Economic Crisis

[Traveler]

I just wanted to add my 2 cents worth about the current economic crisis. I will begin with a statement that got me in a lot of trouble at a company meeting where I use to work. The company I was working for declared a 680 million dollar loss after 9/11 and announced layoffs. I raised my hand and said that 680 million was a lot to lose and I suggested that we begins the layoffs with all the idiots in management that were involved in the loss. Of course that did not happen.

What we need to understand with the current economic crisis is that there is not one cent that has been lost. We have accountants that live and breathe to track that stuff. Every dime went somewhere and someone has every lost cent in some pocket or account. It was not lost. There was a time when a ship would sink and money would end up lost at the bottom of the ocean – but that is not what is happening today. Someone – several someone’s walked off with that money. They took it and they have it. A lot of it. And no one in our government wants to get it back from the one’s that took it. The solution – let the dumb American tax payers pay the money back.

The reason the tax payers should pay? Because if we don’t the one’s that took the money will create even more trouble and we will have to pay even more later; more better to pay the ransom. It is my opinion there are worse than Ben Lauden troubling our freedom. And no one in our government is willing to stop them or even suggest we look for them.

The Traveler

Edited September 23, 2008 by Traveler

[Rico]

I am sitting here in amazement of what you have just posted. It's just like a duh lightbulb has went off. No duh, somebody took the money. It wasn't lost.

[ccoolid]

The bottom line is, yes someone took the money. And i know who did. It was all the capitalist like th CEO's and all that. They spent that money on SUVs and GUCCI. thanks for that

[WANDERER]

Some took the money and ran ....some got caught because they paid too much for something that wasn't of that value later on down the track. But er yes...kind of. Everyone pays for it, some more than others, dollar goes down in buying value and taxes go towards stopping the ship from sinking. On one hand people lose a lot of money through stocks and super...on the other hand food prices go up and people lose their homes.

[drjme]

there are trillions of dollars floating around that are just numbers in a computer system, that can be shifted at the click of a button. Certain extremely wealthy people can affect an entire economic system by manipulating their 'numbers' in a certain way. When 1 company can hold more weath than an entire continent any action can cause huge repercussions.

My basic, dumbed down, limited view of the 'economic cycle' is the injection of this money (credit) into the system (look into fractional reserve banking), everyone takes the easy money, buying, trading and borrowing because there is a lot of credit in circulation, this available credit is then withdrawn (by whom?), and the amount of 'money' circulating dries up, people begin to hold their money and everything starts to tighten up. Economy starts to slow, because it is based on continuous growth and increasing consumption.

And as people/ business' faulter, even more masses of wealth shift from the many poor, to the few very rich (though debt, foreclosure etc.)

So can this be the current situation?

Huge debts racked up by easy credit.

Over inflated values on assets caused by easy credit

Large amounts of 'money' taken out of circulation (it’s still there, it’s just not being used).

Huge amounts of debt affecting major corporates who helped create the problem (due to lending practices), because there is less 'real cash' circulating.

Toxic debt is 'sold' to Govt from these institutions(or purchased by you the tax payer without your consent).

Government would borrow money (more credit) to pay for these purchases.

So you just bought your own bad debt, which you have to pay back, plus the interest on the debt, plus the interest on money created to pay for the interest on the original debt. So basically you, your children and and grandchildren etc are indebted to a ever increasing debt cycle.

So who will be the first to put on their tinfoil hat and name some names? :)

some speculation would be appreciated.

[Palerider]

its all in a swiss bank account.....

[rameumptom]

It is more complicated than you guys are thinking. Capital markets are based upon supply and demand. If I buy a bunch of stock at $100, and then news comes around that the company is killing small babies, suddenly no one wants the stock, and I may be forced to sell at $1. The money literally disappears, spread out among some people, but much of it is also lost in thin air.

We are seeing the markets shrink, due to gambles that are now seen as precipitously dangerous. No one wants to buy stock in Fannie Mae, and they've loaned out 50 times more money than they actually owned. Now they own a bunch of empty houses which they loaned money for, but can't resell for the same value. If they loaned $200,000 per house on 10,000 sub prime houses, that is $2 billion dollars. If everyone walks away from them, and there are no buyers for these houses at $200,000, they are stuck with huge loans they can't pay. If they can sell the homes over time for 1/2, they still owe $1B and interest on what they can't pay right now.

Money disappears into material and stuff, which is now not in demand, and so is worth less. Money disappears.

[a-train]

Money disappears.

Uhhh. No, not really. Thanks for playing though. Lost in thin air?

-a-train

[YoungMormonRoyalist]

Well as an amateur student in economics, no money doesn't not disappear into thin air, but...does it lose it's value? Yah.

The classic point familiar to church members was when the anti-bank founded by Joseph Smith and several other members failed. There was a rush on the bank to exchange the paper currency for hard cash, and when it ran out the paper currency became worthless, just a piece paper with a number stamped on it. This is due to the fact that most banks never keep enough hard cash or something like it to back up these numbers stamped on paper or floating around in computers.

When the majority of the Western World transferred from the gold standard (Basing the value of your currency on the amount of gold/silver/whatever you had) to GDP, the economy became that much more susceptable to fluctuations. This is of some use, such as when Britain purposefully devalued their currency in the '30s in order to attract more foreign investment, though it also means that if the consumption rate or growth raise slows, or downright plummets the value of your money plummets.

So yes, its true that these numbers have not been lost...they just don't mean anything or as much any more. For example, a few years back we bought our house for around 180, 000 dollars. We had a real estate boom that brought up the price to almost 500,000. This is an example of the opposite trend, where something has increased in value. The plummet of a stock market is actually the first step of a recovery, as weird as that may sound. Those, who before the crash, have bought stocks or objects that retain their value (The classic case being gold) can then see what they have and reinvest their money into the stock market, thus brining up the value.

My advice? (Which may or may not be of some value to the beholder) Invest in non-perishable food items. If the economy ever crashes to the point where even 'safe' investments into such things as gold are deemed worthless due to the fact that people will realize that it's just a shiny rock one of the only things of value will be food, which can be used for bartering. Either that or invest in useful education, which will allow you to sell your services to those who produce or have food.

And that's my little doomsday tidbit for today. If this doesn't make sense then I place all responsibility on the fact that it's almost 2 in the morning.

[kona0197]

The problem is that you all seem to think we are having a crisis when in reality your fear is the only thing making a crisis happen.

We are fine.

[Palerider]

The problem is that you all seem to think we are having a crisis when in reality your fear is the only thing making a crisis happen.

We are fine.

I do agree with you in that.....the media does over hype things and stirs things up......I could go on but I don't have time to list everything....:)

[MarginOfError]

With me being something of an economic ignoramus, what would be the result if we just let the market go the way it is now, by which I mean, the government didn't bail out anybody? What happens if we let it crash and burn?

[Jenamarie]

Just with AIG, if they go under, thousands (if not millions) of people will lose their retirment funds, life insurance policies, and other insurance policies that they've been paying into which are now void, and they won't get any of their "investment" back. Heaven help their customers who are at or near retirement, as they'll be up a creek.

[WANDERER]

Global recession...a slowdown or stall (stop) likely in many countries' economy growth to make up for debt losses related to this for an extended period (how many years, how bad...it all depends). Higher interest rates, higher prices, restricted imports and no market for exports. Loan losses for banks mount, asset prices slump, unemployment, super funds hit hard (later retirements, people coming back to work from retirement) and a liquidity crunch...government takeovers to avoid a *fire sale* (the aim is actually to sell it later at a profit or at least not at a terrible loss) and a possible increase in taxes to pay for it. Short selling on stockmarkets banned.

Depends on how much national debt you have and how much of a budget surplus as to how bad it will be. Not good at all for developing countries. Of course if we do nothing at all and increase the problem: some are bandying around the word *depression*.. probably not. (This short summary from the words: global recession: is provided by google for your viewing entertainment).

What does it mean for the little people...going to work for money that won't buy you much (if you still have a job), probably higher taxes, empty (emptier) supermarket shelves and everything costing a whole lot more...a kind of downward squeeze effect. Poor infrastructure: health, education etc as spending budgets will be slashed. But hey, if you went through the last recession you know the drill. A bit of belt-tightening ahead. It's not fun...but there will still be low nutrition food : )

Edited September 24, 2008 by WANDERER

[NeuroTypical]

Here is a pretty good summary of what the holy heck happened and why everyone is nervous.

Kiplinger.com - 15 Things You Need to Know About the Panic of 2008

[a-train]

The problem is that you all seem to think we are having a crisis when in reality your fear is the only thing making a crisis happen.

We are fine.

So are you saying that the only reason Americans in mass are unable to pay their mortgages is because they are afraid? You don't think it has anything to do with getting into too much debt?

-a-train

[a-train]

Here is a pretty good summary of what the holy heck happened and why everyone is nervous.

Kiplinger.com - 15 Things You Need to Know About the Panic of 2008

What did it say?

1. It all began with cheap money. To prop up ailing economies early in this decade, central banks in the U.S. and Japan kept interest rates unusually low, which encouraged speculation. In the U.S., the Federal Reserve lowered the federal funds rate -- the rate that banks charge each other for overnight loans and a barometer for the cost of borrowing money on a short-term basis -- from 6.5% in 2000 to 1% by mid 2003. Cheap money quickly ignited a sharp rise in home values in virtually every corner of the country.

There you go folks.

-a-train

[BenRaines]

Does anyone here understand the CMO investments and their like? Care to wage in on why this has caused the near collapse of the financial markets?

Collateralized Mortgage Obligations and their like are a security that is made up of a bunch of mortgages. The security, like a stock, are traded and backed by the underlying value of the mortgages that are bundled up. When some of the bad loans started to show up and also when people who were buying houses that never should have started losing them or walking away because they were not going to make a million in real estate, some of the loans in the portfolio were foreclosed upon. Some of the sellers of this debt were required to buy it back if it failed. As these calls started showing up, less than 10%, a crisis started. All of a sudden you couldn't give away a CMO. They were still very valuable, more than 90% of the mortgages in the portfolio were performing, but when there is no market the current regulations require that these securities be "marked to market". Means that if they can't be traded then they have a zero value. They don't actually have a zero value in the long run but today they do since no one wants to buy them.

As I have seen the proposal so far the govt. is going to have the opportunity to buy these securities at 60 to 65 cents on the dollar. The potential is that the value has actually dropped by 10% or real worth, based on underlying loans is 90 cents on the dollar. Effective yield to the govt at 65% of value will be a yield of 12-14%. Based on the amount of the mortgage. If you could borrow money at 4%, a govt bond, and lend it at 12-14% you would have a net yield of 8-10%, excellent.

That is what I understand so far.

This is not from an article that I read and I am just saying what they said but from what I know of the finanical markets after 30 years working in them.

Ben Raines

[abqfriend]

I don't know much about CMO's-but I saw and read on the news yesterday that the FBI is investigating several large brokerages and financial companies who were dealing in same or similar products for the last 3 years-It would have been nice if we had some warning!

It is kind of like being on the Titannic and told we are sinking when I am already treading water.

-Carol

Does anyone here understand the CMO investments and their like? Care to wage in on why this has caused the near collapse of the financial markets?

Collateralized Mortgage Obligations and their like are a security that is made up of a bunch of mortgages. The security, like a stock, are traded and backed by the underlying value of the mortgages that are bundled up. When some of the bad loans started to show up and also when people who were buying houses that never should have started losing them or walking away because they were not going to make a million in real estate, some of the loans in the portfolio were foreclosed upon. Some of the sellers of this debt were required to buy it back if it failed. As these calls started showing up, less than 10%, a crisis started. All of a sudden you couldn't give away a CMO. They were still very valuable, more than 90% of the mortgages in the portfolio were performing, but when there is no market the current regulations require that these securities be "marked to market". Means that if they can't be traded then they have a zero value. They don't actually have a zero value in the long run but today they do since no one wants to buy them.

As I have seen the proposal so far the govt. is going to have the opportunity to buy these securities at 60 to 65 cents on the dollar. The potential is that the value has actually dropped by 10% or real worth, based on underlying loans is 90 cents on the dollar. Effective yield to the govt at 65% of value will be a yield of 12-14%. Based on the amount of the mortgage. If you could borrow money at 4%, a govt bond, and lend it at 12-14% you would have a net yield of 8-10%, excellent.

That is what I understand so far.

This is not from an article that I read and I am just saying what they said but from what I know of the finanical markets after 30 years working in them.

Ben Raines

[rameumptom]

About a decade ago, Congress deregulated the loaning of money, so that investment companies could get into it. To prop up the economy due to the collapse of the tech market, Congress also authorized a ton of cheap money to be thrown into the housing sector.

This was not "real money" in that it was backed by American tax dollars. It was backed by debt. The Fed printed more money, making our dollar devalue (one of the reasons oil is so expensive), and encouraged loaning institutions to lend money out. The institutions do not just loan out what they have on their books, but always loan out more than they have, creating some risk. When tons of money was flowing and these banks and investment companies saw others raking in lots of stock profits, all were pressured to get in on the quick buck express. So, they over extended their loaning capacity. There was no real money to back it up, just IOUs that banks would borrow from the Fed on short term loans. When people began walking away from their homes, suddenly the cash flow stopped (no one was paying on their mortgages), and with the tightening economy there was no money to borrow anymore. Suddenly, everyone found that their institutions were about to go under because they had billions in short term debt, and billions in empty homes they could not sell. No more money to pay the bills means bankruptcy.

AIG is an insurance company that insures investment companies. When one bank falters, they cover the defaults. But when dozens fell, it brought AIG down with them. The FBI is now investigating to see if any of these companies fixed the books to see if they could squeak by without folding, such as Enron did. IOW, could these companies have looked at their own books a year ago and tried to slow down and staunch the problems then, rather than go all the way down the drain. There actually were a few companies that saw the writing on the wall a year or two ago, and sold their risky holdings to the idiots that have now collapsed.

A lot of money is also now being moved out of Mutual Funds and stocks and into treasury bills/bonds. This also creates a position where companies do not have money for investing into research, development, infrastructure, or restructuring. So, not only are investment companies hurting, but many industries are now out of money to grow.

[Captain_Curmudgeon]

As I have seen the proposal so far the govt. is going to have the opportunity to buy these securities at 60 to 65 cents on the dollar. The potential is that the value has actually dropped by 10% or real worth, based on underlying loans is 90 cents on the dollar. Effective yield to the govt at 65% of value will be a yield of 12-14%. Based on the amount of the mortgage. If you could borrow money at 4%, a govt bond, and lend it at 12-14% you would have a net yield of 8-10%, excellent.

So how come no one else wants to buy them? Did you buy some, Ben?

You'd think the oil companies would swoop right in, given the huge profits they have sitting around. Make 8 to 10 percent? If they're such a great investment, why do taxpayers have to buy them?

[BenRaines]

To put liquidity back in the market. Since they are not trading based on the fear that all mortgages are going in the toilet. I know mine isn't but there are a few that are. The market for these types of securities is frozen. Govt is providing the market, liquidity, to buy them up at a discount. Just like bonds and stocks are purchased at a discount to real value when there is fear about their future.

As I was watching Paulson talk more about it yesterday it will be what is called a reverse auction. Those who are trying to sell will say how low they will go to sell them. Govt will buy the lowest offer to sell, not the highest. If someone wants to get them off their books they will sell these securities at a very high discount, low price.

I would not be surprised if after the govt buys these debt securities that they don't create a separate market to resell them back in to the marketplace at a profit, plus the interest they will have earned.

These investments still have yields based on the mortgages that are the underlying value.

Ben Raines

Ben Raines

[MorningStar]

I'm curious about what will happen to home prices. Do you think they will continue to go down? I've seen people speculate that they will go back up within a year, but I can't really imagine that happening.

[BenRaines]

This is a market by market condition. In some markets home prices are stabilizing in others there is still room to fall. I think it all depends on if someone is buying a home as an investment or are they buying it as a place to live for the next five to ten years or more.

To many people were buying homes, multiple homes as an investment and not as a place to live for years. That has helped get us to where we are in the housing crisis.

Ben Raines

[Hemidakota]

Kona, there is crisis and those who work for the feds know it....things will begin to change how we will do business with each other over the next two years. Those who are indebted, time is now to consider what is important in life - MATERIAL or FAMILY.