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It's Not Sub-Prime's Fault

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wayneL

wayneL

VIVA LA LIBERTAD, CARAJO!
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Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.

It's not sub-prime's fault at all, it is merely the first symptom of the cause.

No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.

On my blog there are a series of video lectures on economics which explains the whole shebang (which I've posted before).

It's Greenspan's fault... and now he's trawling the world shifting the blame onto whoever else he can, to ensure his place in history is not sullied.

Uncle Ben has picked up the baton now too.

Bastards!

Discuss?
 
Yes good subject ....


It cracks me up no ends just how many people are cursing and blaming the American mortgage holders that are defaulting aka " the little Guys, the scape goats, the fall guys , the victims "

General rule of thumb, follow the money trail folks, he who benefits most was probably to blame :D

And true to form, looks like they will bail out the guilty under the guise of saving the innocent.
 
Hi Wayne

I thought the expansion in derivatives used in financial markets has predominately been in the last 3 to 4 years, sub prime just being the tip of the very large ice block.

Also I thought the current crisis is due to the fact no one knows whose holding the bag but everyone knows some one is and they are going under if put in the position of having to realize the assets from paper to cash. It won’t make any difference even if the paper is OK no one wants to buy.

A question that baffles me some what is if there was no FED then are you suggesting that it all should be left to free markets?

Focus
 
Im for free markets, and a shake up of the fractional reserve banking system and a return to currencys backed by precious metals instead of backed by a "she'll be right mate" :D

Might even happen if the USD imploded :eek:


Was speaking to my ma the other day, back in 1970 my Pa was apparently paid $20.00 a week, or enough for about half an ounce of Gold, the $20.00 bill he earnt then is still just a $20.00 bill if he kept it, but if paid in Gold it kept virtually all its purchasing power .....
 
IFocus said:
A question that baffles me some what is if there was no FED then are you suggesting that it all should be left to free markets?

Focus
Click to expand...

Yes & No, I think we need CBs in the current monetary system (Though a privately owned one like the Fed is not Kosher in my view).

I'm suggesting a completely different course of action. In Austrian theory, recessions are a natural and necessary part of the economic cycle. They clean out malinvestent and a host of other ills, when necessary. However when CBs start pulling levers to avoid recessions, malinvestment continues and exponentially increases as we've seen lately, and attempts are made to prop them up are absolutely toxic.

In two words "MORAL HAZARD".

Those clowns who have taken the most innappropriate risks are now the ones being protected/rewarded by CBs, while the prudent instos/individuals get shafted.

The big problem is that malinvestment has now become so widespread, so indulged in by the masses, that people cannot see it for what it is (e.g. property investors calling for a new Dickensian age of a two tier society {the rotten self centered *****}) People believe that ALL risk should be rewarded, therefore no risk.

In conclusion, CBs should facilitate the free market and stick to there public remit of controlling inflation, but not intervene in the cycle as they are now (Gu'mints do a good enough job of screwing that up all by themselves).
 
wayneL said:
No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.
Click to expand...

Wasn't the loosening of credit done to stimulate the economy so as prevent or reduce the sererity of a recession. I'm no pro on the Federal Reserve but assume it basically performs the same functions as our reserve bank. Or is the Fed more undisiplined when it comes to lowering interest rates. I see how loose credit leads to whats occuring now but how then do you prevent recession.
 
billhill said:
Wasn't the loosening of credit done to stimulate the economy so as prevent or reduce the sererity of a recession. I'm no pro on the Federal Reserve but assume it basically performs the same functions as our reserve bank. Or is the Fed more undisiplined when it comes to lowering interest rates. I see how loose credit leads to whats occuring now but how then do you prevent recession.
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Recession is normal/natural as per my previous post. Let mild recessions happen when they should. They are necessary in the capitalist system.
 
I completely agree.
Loose credit combined with severe asset inflation willlead to high inflation which will lead to high interest rates which will lead to the bust. Greenspan has caused an enormous bubble.

Sub Prime though was also about selling unwitting investors duds so the banks don't lose. Also a symptom of short term horizons of CEOs. The US has lost trust with world investors and how are they going to get it back??
 
wayneL said:
Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.

It's not sub-prime's fault at all, it is merely the first symptom of the cause.

No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.

On my blog there are a series of video lectures on economics which explains the whole shebang (which I've posted before).

It's Greenspan's fault... and now he's trawling the world shifting the blame onto whoever else he can, to ensure his place in history is not sullied.

Uncle Ben has picked up the baton now too.

Bastards!

Discuss?
Click to expand...

Subprime has definitely taken on the role of whipping boy for the financial woes that we now inhabit. However I think blaming it all on the Fed and easy Al lets others off the hook that deserve at least a little bit of the blame.

For example the ratings agency cartel that by virtue of the way they conduct business are in an unavoidably compromised position where they get paid by the companies whose securities they rate. Calling sh*t sugar doesn't make it taste any sweeter but that is essentially what the ratings agencies have been doing.

Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent.
 
dhukka said:
Subprime has definitely taken on the role of whipping boy for the financial woes that we now inhabit. However I think blaming it all on the Fed and easy Al lets others off the hook that deserve at least a little bit of the blame.

For example the ratings agency cartel that by virtue of the way they conduct business are in an unavoidably compromised position where they get paid by the companies whose securities they rate. Calling sh*t sugar doesn't make it taste any sweeter but that is essentially what the ratings agencies have been doing.

Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent.
Click to expand...
Yep, great points dhukka.

The thing that I'm sorta trying to get at is that without The Fed loosening so much, the ratings agencies etc would never called sh*t sugar, because there would have been the unavoidable smell. As is was, it was disguised my mountains of cash. Massive turnover of cash can hide stuff.

So instead of facilitating free enterprise, they were facilitating avarice and outright greed.

That's my chicken and egg view anyway.
 
It's no different to any problem from cancer to a machine needing maintenance to the world economy.

If you delay facing the consequences of the situation, which is exactly what the Fed etc has done, then you generally end up turning a small fixable problem into a massive unfixable one.

Eg car needs an oil change. You do nothing. Now you've got a blown engine. And you still need new oil.

Eg a mild recession is due. It is delayed. Then we end up with a truly massive bust that transforms a generation versus a recession that few would remember for long.

Same with practically anything. Small problems faced today versus massive problems tomorrow. I'd much rather the former than the latter.
 
wayneL said:
Yep, great points dhukka.

The thing that I'm sorta trying to get at is that without The Fed loosening so much, the ratings agencies etc would never called sh*t sugar, because there would have been the unavoidable smell. As is was, it was disguised my mountains of cash. Massive turnover of cash can hide stuff.

So instead of facilitating free enterprise, they were facilitating avarice and outright greed.

That's my chicken and egg view anyway.
Click to expand...

Yep I think the Fed lowering rates too low and keeping them there for too long came first and exacerbated the effect of lax regulation of the financial industry, the flawed business models of ratings agencies and encouraged greed on Wall Street and in the mortgage broking industry.

Looking at the Fed more specifically I think part of it has to do with what Nouriel Roubini calls an asymmetric approach to monetary policy rather than a symmetric approach:

Those of us who believe that central banks should have a symmetric approach to asset bubbles (see my paper on monetary policy and asset bubbles) – i.e. try to prick/contain them when they are on the way up so as to be able to ease policy and minimize the real collateral damage if/when they burst – rather than the Greenspan/Kohn/Bernanke doctrine of asymmetric response – do nothing on the way up when the bubble is growing while aggressively ease when the bubble burst – do also agree that monetary policy that tries to control asset bubbles on the way up is not necessarily and only based on the use of interest rate policy: poor regulation and supervision of the S&Ls caused that real estate bubble and banking crisis.
Click to expand...
 
Its gos even further than people intentionally calling sewer water beer, absolute armies of so called experts genuinely beleived that this train was unstoppable, that capatalism had entered a new golden age of easy untold wealth, gawd only 1 or 2 months ago these experts were saying S&P 500 profits would go up 12 percent to 15 percent this quarter, now realty has showed her ugly head they are saying 1.5 (still optimistic imho) - a 1000pc difference.


:eek:
 
"Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent."

I think care should be taken about pointing fingers of blame at certain groups. My Aunt who lives in (get this!) Eureka, California, sent me a clipping from the San Francisco Chronicle and their reporters discovered that in one very expensive area called the Bay, investors (using that term in a loose fashion) accounted for 20% of mortgage foreclosures with some owning multiple properties. One fella had 11 (all on lo-doc) and all gone down the gurgle.

Now you can take this one small sample and extrapolate that to the rest of the USA and say that a few investors with multiple properties who used lo-doc loans are responsible for the defaults and therefore the crisis. Depends on how you want to skew the stats.

It is possible that greed, stupidity and possibly fraud at all levels got in the way of rational thought (although the thoughts during that time were probably viewed as rational)

And now the good men at the CB's are trying to close the stable door after the Equine flu infected horse has well and truly bolted. Usual 20/20 vision afforded by hindsight.
 
Judd said:
It is possible that greed, stupidity and possibly fraud at all levels got in the way of rational thought (although the thoughts during that time were probably viewed as rational)
Click to expand...

There were voices of reason at the time, Peter Schiff, Stephen Roach et al (and dare I say a few of us bears here on ASF), but only to be mocked by the laughing, sneering, pea brained Perma-Bulls on BubbleVision.

How satisfying to see those turkeys pwned. :batman:
 
wayneL said:
Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.

It's not sub-prime's fault at all, it is merely the first symptom of the cause.

No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.

On my blog there are a series of video lectures on economics which explains the whole shebang (which I've posted before).

It's Greenspan's fault... and now he's trawling the world shifting the blame onto whoever else he can, to ensure his place in history is not sullied.

Uncle Ben has picked up the baton now too.

Bastards!

Discuss?
Click to expand...

I tend to agree. Personally, I think money just got to cheap. For a long time many counties economies propped themselves up buy dropping interest rates to record lows while business and personal debt continues to sky-rocket. This obviously couldn't continue.

I'm sure I'll get stonned for saying this but there are times when the world needs the likes of Margaret Thatcher (and example) to do the things that everyone knows NEED to be done but won't do. The last rate change in the US is a good example of the FED trying to be too nice but simply postponing the inevitable.

As someone who was a fan of the Howard Costello combo I'm beginning to have a lesser view of their management and can only hope that Rudd is the "economic conservative" he claims to be, because after the last election it seems that even Howard & Costello weren't.
 
I dont believe it was just loose lending standards and low rates that caused this. The big problem also seems to be that many banks and investment firms have been sidestepping their responcibility to hold reserves by taking their investments off their balance sheet. Thereby creating the net effect of reducing the % reserves to investment way way below the 8% (or there about) required level. in a normal case you wouldn't expect bad investments to be above 8% of total investment but now that the firms have say equivalent of 10+% of bad investments and 2% reserve.

Basically I think many will find that they are insolvent.

If they still did dodgy lending but kept it all on their books the extent of the problem would be fully known and i would suggest that while still taking a big hit these firms would still be viable.

Therefore i blame the off balance sheet investments that undermine the whole financial system basic rules. Criminal if you ask me :cautious:
 
wayneL said:
Those clowns who have taken the most innappropriate risks are now the ones being protected/rewarded by CBs, while the prudent instos/individuals get shafted.
Click to expand...

Then the way I see it you've got two options...if you can't beat 'em join them, or start a revolution.

I see that its unjust, but up to this moment have favoured the former approach as the latter option is still a long, long way from being a viable path of least resistance. Notwithstanding those who were the last to climb aboard the asset inflation Ponzi scheme and actually might have been affected with negative equity just now...too many other people have benefited and continue to benefit from what has happened.

I don't see any biting of the hand that feeds, yet. If anything I see the middle class blaming the poor (sub-prime, thats what it is after all) for borrowing what they can't afford to repay. As already pointed out, the upper middle and upper classes are getting away with their antics.
 
most importantly is what checks and balances will come out of this fiasco? the market is one continuous history of greedy people pushing the system until it collapses, and a new, more regulated system evolving from the ashes. i look at the market today compared to 1929 and thank christ for things like ASIC when i've got the fruits of labour tied up in something other than hunks of physical gold.

will government keep a tighter reign on banks and lending practices or are the multinationals now a law unto themselves and can only be taught a lesson by screwing up through their own excesses? i fear this is the case.

and make no mistake, this whole situation is bankers losing the plot for the $$$ signs in their eyes and taking everyone else down with them (including my bloody resource stocks)
 
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