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US Steals Banks
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mG_Despair
post Sep 23 2008, 12:11 AM
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It's pretty clear that you can't rustle up 1 Billion dollars without causing massive inflation or raising taxes however... That is the real issue here.

And just imagine what will happen when our Social Programs start to run out of money.

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Orion_Zorn
post Sep 23 2008, 01:40 PM
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exactly.

@Roark - most of this thread is most of us saying that we do not really understand exactly what is going on. I am curious why you - the guy who understands finance and money - doesn't answer Rockstar's questions or mine, about what is actually going on, and how this all works. You just try and refute my almost off topic claim about the Fed.

Can you enlighten us as to what is going on? Will the money they are using for the bailout cause inflation? Is the US basically buying banks with taxpayer money and then reselling them cheaply to other banks?

It just seems odd that this topic is really up your alley, and yet you did not address anything in this topic buy my statement that the Fed is the root cause of it all. Rockstar had good questions that I don't think any of us here but you can answer. Care to enlighten us?

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Roark
post Sep 23 2008, 03:20 PM
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Sure I can try my best.

QUOTE
1. Some portion of the blame lies in the hands of Americans as a whole. I have a friend who bought a house at about 3 times what he could afford based on a crazy baloon mortage payment and variable interest rate. He has now lost his house and all his money and I suspect his mortgage is one of the ones being bought out by the government. He is far from alone. So on some level, the individiual and their greed is to blame. Yes? No?

On a very large level, the individuals are at fault. More at fault than the banks imo. Sure some people get "talked into" stuff they can't afford, but every person involved is responsible for decisions they make. When I go out and buy a house, I'm going to be damn sure I can afford the payments. If someone tells me I'm only going to be paying interest for the first few years, red flags will be going up all over the place. Anyone who has ever been in debt (even cc debt) knows that if you aren't paying down the principal, you are falling behind. Individual responsibility and greed pays a very big part of all this.

QUOTE
2. Greed at the higher levels is definatly at fault. It's hard to blame a 5 year old for eating all the cookies if you set the cookie jar on the floor. Basically the people at the top wanted more money from a greater ammount of mortgages and loans. They (and I don't fully understand how it all works) artifically lowered interest rates to encourage more loans (which artifically caused a housing boom). At some point, interest rates couldn't go any lower and house prices couldn't go any (artifically) higher so the bubble burst. That started the process of overall financial decline were in now. There is also a stock market component to this which I understand even less but surmise it's approximatley the same concept? Yes? No?

Right again. I've heard so many anecdotal tales about how mortgage agents have basically turned into scammers. They started using these "liar loans" where you can give any income you want without documentation. But in order for them to be able to finance them, they bundled the crappy "sub prime" debt with much higher grade debt, and then sold them as bundles. Imagine it as if it were a beef company. They have 100 tons of grade F beef, and 100 tons of grade A beef. They know they can never sell the grade F beef on the market, so instead they mix the two together and sell it as grade C beef. This is what the banks were doing to be able to finance all these loans for people with no income. High risk + low risk = medium risk.

The banks themselves don't lower the interest rate, that's mostly set by the Fed. The Fed lowered their federal funds rate very low from 2002-2004, to the lowest % it had been since the 50s to increase liquidity and stave off recession. Basically the lower the rate, the easier it is for Banks to borrow money to satisfy reserve requirements. The higher the rate, the harder it is. Thus the liquidity of the money supply is highly correlated to this rate. During that time period, the low rate meant the banks were able to keep high reserves to use for lending.

QUOTE
3. Then there is the government to blame (or lack there of). I'm not totally sure what roll they play in this other than supporting legislation that supports these reckless lending policy's? I also gather that the difference between the two parties at the moment is not whether to bail out or not but whether to include legislation that would prevent this from happening again? The Republicans are against it on the grounds that it gives other countries an un-fair advantage as they don't have this type of regulation and the Democrats are in favor citing the fact that we can not continue to allow the cookie jar to be left on the floor. Yes? No?

The govt's role is much more than an enabler... in the late 90s and early 00s, they were the lead cheerleaders for these poopiety loans. Both Clinton and Bush pushed home ownership as the hallmark of the american dream, and encouraged the banks to find ways to get lower income families into houses. I remember all the praise that the govt leveled at Countrywide back then, who were leading the subprime effort. I don't think either Party is right on this issue. Some degree of regulation should be passed here, as the "legal" action of lots of these mortgage agents amounted to no more than fraud.

QUOTE
4. Then we get to the solution. It seems as though the U.S. government will buy out the bad debt (at a cost of somewhere between 700b and 1t) for about 80 cents on the dollar. I get the impression that they will attempt to just sort of 'carry' this bad debt until the economy turns around and then sell the debt back at either a profit or a break even price? I also get the impression that there will be no actual individiual tax payer tax increase, at least not right away? Yes? No?

Yes that is a good assessment of the situation. There is no taxpayer increase yet, because the govt hasn't lost money. By buying the debt, they inherit assets (the payments that are due on that debt). What they eventually lose (defaults on the bad debt) will eventually cost us money, and taxes will either go up, or the deficit will. But if they can unload all of it in a couple years, then it won't have cost us anything. The action with AIG was a loan that will probably be paid back (AIG was having liquidity problems, read that 1907 panic article as it's basically the same problem just with the Fed footing the bill instead of JP Morgan and Nelson Rockefeller), so that doesn't really cost us anything either.

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5. Finally, it seems as though most everybody agrees that we need to do some form of bail out. The costs of not balling out are severe layoffs and hireing decreases. Severe decreases in loans (and increases in interest rates on loans) which will decrease the opportunity for new business. There would also be an additional decrease in housing prices which will lead to a decrease in property taxes which will lead to a decrease in services and money for schools and the like. Yes? No?

Many people do not agree that a bail out is best. As reddit loves to point out, you can't privatize profits and socialize losses. When people see that high-risk, high-payout market opportunities have instead become risk-free because the govt will step in, moral hazard increases 100-fold. The next crisis will just be worse.

Note though that a lot of the action taken has not been "bailouts." In the case of AIG for example, the firm was not at all broke, insolvent, or bankrupt. It just didn't have the cash on hand to pay its liabilities that came due (because of the runs on the market as a whole). So the govt lent them money and received 80% share of its assets as collateral against a default. I don't think that loan will end up costing us anything. This $700 buyout of all the bad debt will be pretty expensive though, because a ton of it will default.

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Orion_Zorn
post Sep 23 2008, 07:27 PM
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Cool, thanks.

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mG_Despair
post Sep 24 2008, 06:36 PM
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QUOTE(Roark @ Sep 23 2008, 03:20 PM)
Sure I can try my best.

QUOTE
1. Some portion of the blame lies in the hands of Americans as a whole. I have a friend who bought a house at about 3 times what he could afford based on a crazy baloon mortage payment and variable interest rate. He has now lost his house and all his money and I suspect his mortgage is one of the ones being bought out by the government. He is far from alone. So on some level, the individiual and their greed is to blame. Yes? No?

On a very large level, the individuals are at fault. More at fault than the banks imo. Sure some people get "talked into" stuff they can't afford, but every person involved is responsible for decisions they make. When I go out and buy a house, I'm going to be damn sure I can afford the payments. If someone tells me I'm only going to be paying interest for the first few years, red flags will be going up all over the place. Anyone who has ever been in debt (even cc debt) knows that if you aren't paying down the principal, you are falling behind. Individual responsibility and greed pays a very big part of all this.

QUOTE
2. Greed at the higher levels is definatly at fault. It's hard to blame a 5 year old for eating all the cookies if you set the cookie jar on the floor. Basically the people at the top wanted more money from a greater ammount of mortgages and loans. They (and I don't fully understand how it all works) artifically lowered interest rates to encourage more loans (which artifically caused a housing boom). At some point, interest rates couldn't go any lower and house prices couldn't go any (artifically) higher so the bubble burst. That started the process of overall financial decline were in now. There is also a stock market component to this which I understand even less but surmise it's approximatley the same concept? Yes? No?


*



I would like to share a personal experience regarding this. My dad works as an unpaid President of a nursing home board. In order to keep the nursing home solvent, a multi million dollar trust was established. The investment committee of the board manages this money. Being my father's son, I once went along on one of this meetings 2 years ago, in which the investment commitee was meeting with dum..dum...dum...An investment banker.

This guy (nominally an industry professional) attempted to sell the Investment committee a "Z-Tranch", otherwise known as a package of the worst and most crappy mortgages. He blatantly lied about the risk of these things, etc. Fortunately, the Investment Committee is chaired by smart people, so it was not purchased. But the fact that this slimebucket attempted to sell the Z-Tranch to a nonprofit 501©(3) organization to make a buck is pretty sick.

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Orion_Zorn
post Sep 25 2008, 08:10 AM
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Yes that is sick.

Also, I don't know if the individuals should be held as accountable as the banks - housing prices were going up, and people got into interest only mortgages on the assumption that the trend would continue. A lot of people were making money on the increase of home values, and when they got extremely high, people got desperate. Yes the individual is accountable, but people knew they could not afford those mortgages long term, they were buying them on the assumption that house prices would continue to climb. Maybe if we taught economics in high schools...

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Roark
post Sep 25 2008, 03:53 PM
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You are responsible for your own actions. If you buy something that costs hundreds of thousands of dollars, you are responsible for paying for it. That includes understanding both the method and risk of your payment plan. If you can't, then rent.

The house I'm living in now was actually bought by a property flipper. Our landlord paid over $700k for the house, planning to rent it out for a few years to keep it in shape, then sell it off. The house is now worth less than $500k. So we have pretty much a guaranteed lease for a long time because she can't sell it at such a big loss. Gives us leverage in rent negotiations too lol.

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mG_Despair
post Sep 25 2008, 04:48 PM
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QUOTE(Roark @ Sep 25 2008, 03:53 PM)
You are responsible for your own actions. If you buy something that costs hundreds of thousands of dollars, you are responsible for paying for it. That includes understanding both the method and risk of your payment plan. If you can't, then rent.

The house I'm living in now was actually bought by a property flipper. Our landlord paid over $700k for the house, planning to rent it out for a few years to keep it in shape, then sell it off. The house is now worth less than $500k. So we have pretty much a guaranteed lease for a long time because she can't sell it at such a big loss. Gives us leverage in rent negotiations too lol.
*


I agree with this in principle.

But you should also be held responsible for paining raw iron nuggets with gold paint, and then representing them as pure gold nuggets to sell them. That's basically what this guy was doing.

only thing is, they will get away with it, due to all there political power. Whereas if a small time business owner committed such fraud, he would get his ass busted by some government agency.

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bridarshy
post Sep 26 2008, 01:09 AM
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Ofc everyone SHOULD take responsibility, but just saying that philosophically in hindsight is no solution to the problem. Mortgages shouldn't be marketed like a pack of cigarettes.

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Orion_Zorn
post Sep 26 2008, 09:13 AM
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If everyone is responsible for their own actions, why do we worry about how we raise our kids? And if we admit that how we raise our kids affects who they are later in life, how can we say they are 100% responsible for their own actions? This is a paradox, any way you look at it. Would Paris Hilton be so snobby if she was born in a poor household in the inner city somewhere?

And if she would NOT be snobby, can we hold it against her that she is currently a snob?


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bridarshy
post Sep 26 2008, 04:44 PM
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I guess where I was going is that people are the way they are, regardless of how we think they should behave. So to say how people should act isn't speaking to the reality that people are usually irresponsible, irrational, and focused on the short term. So to have bad judgment on mortgage signing day is actually the way things should be, unless there were some impetus for each individual to change drastically from the way they have been. Ultimately each is responsible legally, I'm just making the point that their "bad" behavior is to be expected, not unexpected.

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KS_Rockstar
post Sep 29 2008, 03:16 PM
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Back on topic, at the moment at least, it seems not. We still have a few members of congress with an ounce of spine.

I'm sure eventually something will be done but I'm glad it's not another Iraq like, "we must invade right now, no time to think about it, don't question us, just be afraid, be very afraid and sign us a blank check for 700b NOW!"

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Orion_Zorn
post Sep 29 2008, 08:39 PM
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a higher percentage of Democrats voted for the bailout than Republicans. Kind of interesting that Republicans are going against Bush, imo.

http://www.youtube.com/watch?v=YBVB1Uc0nko

video of Ron Paul talking about the bailout. I remember about a year ago hearing him say 'we are headed for a big downturn, possibly even a Depression' and when I told people, everyone laughed.

Now I say - listen to the people who saw this coming, and at least one of them is saying "any bailout will just make things worse, not better."

Also, Murray Rothbard said that the reason the Depression lasted so long was that the Government passed Act after Act, trying to fix things, when all they did was create more problems.

He states the New Deal is really what caused the Depression to last so long.

http://www.lewrockwell.com/rothbard/rothbard183.html

This entire thing is caused at its heart by politicians and greedy rich people. Lets hang em all, and start over. :lol:



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