There is no financial crisis

in General Discussion edited January 2014
There is no financial crisis.

So here's what happened. When I was done with school one day I headed back home, I was hungry so I took a detour to this fast food joint and ordered a sandwich and then went off to eat it in a corner when it suddenly occured to me they didn't charge me!

Yeah apparently they were super busy and distracted because there was this manager/investor type looking around everywhere and talking to them.The cause behind me not realizing I hadn't paid them was because my head was spinning over this disturbing thought I had about the recent stock market crash.The fact is that nothing crashed except currency! All the people in all the companies are still there, all the technology is still there and not forgotton. Now obviously besides the fact that the dollar is known to have lost value the price of stock(in dollars) has also crashed. Now think! Shouldn't the opposite have happened? How can stock value fall more than currency? It can't!

This financial crisis is purely psychological and those who don't snap out of it are doomed to failure. Not that it matters much to me personally at this stage in my life though but my guess is that most people are fully unaware or only partly aware that most stock is currently undervalued and there will be no depression. This is so audaciously simple that it just goes over everyone's heads. All of these figures of low growth don't mean anything. Answer me this, if the growth of the last decade was 20% then what difference does it make if everything shrinks by 10% over the next decade? Answer, none! There is no crisis or as that one person whose name I don't recall right now said, it's just an opportunity.


  • Reply 1 of 3
    I also used to think that we weren't in a financial crisis...until I hit the job market.
  • Reply 2 of 3
    Sorry to disagree, but there is a financial and economic crisis not only in the United States, but other countries dependent upon the US economy.

    We are currently in what's called a Post Real Estate Bubble Recession.

    A real estate bubble occurs when easy terms for credit combined with speculation in real estate creates a bubble of rapidly rising equity. It creates lots of borrowing and improvements in real estate, creates a lot of jobs. There is nothing wrong with real estate bubbles, many have occurred in the US in many areas of the country without too much aftereffects. It's a speculative game, where those who have the ability to take the risk can do so. Those who usually speculate, do so with their excess, second or third homes, a large cash portfolio etc. So if they take a hit, it's no big deal, they still have their main home and a secure income.

    What made this real estate bubble especially bad is the green lighting of sub-prime borrowing. Sub-prime are those borrowers that don't normally qualify for a loan because of either bad credit, no credit, not enough income or other risks, even illegal aliens, that would make them a high risk category for successfully paying off something as long as a 15 or 30 year mortgage.

    The first mortgage companies and banks to give out sub-prime mortgages during the bubble occurred in California. Then again, when the Congress switch political parties, in 2005, Freddie and Fannie, the two Government Sponsored Entities, was mandated to increase their exposure to the sub-prime market, right at the height of the real estate bubble. When warnings were sounded, those making the warnings were brushed off as being insensitive to those in lower income levels.

    To understand the whole chain of events of this problem we need to go back in time to see the causes.

    Over many years, the US Government in various ways, tries to maintain control over banks as a instrument of social and economic policy. As we know, our government switches from being socialist to capitalist to various states in between depending who is elected. Socialists believe absolute government control in all aspects of society is in order and capitalists think more survival of the fittest with separate businesses, choice and competition caters better to consumers. It's a dual system that in some areas more government control is better and others it's better served by businesses. In my opinion neither side is perfect, but we get the best and worst of both and they do conflict with disastrous consequences.

    Banks are in business to make money, but are dependent upon the laws, insurance (FDIC), and money that is printed, loaned and distributed by the US Government. Also most banks, being corporations, are dependent upon answering to their shareholders who invest their money by buying shares.

    The US Government, through the Federal Reserve, loans money to banks so in turn they can loan it to borrowers, this is called the Prime Lending Rate, and through this method the Government can maintain some control over the economy, increasing or decreasing inflation, by increasing or decreasing the money supply.

    As one can see from this chart, there has been a trend prior to Jan 2002 of disinflation (decreasing inflation).

    The Federal Reserve was worried that the economy was headed for a prolonged deflation by the long term trend and also the Sept 11, 2001 attacks prompted Alan Greenspan lowered the prime rate the Fed loans money to banks to spur the economy into a inflationary trend which is easier to control and less damaging than deflation.

    What a lot of people feel is he kept the Prime rate down too low for too long, causing the real estate bubble because too many people had access to cheap money. Banks usually take the Prime Rate loaned money and add a mark-up and then in turn make this money available to people and businesses. So the lower the Prime, the better and the more money a bank has, the more it can loan out to other banks (in case they used up their allocated amount from the Fed) or people, businesses to borrow. This is why banks encourage people to put their money in them, by competing with services and certificates of deposit. The Federal Reserve doesn't allow banks access to unlimited money to loan (except in special circumstances) as this would cause a flood of the money supply and rapid hyper-inflation, a very dangerous state where the value of money decreases relative to it's purchasing power.

    The Federal Reserve tries very hard to keep inflation in check, just allowing a little inflation per year, without hyper-inflation or deflation, which would cause chaos.

    As one can see by the chart, the lowering of the Prime had it's intended result, the inflation rate rose, people were employed en masse by the real estate bubble and greed quickly over came grief of the terrorist attacks of Sept. 11. On purpose? Perhaps? But things didn't have to blow out as bad as it did, that was caused by something else which Alan Greenspan admitted that he didn't plan on the banks acting so irresponsible with sub-prime lending.

    Ok, now the banks and mortgage companies are the bad guys right? They allowed ignorant sub-prime consumers to take out loans they couldn't handle right? Right, some did exactly that (and some didn't), the bad ones acted irresponsible, just like the people taking out mortgages on their artificially inflated home's value (but a lot didn't know that, never have been through a real estate bubble before). What upset this balance was the disconnect from the borrower from the loaner and the US Government was responsible, and I'll explain.

    Usually a bank or a mortgage company has to carry the entire term of the mortgage of 15 or 30 years, a lot longer than any real estate bubble. So they take considerable pains to make sure the borrower is going to be able to pay back the loan or if the borrower defaults, the bank comes out ahead when they sell (due to increasing equity in real estate) the repossessed property, plus all the money made from payments and interest.

    That formula doesn't work in a real estate bubble, because the prices of real estate are artificially high. So banks are leery of loaning anything past what is considered speculative prices.

    But what if banks had a way to make the loan and then dump the loans for others to carry the full term? Then they could make all the initial amounts and don't carry the risk?

    Such a opportunity occurred way back under Bill Clinton, who made changes to the original Community Reinvestment Act (to prevent redlining) to force banks to make loans to sub-prime borrowers. As a result of this law, Bear Sterns (yea that one) created the first mortgage backed security, a way for speculators around the world to take a risk in good old American Real Estate, the bastion of capitalism and the worlds largest superpower.

    Now normally mortgages are rated between AAA and BBB, with AAA being the best (no-sub-prime) rated by Moodys, the rating agency. BBB rated mortgage backed securities carry more risk for investors, thus better returns.

    So now everything moves along kind of fine and dandy until the real estate bubble hits and greed sets in everywhere. A mortgage lender out of California starts TV advertising for home loans with little or no credit, California regulators don't do squat, neither does the Federal Government, after all perhaps some investors want to take on these risky sub-prime loans, so that's their business no need to interfere, like two adults meeting at a bar for mutual sex.

    But then Congress switches parities and lawmakers decide that it's unfair that the sub-prime market be not allowed to have their own homes. So they leverage their control over two massive mortgage giants Freddie and Fannie to get into the sub-prime market and all hell breaks loose.

    Irresponsible banks and mortgage companies are now going bonkers, they got a way to give out loans to anyone who steps in the door as the Government was taking all the risk. No income, no job, no verification loans (NINJA loans) was rampant and criminality widespread.

    In fact, there was so much glut of sub-prime mortgages that a new mortgage back security was created, called a CDO. Which blended the best AAA rated mortgages with BBB sup-primes and then rated AAA by Moodys! The world's investors and even entire countries wealth was caught up with these frauds!

    Finally the President and the Federal Reserve had to take control of the two highly over-leveraged GSE's (Freddie and Fannie) from Congress, and shut down the party. Which naturally incurred the wrath of Congress which blamed him for the entire economic collapse that occurred, but really was their fault for making it considerably worse with their adventures in socialized sub-prime housing on the backs of taxpayers.

    All the banks caught with too much sub-prime exposure failed and collapsed or got bailed out or sold. All the banks that managed to get rid of their sub-prime exposure before the end or didn't stray from responsible lending standards of credit, collateral and character, did fine.

    A post real estate bubble recession was going to occur regardless, as the speculation in real estate and improvements does employ a lot of people, especially in the construction industry. Once the speculation stops, so does the money and the jobs created by it. However a normal post real estate bubble recession is usually short in duration, as normal growth of the population creates new jobs and new need for housing etc. Also usually only those who can afford to speculate, much like those only able afford go to Vegas to gamble usually wind up the major losers if they held on to property too long or bought too late in the bubble.

    Real estate speculation is NOT intended for the sub-prime market and loans shouldn't have been given to people who had no intention or means to repay, especially at speculative values.

    The Congress is responsible, the same ones in power now, for their massive misstep and giving the green light of government approval for sub-prime lending on the backs of taxpayers who didn't approve of the risk, which is different than investors who do.

    If it wasn't for massive lending by Chinese, and firing up of the money printing presses, smart intervention by Alan Greenspan, Ben Bernanke and Shelia Bair this country would have collapsed economically.

    Now we are on life support, the Chinese are slowly pulling out their investment in the US, economically shaky Japan (who never really recovered from their real estate bubble due to missteps) are now the largest owner in U.S. debt. The Congress and new president are searching for ways to tax people without killing the fragile recovery. Like soda, cigarette taxes and the takeover of health care with mandatory higher payroll taxes of nearly 20%, because the debt of 11 trillion dollars (almost 1 year of GNP or nearly a year of labor by every working person) is going to kill the country eventually and reduce the US to a second rate power. The only solution our present Congress has to make government even bigger and take over more of the economy to pay for failures they made in other areas.

    Countries that are dependent upon the US economy are having troubles because so many US property owners owe more than their houses are worth, paying huge mortgages which leave little disposable income to buy anything but necessities, facing huge unemployment and even reductions in pay.

    I read that many US college graduates are moving back in with their parents, because they can't find jobs and thus being able rent their own places.

    It's going to be tough, for a long long time. It didn't have to be this way, it could have been all over in a year, like many post real estate bubble recessions do and only the rich and those hired during the bubble taking a hit.
  • Reply 3 of 3
    For those of you who didn't wade through all of what Woohoo! had to say, it boils down to these two disturbing factors:

    1) Congress put the government into the business of deciding who should get a mortgage and who shouldn't (and the "who shouldn't" is essentially no one). This was a decision much better left to banks who's business it is to figure out who should get a mortgage.

    2) Banks no longer had much if any responsibility to figure out who was a good credit risk. Instruments were created so the risk could be passed off and that left them with the incentive to write loans no matter if they made any sense or not.

    Put those two things together and you end up with a very toxic mess that will take a long time to rectify. The problem is, Congress is the body that has to fix the first problem and so far they've shown no desire to do it or even admit they created this problem for that matter.
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