The Great Recession - post mortem

[Edward64]

I don't buy the Greenspan root cause. Sure he may have setup the environment that got us in this mess but there was plenty of time, other challenges/opportunities since he has left that pretty much makes him minor root cause.

Not necessarily in order but would put the following ahead of Greenspan

1. Paulson
2. Bernanke
3. Mortgage brokers and related financials institutions (greedy)
4. Home owners with 0% down

[gkb]

Originally Posted by miami_fan

I have not read this whole thread but I have listened to many of the "experts" speak. Has anyone actually taken any responsibilty for any of this? It seems to me, Greenspan is dong the same exact thing that every other player in this mess has taken.

I read this the first time as, "Greenspan is a dong" ... which I thought was pretty funny.

[Edward64]

What a day. Bear, Lehman, Merrill, AIG.

Sorry for being bearish ... I know its not been mentioned before but could we be looking dipping into a uncontrolled spin into a Depression? (what is that definition anyway).

If not, tell me why? It doesn't look as if the world has alot of confidence in our financial institutions and not sure Paulson & Co has the consistency/credibility to restore it. I've always heard it was the lack of liquidiy and confidence for the 29 crash ...

[Buccaneer]

I was thinking about my acquaintence at Lehman, who is one of the leading oil analysts in the country. He was the one that said that the "normal" price of oil should be in the $80-90 range, when it was irrationally up to $150 due to speculation and fear. He bucked the trend when his rival analysts were making more running up the oil futures. He'll be ok since he knew what he was talking about (taking a look at today's price).

[cartman]

I would place more of the blame at the feet of Gramm than I would Greenspan. The crap he authored and got passed into law his last couple of years in Congress led directly to the current financial crisis. Some of the measures passed took a lot of the more esoteric financial vehicles out of the realm of federal governance, leaving the Fed pretty much powerless to do anything about them.

[Tekneek]

I'd throw in his wife as well, with some of what she did at the CFTC. The two of them setup some real messes while setting themselves up for well-paying consultant/lobbyist jobs. Somehow out of the way just enough to avoid any real culpability.

[Flasch186]

Isn't Gramm an economic advisor to one of the Presidential candidates?

[Warhammer]

I blame this on the investment companies. However, there is nothing wrong with what is going on. What is wrong, is if the government comes in to bail them out.

[BishopMVP]

Originally Posted by Edward64

Not necessarily in order but would put the following ahead of Greenspan

1. Paulson
2. Bernanke
3. Mortgage brokers and related financials institutions (greedy)
4. Home owners with 0% down

I haven't looked at the big picture in-depth enough to really apportion blame, but I thought Paulson only came in fairly recently, and most of the practices that are at fault in the crisis were already occurring by that point. I mean, it seems the biggest root cause was incorrectly insuring higher-risk mortgages, and that damage would have been done well before Paulson appeared. So I'm curious why you would put Paulson ahead of Greenspan?

[darkenigma510]

Greenspan started the moral hazard back in 1998 with LTCM...its only been on the rise since then and has contributed in no small way to the nonsense we are seeing now....

[Tekneek]

Originally Posted by Warhammer

I blame this on the investment companies. However, there is nothing wrong with what is going on. What is wrong, is if the government comes in to bail them out.

Nothing wrong? Huge financial institutions collapse as a part of normal routine business? Something is definitely "wrong", now as to whether it requires government intervention is debatable, but to say there is nothing "wrong" going on seems a little strange to me.

Fact is that the government will have to get involved at some point. With the way debt levels have risen in this country, they cannot afford to have investment money going to other economies because investors have lost confidence in the system here. They will have to take action to try and restore that confidence, else the system here will just collapse upon itself (worst case scenario, of course, but not impossible at all).

[Logan]

Originally Posted by BishopMVP

I haven't looked at the big picture in-depth enough to really apportion blame, but I thought Paulson only came in fairly recently, and most of the practices that are at fault in the crisis were already occurring by that point. I mean, it seems the biggest root cause was incorrectly insuring higher-risk mortgages, and that damage would have been done well before Paulson appeared. So I'm curious why you would put Paulson ahead of Greenspan?

Yeah, I didn't get that either. Paulson became Secretary in July of 06, replacing John Snow.

[Mizzou B-ball fan]

Originally Posted by Logan

Yeah, I didn't get that either. Paulson became Secretary in July of 06, replacing John Snow.

Agreed. It's like blaming a battlefield medic for a soldier's wound rather than the guy who shot him.

[Tekneek]

Originally Posted by Mizzou B-ball fan

Agreed. It's like blaming a battlefield medic for a soldier's wound rather than the guy who shot him.

Unless, as I have seen/heard some economists say, this 'crisis' has been made worse by Paulson since the summer of 2007. I have not looked into that at all, but I heard this angle of the story being presented by someone on CNBC earlier this morning once again. I have not heard anyone blaming him for the entire thing, which surely wouldn't make any sense, but some claim he has exacerbated the meltdown.

[Marc Vaughan]

Originally Posted by Tekneek

Unless, as I have seen/heard some economists say, this 'crisis' has been made worse by Paulson since the summer of 2007. I have not looked into that at all, but I heard this angle of the story being presented by someone on CNBC earlier this morning once again. I have not heard anyone blaming him for the entire thing, which surely wouldn't make any sense, but some claim he has exacerbated the meltdown.

I think its been coming a LONG time personally, I also think that outside of financial stocks* most of the drops recently have been out of fear rather than reality ...

My bet presently is that things will stay choppy until around the election, at which point the mindset of people will become more positive and lo and behold things will recover somewhat.

(much like the 'gas price crisis' which was self sustaining while it lasted - but now is going back towards its long term trend, imho the Dow is now behind its 'trend line' and will be forced to buck back up to reality at some point in the future)

*And to be honest out of the financial companies I'm sure that most of them would have been fine if modern communication mediums and fear mongering from those hadn't affected their ability to function normally.

[JPhillips]

Goldman Sachs missed their earnings projection by 70%. Could be another bloody day on Wall Street.

Marc: I think just the opposite in regards to communication. There are hundreds of billions of dollars in bad loans be written off or still to be fully written off. Without the constant message of we're turning the corner, there are bargains to be had, etc. I think there could have been a much worse crisis. Given the size of the problem it's remarkable that things have held together as well as they have.

[Marc Vaughan]

Originally Posted by JPhillips

Goldman Sachs missed their earnings projection by 70%. Could be another bloody day on Wall Street.

Marc: I think just the opposite in regards to communication. There are hundreds of billions of dollars in bad loans be written off or still to be fully written off. Without the constant message of we're turning the corner, there are bargains to be had, etc. I think there could have been a much worse crisis. Given the size of the problem it's remarkable that things have held together as well as they have.

I think that the communication has helped in that companies can't hide things, however I think that the 'fear' that is generated has caused as much trouble as the visibility has removed by causing runs on companies and impairing their ability to function.

Thinking rationally about things the default rate on mortages isn't at a level where the paper is valueless yet some loans are trading for literally a 20 pence or under in the pound (or cents on a dollar if you prefer).

Even if all of the loans in question had defaulted and the price of the properties involved been cut by 50% in the present housing market then I'd have thought that taking into account the costs in selling the properties they'd still be worth 30p in the £.

(incidentally why has no bank tried to setup a real-estate arm instead of selling the foreclosed properties at a huge loss? - ie. rental agency; they'd help remove some of the glut from the housing market (helping that recover) and also gain some income from rent while ensuring that the property is kept in a reasonable state of repair)

[Fighter of Foo]

Who passed the law that removed the 10:1 liquidity cap on all financial companies? Bear Stearns was around 30:1 and Fannie Mae was near 80:1! I'm sure it's not the only cause, but it's definitely a part.

[Logan]

Originally Posted by JPhillips

Goldman Sachs missed their earnings projection by 70%. Could be another bloody day on Wall Street.

Not quite. Earnings were down 70% from a year ago; they actually beat estimates by 10 cents a share ($1.71 vs $1.81).

[Galaxy]

Rates stand firm.

[Flasch186]

there is a feeling on the street that we're truly at the cliff and we could get a monster leg down predicated on AIG or another 'shoe'. However, should we get that 'capitulation' it could be the basis of a nice short term rally in the markets but that wont ease individuals pain.

[DaddyTorgo]

Originally Posted by Flasch186

there is a feeling on the street that we're truly at the cliff and we could get a monster leg down predicated on AIG or another 'shoe'. However, should we get that 'capitulation' it could be the basis of a nice short term rally in the markets but that wont ease individuals pain.

absolutely

i think you have to look at AIG first and foremost potentially dropping (not sure how they can manage to salvage themselves at this point to be honest, although lord knows everyone will try), and then potentially Goldman/Morgan Stanley...

was saying earlier to folks that i can almost see a scenario where we have BoA, JPMorganChase, and then another retail-bank or two (WellsFargo maybe?) being all that's left standing and having gobbled up all the IB's, because the retail banks have the customer deposits that are helping to keep their balance sheets from looking quite so ugly. We're most of the way there already -- and while WellsFargo may not have the capital to buy say Goldman right now, if Goldman or MS implode the way the others did, it's definately not a stretch.

[Tekneek]

Originally Posted by Galaxy

Rates stand firm.

Not entirely surprised. Rates are supposed to be cut elsewhere in the world and there is some concern about devaluation of our currency (finally).

[Galaxy]

Goldman Sachs won't fail. They may be the strongest of the weak right.

[DaddyTorgo]

Originally Posted by Galaxy

Goldman Sachs won't fail. They may be the strongest of the weak right.

Oh I hope they don't. I think honestly that GS and MS can survive as-is, but it's just worrisome ya know?

[Chubby]

The economy is wierd for me right nowas my job is stable and I'm actually thinking of sellling the house and buying a new bigger one. Pretty much against the trends right now I think. We bought this house in a stable market (this area has seen small gains in home values as we never got overvalued) and will be looking to tradeup in a few years at the latest but it may be time to sell high (current home) and buy low (new home in depressed suburb)

[Logan]

So Barclays may be buying up most of Lehman which will save a bunch of jobs.

And the government is going to bail out AIG.

[DaddyTorgo]

Logan - where are you seeing that news?

Oh, and MS reported nice earnings (revenue $8bn, $1.32 a share) - they're up 11% in after-hours trading so far.

[DaddyTorgo]

dola - nevermind - now i see the Barclays/Lehmans news

still nothing concrete on AIG though

[digamma]

another domino falls, as a rather large money market fund "broke the buck" today. Folks had been watching for this over the last year with all of the SIV losses, but money fund sponsors (Bank of America, US Bank, Legg Mason, to name a few) had, to this point, taken action to support and prop up certain funds that were teetering on the brink of falling below the $.995 level mandated by SEC procedures for money funds. This one blew through the buck based on its short-term Lehman holdings and now has an NAV of 97 cents. Pretty remarkable stuff.

http://www.bloomberg.com/apps/news?p...kBs&refer=home

[JPhillips]

Originally Posted by Logan

Not quite. Earnings were down 70% from a year ago; they actually beat estimates by 10 cents a share ($1.71 vs $1.81).

Thanks. What I saw reported was obviously incorrect. Any instability at Sachs would be catastrophic IMO.

[Galaxy]

Originally Posted by DaddyTorgo

dola - nevermind - now i see the Barclays/Lehmans news

still nothing concrete on AIG though

So we are flushing $85 billion of more taxpayer money down the drain just to help out a company? I understand the problems of them failing, but jeez.

[Flasch186]

what's scary is Meredith Whitney continues to be right and her speculation keeps coming true, her forecasts for next year are even worse.

[Galaxy]

Originally Posted by Fighter of Foo

Who passed the law that removed the 10:1 liquidity cap on all financial companies? Bear Stearns was around 30:1 and Fannie Mae was near 80:1! I'm sure it's not the only cause, but it's definitely a part.

Dumb question, but what exactly is the liquidity cap? Amount you borrowed times your total assets?

[Tekneek]

Originally Posted by Galaxy

So we are flushing $85 billion of more taxpayer money down the drain just to help out a company? I understand the problems of them failing, but jeez.

At this point, I'd rather they take all these billions they've used to prop up these big companies, who should have known better, and bought health insurance for a lot of honest hard workers that simply cannot afford it. Or invested it in alternative energy... Maybe, if we had allocated all the money we've spent in Iraq on alternative energy, we would not have to give a damn about what happens over there either. So many billions of dollars blown on the wrong things over the past 5 or 6 years. What a disaster...

[Tekneek]

Originally Posted by Galaxy

Dumb question, but what exactly is the liquidity cap? Amount you borrowed times your total assets?

I thought it was how much you loan out versus how much you actually have. Like being able to loan out $10 for every $1 in actual deposits/assets. I could be wrong...

[Logan]

Originally Posted by Galaxy

So we are flushing $85 billion of more taxpayer money down the drain just to help out a company? I understand the problems of them failing, but jeez.

It's not helping out one company, it's helping out about a thousand companies.

[Galaxy]

Originally Posted by Tekneek

I thought it was how much you loan out versus how much you actually have. Like being able to loan out $10 for every $1 in actual deposits/assets. I could be wrong...

That makes sense. I think I am thinking of debt to assets ratio.

[Tekneek]

Originally Posted by Logan

It's not helping out one company, it's helping out about a thousand companies.

A little socialism apparently isn't a bad thing after all. Although the GOP will easily forget this ever happened when times are better and the "we're a free market capitalist system" message is the one they are trying to sell once again.

[Edward64]

Originally Posted by Mizzou B-ball fan

Agreed. It's like blaming a battlefield medic for a soldier's wound rather than the guy who shot him.

This is on Paulson's watch. Regardless of who shot the soldier, the treatment he has used hasn't seem to work well.

[Edward64]

This financial situation will be fascinating reading in the post-mortem books in a couple years.

I'm all for the AIG bail out.

[JPhillips]

Originally Posted by Galaxy

So we are flushing $85 billion of more taxpayer money down the drain just to help out a company? I understand the problems of them failing, but jeez.

I'm completely ignorant, but where does the 85 billion come from? The US doesn't have any extra money, so are we in effect borrowing this from China to loan to AIG.

[Galaxy]

Originally Posted by Logan

It's not helping out one company, it's helping out about a thousand companies.

I understand this in the first place. Problem is, we shouldn't be doing this in the first place.

My question is, are we going to get the money back, plus the interest we are going to have to pay on (as well as adjusted for inflation)? Growing our deficit even more isn't going to help in the long-term. Does AIG have the assets to back up the loan (I've heard the aircraft leasing business is quite valuable)? Are they just trying to get a loan while they try to sell off some of the lucrative assets they have to make it through, which will allow them to inject capital into it's business and pay back the loan?

[Galaxy]

Originally Posted by Tekneek

A little socialism apparently isn't a bad thing after all. Although the GOP will easily forget this ever happened when times are better and the "we're a free market capitalist system" message is the one they are trying to sell once again.

It's not even that you need "socialism". It the idiots decided to keep money cheap and print it like its going out of style, pass legislation that allowed companies to erase liquidity caps and give anyone a loan or credit, and loose accounting rules. I'm all for responsible regulation.

[path12]

Originally Posted by JPhillips

I'm completely ignorant, but where does the 85 billion come from? The US doesn't have any extra money, so are we in effect borrowing this from China to loan to AIG.

Fire up that printing press.

[Fidatelo]

I'm curious what point the US debt/deficit has to reach before the country as a whole gets 'downgraded' or whatever the equivalent is for countries borrowing money. At what point would it have to reach before it starts to spiral out of control and cause real, everyday repercussions?

I know that Canada was hurting in a big way back in the late 80s early 90s after years of over spending from Trudeau and Mulroney, and it became a major issue to get our books in the black and actually pay down the debt. Obviously the US has a lot more leverage than a country like Canada, but every country must have a breaking point, right?

[path12]

I guess that whole "no bailout" thing lasted all of two days. The thing that kills me is that AIG turned down a buyout offer about a week ago and now the Fed will cover it instead. While I understand why they felt they needed to in order to prevent a meltdown, all it really does is put a band-aid over that cut artery, doesn't it?

[BishopMVP]

Originally Posted by Fidatelo

I'm curious what point the US debt/deficit has to reach before the country as a whole gets 'downgraded' or whatever the equivalent is for countries borrowing money. At what point would it have to reach before it starts to spiral out of control and cause real, everyday repercussions?

I know that Canada was hurting in a big way back in the late 80s early 90s after years of over spending from Trudeau and Mulroney, and it became a major issue to get our books in the black and actually pay down the debt. Obviously the US has a lot more leverage than a country like Canada, but every country must have a breaking point, right?

The old adage is if you (Canada) owe the bank (the World) a thousand dollars, the bank owns you. When we (US) owe the bank (World) a billion dollars, we own the bank. Countries like China have already begun shifting their new investment into a broader range than just US treasuries, but they still have billions in longer-term securities that they simply can't afford to let the US default on. (Same reason why a war between us and China is unlikely.) Not to mention the global economic catastrophe that would affect everywhere if the US economy entered an actual depression.

Originally Posted by Galaxy

So we are flushing $85 billion of more taxpayer money down the drain just to help out a company? I understand the problems of them failing, but jeez.

I'm still a much bigger fan of some Schumpeterian economic destruction, and think we're screwing ourselves long-term with these bailouts, but this one isn't quite that bad.

Originally Posted by CNN

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates. AIG will sell certain of its businesses with "the least possible disruption to the overall economy." The government will have veto power over the asset sales and the payment ofdividends to shareholders.
Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.

Some phenomenal posts over here - Megan McArdle Yes, it's a U Chicago economist, and some of the better posts mostly take on Democratic party-line commenters, (What should Bush have done, etc.)
but she also points where the Republican memes (It can be traced back to Clinton-era policies demanded expanded loans to minorities) aren't supported well by the data.

[ISiddiqui]

That McArdle blog is really good.

This post especially is great:

http://meganmcardle.theatlantic.com/...regulation.php

[DaddyTorgo]

amusing quote from one of the comment threads on mcardle's blog

Jesus H. Christ, and I really thought I'd get to see some honest-to-God global panic over this, not some piddly 500-point drop. The Fed and Secretary Paulson are driving me batty with these bailouts. Can't a guy just watch the world burn for one mother------- minute without the government stepping in and saying, "Not right now, maybe later"? Is that so much to ask?

+1