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  1.    #1  
    For several very over ripe years housing prices have grown at a dependably accelerating pace -- a rate that was far better than either inflation or the stock market.

    This became especially important for the overall health of the economy after the economic shocks felt after both the end of the internet bubble, and then 9/11.

    People who had lost money in the tech bubble gravitated to owning real estate, comfortable that this was something which had almost always appreciated.

    Housing was also the ultimate beneficiary of the Clinton golden years -- that unique era of prosperity and national surplus which had enabled the Federal Reserve to lower interest rates to unremembered lows.

    Those low interest rates allowed prospective buyers to better afford to pay more for a home purchase -- something that also contributed to pushing up home prices.

    Confidence in housing appreciation bred an arrogance that inevitably lead to late night get rich quick flipping in 5 easy lessons: call now !!!, shows.

    But the appreciation also caused banks and lenders to show less and less caution on what they lent money on, confident that they would always recoup their loan from the sale of appreciated property.

    Low interest rates and bruised stock market memories had the further effect of creating a hyper thirst on the part of bond investors for getting big "unrisky"returns at a time when normal interest rates were quite low.

    Brokers emerged who began to act as mortgage intermediaries for investors. The brokers would bundle together the mortgages they had made as high interest paying bonds that investors would then buy. This process of bundling mortgages and reselling them was called securitization.

    To enable these marginally qualified borrowers to get a mortgage, lenders rewrote their rule books on who they would lend to, and pushed new mortgage mechanisms like teaser 5 yr ARMs, and no money down interest only mortgages.

    Even as the Fed had already begun to raise interest rates, Greenspan (the then Fed chairman) blessed the idea of stretched consumers taking out low entry cost ARMs. (I think this was 2004)

    Half of the 14 million home buyers during the last 2 yrs used ARMs or some other volatile mortgage instrument.

    Competition among investment banks and later hedge funds, lead to an appetite for better and better returns. The market responded by lending to less and less qualified borrowers -- sometimes distressed borrowers, who could be charged greater and greater rates of interest (after their initial ARM period expired).

    Many hedge funds use sophisticated computer models to “guarantee” that they can make money on the small differences in the values of securities. To magnify those relatively small returns they made massive leveraged bets, using borrowed funds.

    Amongst the vehicles on which they played heavily, were mortgages -- especially subprime mortgages -- the ones that are made to consumers with the weakest credit, and the riskiest properties.

    As the Fed raised rates (17 times I believe), the costs for holders of ARMs began to reset much higher from those initial low teaser rates. Many ARM borrowers had expected to be able to refinance their loans with a better fixed rate mortgage as their property appreciated in value.

    That expectation was confounded by a self reenforcing series of events.

    As rates rose many people couldn’t afford to pay their loans, and many allow them to fall into foreclosure.

    The rise in foreclosures alerts investment banks that the mortgage paper that they’ve bought as a group, may have much less underlying value than they expected.

    Lenders begin to tighten their loan standards. This has the additional consequence of dying up the pool of potential home buyers.

    Lessened demand, greater supply. Fewer buyers means less demand, which means lower home prices. This while the supply of homes on the market is being flooded by those foreclosed on.

    Hedge funds and investment banks hold securities backed by mortgages that have an ostensible value. That value is supposed to reflect the value that those securities would receive if they were sold to a third party. But since those bonds rarely trade, it was easy to maintain the fiction that their “paper” was no less valuable than it ever was.

    But the rise in foreclosures together with the weakened housing market resulted in growing numbers of mortgage lending companies declaring bankruptcy.

    This indirectly compelled hedge funds and investment banks to recognize the valuation fiction behind much of their investment portfolios. They had to mark the value of their securities “to market” -- to what someone else would buy them for. In many cases this was NOTHING.

    Investors who entrust their money with hedge funds can also take it out when the hedge funds don’t perform. The hedge funds need to raise money to pay back those investors. They’d love to liquidate their ugly mortgage backed securities -- but those have no value right now.

    Instead they are forced to sell their good stuff – stocks. Any and all stocks.

    Housing has historically been the collective national mattress under which families stored their retirement savings and general net worth.

    The tightening of lending standards together with the overabundance of homes looking to be sold, combined with the continued over building of condos already under construction, has the potential to absolutely devastate the housing market. It has the potential to eviscerate this american dream in ways that are utterly profound.

    The new Federal Reserve chairman Bernake, appointed by junior, is still focused on curing inflation. (At about 2 % currently). He is determined to not lower interest rates.

    Another part of junior’s presidential legacy.
    Last edited by BARYE; 08/21/2007 at 12:49 PM.
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  2. #2  
    today is saturday, and its raining, so I can't play outside. Must be Junior's fault.
    Vinnie
  3.    #3  
    Quote Originally Posted by john_v View Post
    today is saturday, and its raining, so I can't play outside. Must be Junior's fault.
    yes every ruined picnic, every girl who wouldn't give her phone number, every flat bicycle tire, every bad movie that I've attended, every weed in my garden -- yes its true, junior is the cause of all of that !!!

    And he even has some responsibility for those he appoints. People like Rumsfeld, Gonzales, and FEMA's Brown.

    Federal Reserve chairman Bernake will influence our economy well after junior is but a hated memory.

    But FWIW, I really shouldn't have distracted from what I really wanted to focus on -- which is how the current mortgage crisis is causing wretchedly deep damage to the american dream of owning your own home.

    Many good honest people are currently losing their homes to foreclosure. The lenders, having taken possesion, sometimes have great trouble reselling those homes, and neglect the maintenance of them.

    This has the perverse effect of lowering the value of the other privately owned homes in a neighborhood.

    Though the Fed has recently made some limited moves to readjust their focus away from "inflation", the effects of the housing bubble are still a long way from being fully played out.
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  4. ktm97's Avatar
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    #4  
    Just don't blame the people that signed on the dotted line, no personal reponsibility, it's always someone else's fault.
  5.    #5  
    Quote Originally Posted by ktm97 View Post
    Just don't blame the people that signed on the dotted line, no personal reponsibility, it's always someone else's fault.
    Yes borrowers who misstated their incomes, bought a house they couldn’t afford, stretched for a house in an upwardly exploding housing market -- panicked into buying a home today fearful that by tomorrow it would be out of reach -- they have responsibility for their mistakes, and they are being punished for them daily.

    But so too are mortgage brokers rewarded for approving dubious mortgage arrangements, appraisers who felt pressured to a sign off on inflated appraisals, investment banks that packaged (securitized) these dubious loans into “bonds”, the rating companies (S & P, Moody) that offered opinions on the quality of these “bonds” without appropriate research or analysis (and a system in which bond issuers hire and pay a rating agency based on the opinion it will later give), hedge funds which then bought these securitized mortgages on the assumption that they offered a safe secure path to high returns -- a path they then attempted to magnify (leverage) by borrowing GIGANTIC sums from places like Japan (where interest is low) to make those huge bets.

    There’s a lot of blame.

    And a lot of harm.

    But conversely, it wasn’t all bad either.

    In 1997 a very damaged vacant house in a good neighborhood came onto the market. It was a house I had convetted for years, knowing its extraordinary hidden value.

    It was being sold for $110K -- and I had 20K in the bank. Because it was classified as a “shell”, because I would need to borrow another $100K for reconstruction, because I had no really documented income (though I had a good credit history), it was very tough for me to get a loan at any term I thought I could reasonably afford. My futile search for better loan terms allowed someone else to buy and fix it up. Its worth more than a million dollars now, and it still hurts whenever I bicycle past it.

    In 2003 I found another house I wanted. It was offered for about 250K. I got several reasonable loan offers, and accepted a “no doc” 10 yr. ARM at 5.25% (which I then refinanced 9 mos. later as a 30 yr. fixed @ 5.625%)

    Many people now have homes because of the looser lending standards that began to become available around 2003. With the tightened standards that have now come to be imposed, I would never have been able to buy my house.
    Last edited by BARYE; 08/19/2007 at 02:03 PM.
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  6. #6  
    It is amazing that we insist upon blaming someone else for our mistakes. Incidentally, this is a cycle thing - the housing market and related industries have their ups and downs regardless of who is running the ship. We say the housing market was great under Clinton, but we were entering a slight depression. The economy under Bush has never been stronger. Cycles.

    Ben
  7. #7  
    Quote Originally Posted by bclinger View Post
    It is amazing that we insist upon blaming someone else for our mistakes
    Judged by that standard, the Bush administration has many years of "amazing" work under its belt.
  8. #8  
    Quote Originally Posted by bclinger View Post
    It is amazing that we insist upon blaming someone else for our mistakes. Incidentally, this is a cycle thing - the housing market and related industries have their ups and downs regardless of who is running the ship.
    Once you live long enough, everyone sees the cycles....

    Far as blaming someone else... I agree 100%. A friend of mine is losing his house, due to his "banking" by the time his arm was due he would have had a raise at his job. Surprise, no raise, and people below him got a raise (looks bleak for him at that company). Of course, now he can't "give" the house away, since the market in that area has had the bottom fall out of it.

    The house bills were more than he thought... not to mention his old car went to hell and he decided to buy a brand new car. Next his kid is going to college this year.

    He was caught up in an "image" problem. Heck, everyone else at church and work were moving into a house, he felt the need to do the same. Plus, he thought, he could always sell his house for more later.

    Right now he is 1000's of dollars behind on his mortgage and thinking of "downsizing" to an apartment. He has no savings and lives pay check to pay check.

    Blame who? Heck, I guess he could blame me... maybe I "wished" this on him. Bush's fault? I don't care for Pres. Bush, but this is not his fault. Realtor’s fault? Bank's fault? Hmm... no, they simply showed my friend "how" to get into the house. My friend understood and took risks to his own demise.

    What kills me is that we talked about all of this. I predicted that the housing market would fall. You can’t believe all the housing developments that were going on at the time he purchased his house. We have more than tripled the number of houses in five years, than we have in the past 20 (ok, maybe not, but you get the picture – it was a staggering number in the past five years). I told him there was no way the market could support such development in our area. And it did not.

    People seem to have an image issue…
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  9. #9  
    Its not surprising to see the GOP cheerleaders painting a rosy picture on this economic slump (Cavuto says the worst is over and now is the time to buy stocks!), and also to hear them "concede" that any slump in the economy if it does exist, is not the result of Bush administration policy. I also know if the economy does start to improve (and I hope it does) then the GOP cheerleaders will be clamoring all over themselves to give the Bush admin its due credit.
  10. #10  
    God save Junior
  11.    #11  
    maybe I lack credibility when I say I'm not specifically looking for villains (aside from junior, of course). I acknowledged earlier the culpability and knowing innocence of many of the victims of this meltdown.

    What I’m really interested in though, is the possible implications of this crisis, how it will play out, what its effect will be on the economy in general, and specific parts of it in particular. I'm interested in ideas that could resurrect the system of lending for home purchasers, ideas that could possibly stave off a profound recession that perhaps is in the offing.

    There have been bad isolated bubbles in real estate in recent years. Houston, Miami, northern Virginia, Denver come to mind. They were mostly about commercial property and condos, rather than private single family homes. But I can't recall anything as comprehensive and as deep as this current situation has the potential of being.

    From how I see it, most all the players in this drama have forthrightly pursued self interested objectives motivated by desire, fear, envy, and greed. But that’s not illegal or improper.

    (There were some who deliberately gamed the system for personal profit up to and sometimes just beyond, lawful constraints. Others, took advantage of the system’s desire to approve almost any loan to conduct massive criminal frauds. Though contributing to the severity of the crisis, this doesn’t appear to have been responsible for it.)

    From what I have seen, the crisis was the outgrowth of a confluence of a series of seemingly disconnected events.

    The Clinton prosperity: 8 years of economic growth, tax increases on the wealthy, tame inflation, and balanced budgets allowed the Federal Reserve to drastically cut interest rates

    The Tech Bubble: beginning with Netscape's IPO (almost exactly 12 yrs ago), Wall Street became an ever greater obsession of average citizens. For the next five years (until March 2000) dot.comers could practically walk into the office of venture capitalist with an idea scribbled on a napkin and walk out with a million dollars. Companies with neither products, profits, or realistic plans went public selling shares to ravenous investors urged on by stock analyses who secretly promoted companies their brokerages did business with.

    When it collapsed (in part because of Federal Reserve interest rate increases), disillusioned investors sought other safer places for their money. Housing “always” went up.

    The Japanese Bubble: For four years -- from 1986 until 1990, the Japanese economy was the envy of the world -- a wealth generating colossus that seemed unstoppable. Tiny pieces of Tokyo became worth tens of millions of dollars -- and the Nikkei stock index found stratospheric heights well above the clouds. (BTW, I made a bunch of money back then betting against the Nikkei).

    When their stock and real estate bubble burst, the Japanese economy went into an extended and painful recession. The recession (and a variety of problems peculiar to Japan), caused businesses to contract, and to almost stop all borrowing -- despite Japan having one of the world's highest per capita savings rates.

    Their national bank attempted to revive Japan's economy by dramatically cutting interest rates -- and then cutting them even more. Eventually the Japanese rate of interest got so low that money was essentially free to borrow -- which is what American hedge funds routinely did.

    junior's nouveau riche: having benefitted from junior's tax policies which concentrated more and more wealth into the hands of the already rich, they sought out investments that could maximize their returns. Hedge funds beckoned.

    Hedge funds: with their million dollar price to participate, and promise of stellar returns -- flourished, but competitive pressure compelled them to take greater and greater risks to keep their investors and internal partners satisfied. One of their primary investments was “bonds” backed by high return, high risk, subprime mortgages -- purchased in huge volumes.

    The Currency Carry trade: Hedge funds and investment banks financed these big bets in large part by borrowing from Japanese banks. The gamble was that the dollar/yen relationship would either remain stable or that the dollar would rise, allowing the loans to be repaid with fewer dollars. Since the onset of the crisis, the yen has risen dramatically, putting even more pressure on hedge funds and investment banks.

    The Golden Predicate: “Real Estate, Real Estate, Real Estate.” That property always appreciated in value. That a home would always be worth more than you paid for it.

    This was the shared underlying assumption by almost every player in the chain.


    After the Tech crash and 9/11, the american economy was in large part financed and lead by housing. Families felt confident in spending wealth that was backed by their homes rising value.

    If mortgages become unaffordably expensive or unavailable at all -- what does that imply for the value of real estate ?? How can homes be sold, and at what price, if they can’t be reasonably financed.

    What are the implications for the economy as a whole, for companies like Home Depot, for home builders, construction workers, mortgage brokers, etc.etc ??

    What are the implications for communities if homeownership itself becomes devalued ??

    Is the great American Dream at risk ??
    Last edited by BARYE; 08/20/2007 at 03:55 PM.
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  12. Crimson's Avatar
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    #12  
    Well I am one of those people who bought before the housing boom, gained a nice bit on their house value, and now even though the market has regressed a bit.. I am still way ahead.. wife and I are talking about purchasing another house (Vacation home perhaps), just because prices are so good in some areas. Those of us who didn't go crazy and buy a $500,000 house now worth $350,000 are going to make out as we buy up the property others are dumping..
  13. #13  
    The Great Depression was Bushie's fault too.
    ‎"Is that suck and salvage the Kevin Costner method?" - Chris Matthews on Hardball, July 6, 2010. Wonder if he's talking about his oil device or his movie career...
  14.    #14  
    Quote Originally Posted by Crimson View Post
    Well I am one of those people who bought before the housing boom, gained a nice bit on their house value, and now even though the market has regressed a bit.. I am still way ahead.. ...

    Quote Originally Posted by Toby View Post
    The Great Depression was Bushie's fault too.

    In October of 1929, a school teacher in Kansas probably read headlines in her newspaper telling of this spectacular crash on Wall Street.

    She probably shook her head in bemusement at those crazy easterners, their games, and their well earned come uppance.

    Owning no stocks, and living in a prosperous community a million miles from Wall street, she was confident that her world was entirely unconnected to those goings on back east.

    Yet 2 years later, her community devastated by plunging tax receipts, she's laid off.

    We’re all much more interconnected than we realize -- really bad monetary dislocations have the power to cause indirect devastation far from their originating source.

    I don’t know if the mortgage meltdown is one of those situations, but it genuinely has the potential to be one.

    (BTW -- yesterday I heard that Fed Chairman Bernake is renowned for an academic paper he wrote that analyzed how the depression was made MUCH worse by the then Fed policy of continuing to raise interest rates as the economic collapse began.)
    Last edited by BARYE; 08/21/2007 at 12:39 PM.
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  15. #15  
    Quote Originally Posted by BARYE View Post
    In October of 1929, a school teacher in Kansas probably read headlines in her newspaper telling of this spectacular crash on Wall Street.

    She probably shook her head in bemusement at those crazy easterners, their games, and their well earned come uppance.

    Owning no stocks, and living in a prosperous community a million miles from Wall street, she was confident that her world was entirely unconnected to those goings on back east.

    Yet 2 years later, her community devastated by plunging tax receipts, she's laid off.
    Interesting story. We could all waste time coming up with hypothetical people and hypothetical effects, but it would mean even less than the anecdotes that real people relay.
    We’re all much more interconnected than we realize -- really bad monetary dislocations have the power to cause indirect devastation far from their originating source.
    One of course should also realize that the stock market and the housing market are completely based on the confidence that we place in them and to a large extent become self-fulfilling prophecies.
    I don’t know if the mortgage meltdown is one of those situations, but it genuinely has the potential to be one.
    Of course it does. Whenever people and speculation on future value meet, the mechanics of a pyramid scam can come into play. However, we must not forget that there are some intrinsic values that real estate will always have. Just because some people let themselves get carried away and may individually lose their shirts, this does not always mean that things are permanently b0rked. Remember, our monetary system is not based on any real standard. It's only worth what we believe it to be worth. Hence, the 'American dream' is only dead if we believe it to be.
    ‎"Is that suck and salvage the Kevin Costner method?" - Chris Matthews on Hardball, July 6, 2010. Wonder if he's talking about his oil device or his movie career...
  16. #16  
    Quote Originally Posted by Toby View Post
    The Great Depression was Bushie's fault too.
    The fact of the matter is that the American public does hold the president ultimately responsible for the economic well being of the country. In the example you bring up, the first presidential election during the great depression led to an overwhelming rejection of the incumbent president (Hoover).
  17. #17  
    Quote Originally Posted by cellmatrix View Post
    The fact of the matter is that the American public does hold the president ultimately responsible for the economic well being of the country.
    The fact of the matter is that the opinions of the public do not change the facts of the matter. Believing something to be true does not make it so. What real power does the president have over the economy? What can a president directly do to turn an economy around?
    In the example you bring up, the first presidential election during the great depression led to an overwhelming rejection of the incumbent president (Hoover).
    Well, of course. The public is always looking for a scapegoat, be it the president, terrorists, illegal immigrants, etc. Much easier to place blame rather than look in the mirror.
    ‎"Is that suck and salvage the Kevin Costner method?" - Chris Matthews on Hardball, July 6, 2010. Wonder if he's talking about his oil device or his movie career...
  18.    #18  
    Quote Originally Posted by Toby View Post
    ... What real power does the president have over the economy? What can a president directly do to turn an economy around?

    Well, of course. The public is always looking for a scapegoat, be it the president, terrorists, illegal immigrants, etc. Much easier to place blame rather than look in the mirror.
    Presidents are unbelievably influential to the performance of the national economy.

    The Clinton Prosperity is an excellent example.

    Clinton became President in part because of Ross Perot's campaign to publicize raygun & daddy bush's horrific budget deficit.

    Clinton resisted democratic pleas to increase spending on pet projects, while he increased taxes on america's wealthiest (in spite of GOP predictions that this would cause a depression.)

    In a few years this lead to a reversal that most thought was impossible: a national budget surplus.

    Despite full employment and booming growth, inflation was tame and the Fed felt empowered to lower interest rates to unremembered levels.

    The dollar was strong (a Euro was worth $.80), and crime even went down as more jobs became available in the inner cities.
    Last edited by BARYE; 08/24/2007 at 10:25 AM.
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  19. #19  
    Quote Originally Posted by BARYE View Post
    Presidents are unbelievably influential to the performance of the national economy.
    They can influence to some degree, yes. But again, what tangible power over it do they have? Specifically, in this case, what did the President do to make people overextend themselves on mortgages or credit? Another thing to consider is what are the economies in the rest of the world like right now?
    The Clinton Prosperity is an excellent example.
    The 'Clinton Prosperity' can largely be tied to the technology sector (much like the roaring 20s could largely be tied to the automotive sector). There comes a point, though, where saturation causes the growth curve to taper off, plateau, and even drop before it returns to more sane levels.
    Clinton became President in part because of Ross Perot's campaign to publicize raygun & daddy bush's horrific budget deficit.
    Clinton became President because he was more personable and likeable than the elder Bush. Also, the elder Bush had his infamous 'no new taxes' gaffe to live down.
    Clinton resisted democratic pleas to increase spending on pet projects, while he increased taxes on america's wealthiest (in spite of GOP predictions that this would cause a depression.)
    Please explain how control of the purse strings was taken out of the hands of Congress.
    In a few years this lead to a reversal that most thought was impossible: a national budget surplus.
    It should be noted that this is not thought an impossibility because of whether it is in fact possible, but rather because it is considered unlikely that Congress will spend less money than it takes in.
    Despite full employment and booming growth, the Fed felt empowered to lower interest rates to unremembered levels.
    What's the employment and GDP growth at now?
    ‎"Is that suck and salvage the Kevin Costner method?" - Chris Matthews on Hardball, July 6, 2010. Wonder if he's talking about his oil device or his movie career...
  20.    #20  
    Quote Originally Posted by Toby View Post
    They can influence to some degree, yes. But again, what tangible power over it do they have? Specifically, in this case, what did the President do to make people overextend themselves on mortgages or credit? Another thing to consider is what are the economies in the rest of the world like right now?...
    The economies of the rest of the world are booming. The U.S. has been in a silent recession for most of junior's term, one disguised by the previously strong housing market and financial sector.

    Huge swaths of middle america have been downsized to working at WalMart after losing good paying factory jobs now moved to China.

    This bunch in power have been proactively laisez faire -- actively doing nothing when it could help their wealthy friends.

    Allowing for example, unsafe deep mountain "cavein" mining that killed 6 miners recently. Or opening up forests to clear cutting, or lowering environmental standards -- and not even enforcing those.

    Doing nothing as jobs are outsourced to China and India. Doing nothing (until very very recently) to stem the surge in illegal migration.

    Doing nothing as perhaps 7 million familes get foreclosed from their homes.

    Yes The Clinton Prosperity was in part the byproduct of a technology explosion. But one that benefitted from an administration that understood and respected science and technology. (Gore's role was significant too).

    The last 7 years could have had a similar upsurge in biochemistry and eco friendly tech. Instead our government was taken over by a theological clique that feared stem cell research and giggled at the threat of global climate change.

    Instead of investing in ourselves and our future, they've been buying desert sand.
    Last edited by BARYE; 08/24/2007 at 11:24 AM.
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