mf - story #4567 - You know Ricky, you'

posted by dennisn on October 2nd, 2008 at 6:20PM

You know Ricky, you're a really stubborn guy ;P.

Here's a brief history of what happened. Decades ago, the Democratic party (which hasn't changed much/at all) began interfering in housing markets, under the misguided goal of giving poor people houses. They created Freddie and Fannie--essentially government monopolies which blindly gave out loans to anyone who "needed" them. Clinton perpetuated this fiasco by actually *forcing* mortgage lenders (primarily Freddie and Fannie) to give out loans to poor (risky) home-wanters. This government interference created a bubble in housing prices, since people knew they could charge whatever they wanted for their houses, knowing that the government would ALWAYS grant them a loan, which was essentially GUARANTEED. (The government would never allow itself to "default"--considering it has millions of willing slaves to steal from.) The bubble inevitably popped and, as was always expected, the government became/is under pressure to back it's loans.

In conclusion, government made this whole mess, knowing that gullible slaves (like you) would always be there to dutifully rescue them.

It was wrong decades ago. It is wrong today. Stop doing what you know is wrong!

(I'm afraid you have been deeply indoctrinated to believe in everything The State tells you. I hope it's not too late to save you ;D.)

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posted by rick on October 3rd, 2008 at 5:13PM

Right. So it was wrong for the lenders to give out risky loans. And it was wrong for consumers to live beyond their means and take on debt they can't afford. I don't deny that. If anything I thought it was government /de/regulation of the last few years that allowed this to happen.

That doesn't change the fact that right now we are in a situation where no one can get credit, in an economy driven by credit. This is what the bill addresses.

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posted by dsk on October 7th, 2008 at 8:30AM

>And it was wrong for consumers to live beyond their means and take on debt they can't afford.

I can see this happening.

>So it was wrong for the lenders to give out risky loans.

But why did they do it? Lenders were giving out 20, 30, 40 year mortgages to 'subprime' (i.e. high-risk borrowers). The only way you can rationally justify those loans, under a free-market, is if house price would continue to rise at the level that they did forever. Nobody was that stupid, not the internet peanut gallery who saw this as a bubble years ago, and certainly not the financial guys making millions forecasting markets, nor the banks who put up their own money. Rick, you can not convince me people were that stupid. When it comes to their own money, people are smart. When it comes to billions of dollars of their own money they are very very smart.

Everyone knew that the incredible rise of house-prices was going to drop dramatically within a few years. Even without this, real-estate is cyclical, it goes up and it goes down. So why would a bank issue a 40 year mortgage to a person who has little chance of paying it back, and with the knowledge that house price will stop rising at the level that they did (and even fall). There had to have bee a massive market distortion for this to happen. Banks which operate billions of dollars are not that stupid - and you're trying to tell me that they are.

This market distortion could only have been caused by government.

I've read a few articles on this. Here's two of them:
http://www.investors.com/...=306370789279709

http://www.bloomberg.com/...sid=aSKSoiNbnQY0

The articles may or may not have gotten the whole story. They may or may not be right. But what they say makes infinitely more sense to me, than what you're trying to convince me of (that is, entities with billions of dollars whose sole reason for existing is to lend money, in fact don't know how to do it. That the right market strategy for them to make money is in the hands of a random software developer from Seattle).

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posted by rick on October 9th, 2008 at 5:09AM

Some random researching led me to http://www.letxa.com/articles/25 this article.

What are financial derivatives? What are Credit Default Swaps (CDS)? They are sort of like insurance against loans, except they are not regulated as insurance, so they are more like bets against the borrower being able to repay the loans. But since they are simply contracts between entities, there is no regulation to ensure that the sellers of CDSs actually have a capital reserve in case the borrower defaults on a loan. Also, as the article points out, they can sell multiple CDSs on a single loan, even to entities that aren't lending any money.

Knowing this, a series of mortgage defaults can trigger an avalanche of claims that can overwhelm banks that sell these derivatives.

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posted by rick on October 7th, 2008 at 8:09PM

No argument here. That's consistent with some articles I've come across. Specifically, http://query.nytimes.com/...on=&pagewanted=1 this one about Fannie Mae responding to pressure from the Clinton Administration to lend to low-income borrowers.

I'll bring up another http://www.nytimes.com/20...n01NhrLJAjQLHx5V w&oref=slogin article though. The investment banks successfully pushed to remove regulation that dictated how much money they had to keep in reserve to buffer against losses from failed investments. So the banks have to accept some of the blame as well.

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posted by dsk on October 8th, 2008 at 12:26AM

>The investment banks successfully pushed to remove regulation that dictated how much money they had to keep in reserve to buffer against losses from failed investments.

Ok. So now you explain to me how being allowed to hold a lower reserve of cash makes banks issue irrationally risky loans. I can't see a correlation between the two. In fact, I could make the case that it should make banks more prudent.

Anyway, the most I could say is that they would have less money to throw around on bad loans - which might have meant an eventual bailout of $500 billion, instead of $700 billion. But it doesn't address the fundamental issue I had with your reasoning. Mainly why banks would exhibit irrational behavior in the form of lending to people that have little chance in paying those loans back (and all this with full knowledge that house prices were not going to go up forever), in the first place. The answer to this question has nothing to do with deregulation, and almost certainly implies market distortion.

Deregulation might have increased the eventual losses only by the happenstance of coming about during a time of this distorted behavior but clearly, could not be the root of the problem itself. With or without deregulation we were heading towards this crash.

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The problem is two-fold: The b by rick on October 9th, 2008 at 4:32AM.

Ricky, are you a part of the g by dennisn on October 9th, 2008 at 10:08AM.

I don't think anyone is in the by rick on October 9th, 2008 at 4:51PM.

Well, you seemed to be suggest by dennisn on October 9th, 2008 at 5:30PM.

>If we didn't have the balls t by story on October 9th, 2008 at 6:35PM.

If you can somehow say, with a by dennisn on October 10th, 2008 at 11:54AM.

>thus digging themselves into by dsk on October 9th, 2008 at 9:39AM.

posted by dennisn on October 7th, 2008 at 10:24PM

No. The the banks did not behave recklessly. They knew they had government backing, and thus could safely take on far more risk than a free market would possibly have allowed. In an unregulated environment, they would have risked being unemployed, and thus would have self-regulated themselves. With government intrusion, essentially none of these risks or signals are relevant.

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>Housing prices were rising, w by dsk on October 9th, 2008 at 9:56AM.

Yes and no. The banks knew th by rick on October 9th, 2008 at 5:02AM.

posted by dennisn on October 3rd, 2008 at 7:21PM

As I said before, there are two key points here:

(1) Will this "fix" actually help "the economy". I strongly say no. You appear to suggest yes. I highly doubt there's anything you can say to change my mind. I am a dedicated laissez-faire capitalist. I believe in individual freedom.

(2) Is it right to make me pay for OTHERS' mistakes? Clearly not.

Conclusion. The bailout is absolutely WRONG.

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