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Thread: Why Did Economists Not Spot the Crisis?

  1. #76
    Global Moderator Defense Professional JAD_333's Avatar
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    Quote Originally Posted by editec View Post
    I concur. Once you allow BAD BUSINESS PRACTICES to advance, Banks really almost have no choice BUT to play by those bad rules. If they do not? Then while the music is playing, before band inevitably stops, those banks which are not playing loose and fast APPEAR not be be making as much money as they should.
    I think that's generally true, but there were banks, big and little, that didn't get carried away during the housing boom and maintained a prudent mortgage portfolio. Bank of America, for instance, was fairly clean when the housing market collapsed. Of course, it is now loaded with toxic mortgages thanks to its stupid purchase of Countrywide early in the crisis. In my area, there are a couple of regional banks that maintained strict mortgage requirements all through the boom.

    Hence the saner banks suffered while the insane banks saw their stock market prices rise.
    Not quite sure what you mean here.

    Except the BAD mortgages have been bundled with the good mortgages into those bonds with dubious values.

    Its damned hard to take that toxic omlet and separate out the original toxic eggs from the non toxic eggs.
    I am not sure that is the case. The way it was explained to me is that each mortgage within a derivative is tracked. In fact, the end came when a whizz kid at one of the big investment banks noticed that later derivatives were under-performing earlier ones, and began checking. He discovered that the quality of mortgage was declining. Countrywide and other non-bank originators were churning out a high percentage of weak loans, many of which showed no mortgage payments made at all. This particular investment bank immediately stopped buying mortgages which of course meant the mortgage companies that they typically bought from could no longer count on selling their paper to raise fresh cash to make more loans. One investment bank after the other followed suit. The mortgage companies got left holding the bag, and a foul bag it was. The investment banks also got stuck as did their clients who bought the later derivatives. BTW, many of the earlier derivatives are still performing in plus territory, but they are probably doing less well than before the bust.

    Because the creators of these bonds mixed them together in some kind of mathamatic DREAM to obfucate the toxicity that was in them.
    That could be, but it could well have been pure carelessness by the investment banks. We have to keep in mind that they were buying mortgages in bulk from companies that had sold them good paper in the early stages of the boom. By the time they smelled a rat, it was too late.

    Moodys and Standard and Poor did NOT do due diligence.
    Quite right, I think they assumed the sterling performance of the early derivatives meant all of them were equally good. Very poor DD indeed. Borderline criminal negligence in my view.
    To be Truly ignorant, Man requires an Education - Plato

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    Quote Originally Posted by JAD_333 View Post
    I think that's generally true, but there were banks, big and little, that didn't get carried away during the housing boom and maintained a prudent mortgage portfolio. Bank of America, for instance, was fairly clean when the housing market collapsed. Of course, it is now loaded with toxic mortgages thanks to its stupid purchase of Countrywide early in the crisis. In my area, there are a couple of regional banks that maintained strict mortgage requirements all through the boom.



    Not quite sure what you mean here.
    I mean that if you are running a commercial bank that is not returning the same profits as competors who were writing bad mortgages, the temptation to do so, just to keep your stock prices in line with industry norms must have been terribly hard to eschew.



    I am not sure that is the case. The way it was explained to me is that each mortgage within a derivative is tracked. In fact, the end came when a whizz kid at one of the big investment banks noticed that later derivatives were under-performing earlier ones, and began checking.

    He discovered that the quality of mortgage was declining. Countrywide and other non-bank originators were churning out a high percentage of weak loans, many of which showed no mortgage payments made at all. This particular investment bank immediately stopped buying mortgages which of course meant the mortgage companies that they typically bought from could no longer count on selling their paper to raise fresh cash to make more loans. One investment bank after the other followed suit. The mortgage companies got left holding the bag, and a foul bag it was. The investment banks also got stuck as did their clients who bought the later derivatives. BTW, many of the earlier derivatives are still performing in plus territory, but they are probably doing less well than before the bust.
    The day the music died.



    That could be, but it could well have been pure carelessness by the investment banks. We have to keep in mind that they were buying mortgages in bulk from companies that had sold them good paper in the early stages of the boom. By the time they smelled a rat, it was too late.
    I don't think they were careless. I think they were lied to about the risk associated with these bundled mortgages.



    Quite right, I think they assumed the sterling performance of the early derivatives meant all of them were equally good. Very poor DD indeed. Borderline criminal negligence in my view.

    We're of the same opinion on that score.

  3. #78
    Global Moderator Defense Professional JAD_333's Avatar
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    The story is getting clearer and clearer with every passing year. In 5 or 10 years, maybe more, we'll know more about how the crisis evolved beyond the greed and ignorance.
    To be Truly ignorant, Man requires an Education - Plato

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    Well, our economists will certain devise narratives to help us imagine that they understand it.

    And then they'll debate those narratives forever, just like we see happening in the debate about the GREAT depression of the 30s.

    One thing I am quite sure of: too much money went into too few hands for far too long.

    That cannot lead us to a healthy supply/demand formula for a healthy consumer driven economy forever.

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    There's a goodchance that in ten years time we will be too busy dealing with the next crisis. That is if the worst of this crisis is really over (there appear to be some real nasty suprises hidden in the Chinese economy)

    After all who is really studying the S&L of the 1980-1990's crisis at the moment?

    I say there are good odds that "history" will repeat itself.

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    As long as we keep missing the point that when BIG CAPITAL has too much money in comparison to demand, these banksters WILL create bubble after bubble in the investment market.

    We went thought merger and aquisition bubble, the commercial real estae crises,the Mexican crises, the Russian crises, the Hong Kong Crises and now we're mired in the real estate AND DERIVATIVEs crises.

    All because why?

    Too god damned much capital chasing too few profits.

    Commercial banks are GOING TO LEND as long as that's how they make their profits.

    And they are going to lend even when the lending is dubious ESPECIALLY if they are NOT afraid of going down because of it.

    Here's a thumbnail of the last 30 years or so focusing on mostly CITIBANK's continued diasters.

    Walter Wriston, Citibank, and the Rise and Fall of American Financial Supremacy

    Anybody who thinks these problems are the result of creeping socialism, communism, liberalism or any other kind of ISM is blowing right wing partisan smoke.

    These problems are caused by inefficiencies in the markets due to this politically sanctioned and exacerbating imbalance between capital and demand.


    Banks are and will be predators if we ALLOW them to be so.

    And for the 40 years we have allowed big capital every advantage at the expense of the workers who are that DEMAND side of the capitalistic equasion.

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