called sub loans.  Banks made more bad loans to meet the new quotas thinking Freddy and Fanny would continue to buy these bad loans. 

Well the donkey couldn't carry the load.  These managers fled from their management jobs with their 10s of millions of dollars as the whole thing fell down around them. All legal by the laws the liberals passed. You know the rest or maybe you don't even believe this happened.  The US has over a 3 trillion dollar budget.  What do you think this extra trillion, needed to fix this social problem, is going to do to your back pocket from which you pay taxes?  Oh yea Obama is not going to collect taxes from you, Only from the rich.  We don't really need rich people or jobs anyway, as long as Obama controls the printing presses.  He can just mail you money each month.   

Now Obama wants to do the same thing with all his programs.  You are patriotic aren't you and willing to pay these extra dollars.  Who ever controls Obama, they want these programs to continue.  They can make so much money from this kind of fiasco.

Gweeeeeeeeez 

 

   

[Hawk]

Oh Hawk! You're so negative. :)

--Ray.

I think cynical is a more appropriate word.  ;D

Besides, what's there to be positive about right now?  ???

Neither one of the candidates has any intention of any kind of cut back on government spending. In fact, they both want to add more.

[Gwizz]

I heard yesterday that the cost of this liberal experiment in socialism will cost every American 2 thousand dollars. 

I'm not sure if this includes interest or not.  Maybe those liberal managers who profited by this financial disaster, will loan some of their win fall money to the US government.  China, Russia and the Arabs I'm sure will loan money to us and be glad to collect the interest.

Now, this morning I heard the cost will be more than 2k per person.

I read that Obama is holding back his opinion of the cause of this fiasco. 

I guess his handlers have not yet figured out how he could best reply.

PS: I changed my 37K figure to 2k in two places above.  My calculator struggles with Trillion dollar numbers and so do I.

Our National debt is in the mid 9 trillions.  The lid until today was 10.5 trillion.  It has just been raised to 11.3 trillion. 

True to habit, the Democrates want to add some pork of some type, to the bailout amount, yet to be voted on.

[djf01]

Besides, what's there to be positive about right now?  ???

The one thing to take some comfort from is both candidates are career politicians with congressional experience.  Their job is to work through issues and find compromises that are agreeable to the majority, if not entirely to their core constituency.  This requires a more pragmatic mindset, and a willingness to be flexible.

This is why congressmen and senators usually make terrible Presidential candidates, and state Governors usually make good ones.  Controllers of the executive can make all the grand announcements while in charge of the executive, while others have to hammer out the details and sort out the problems.  And legislators have voting records, often on very complicated issues that may involve huge technicalities and deals for support of other more important pieces of law.  But this is really easy to attack in a 15 second sound byte.

This is why (well, one of the reasons) Kerry was an abysmal candidate in 04.

Anyway, I think both are likely to lead relatively moderate executives of their own political persuasion.  This has pros and cons of course.  If you take an average position you get an average government.  But the pros are that big huge blunders are much rarer.

This is obviously not without it's problems. 

[Hawk]

The one thing to take some comfort from is both candidates are career politicians with congressional experience. 

Obama's congressional experience is sorely lacking.

[djf01]

Obama's congressional experience is sorely lacking.

A lot more than Bush's (either one).  Or Regan's.  Or W Clinton's for that matter, nor most US presidents in the past century.

[Hawk]

I believe the last President that had less experience than Obama was Lincoln.

[djf01]

I believe the last President that had less experience than Obama was Lincoln.

No.  The last president with less experience than Obama was G.W.Bush.  (4 years as a governor I believe).  0 min in any legislature.  But he's not the first by any means.

[Hawk]

4 years as a governor is a hell of a lot more experience than what Obama has.

The only thing Obama has going for him is he's a damn good con-man. A snake oil salesman extraordinaire.

[Gwizz]

A Governor gets full time executive experience.

A legislator's chance of getting executive experience is almost nil.

Obama did chair one committee which did nothing, since he never convened the committee.

Come on, you understand what executive experience is all about.  

It is interesting that McCain is being criticized for owning 13 cars and two of them foreign made.   >:(

With a wife and 7 kids that drive and the money to own them, It would not surprise me.

Obama was driving a Chrysler 300.  But, when he became a candidate for President he gave up his muscle car and bought a hybrid to be more green.  And he can afford more cars with the money he made off the banking debacle.  Only one Senator (Dodd) made more money off of it.

I'll add the link to the Omama connection to the banking debacle.

http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=75586

[maddog]

Come on, you understand what executive experience is all about.  

Mr. McCain has the same amount of experience then. Only he's been experiencing it since 1981.  ;D

[Gwizz]

You guys like to debate and I have also been tempted to embellish this debate.  But that is not fair to those that read this thread for the facts.

McCain has a lot of executive experience.  Years of it.

[Hawk]

No.  The last president with less experience than Obama was G.W.Bush.  (4 years as a governor I believe).  0 min in any legislature.  But he's not the first by any means.

I believe you are far more intelligent than that dj, so I can only assume that you're making statements like that in an effort to squash any intelligent discussion.

Well, you've succeeded on my part. I'm oughta' here.

[maddog]

You guys like to debate and I have also been tempted to embellish this debate.  But that is not fair to those that read this thread for the facts.

McCain has a lot of executive experience.  Years of it.

That's Ok. The thread has crept away from money market problems anyway.

I don't understand those last two sentences. I don't think either candidate has that much executive experience. They're both Senators which isn't an executive position in our government.

As for the first two, I believe I have been countering falsehoods with simple logic. I keep tellin' ya, Gwizz, the places you're getting these from aren't giving you truth. It's spin. It's "Truthiness" (http://www.reference.com/search?q=Truthiness) It sounds like truth until you stop and think about what they have said.

Now, with that said, I think I can let the thread die off..... Hey Hawk! Wait for me!

--Ray.

[djf01]

I believe you are far more intelligent than that dj,

Excellent, I've fooled another one ;-)!

so I can only assume that you're making statements like that in an effort to squash any intelligent discussion.

Not trying to squash any discussion.  Just trying to make fun it's "intelligent" nature.

Even Regan made a joke of this issue in the '84 campaign.

Seriously, this is such a non-issue.  Both candidates are eminently qualified and experienced to take on the position.  (The same can't be said for both VP candidates BTW). 

And I don't understand why you guys are raising it.  If you are trying encourage people to vote Republican, you'd do well to remember that this "experience" issue is trying to make a virtue out of McCain's biggest personal weakness as a candidate: [attempted humour] that he's so old he can't remember how many cars he's got, let alone where he's parked them [/attempted humour].