Investor Sentiment

[GordMay]

Thanks Tao, for a literate, learned, and thoughtful account of a difficult subject.

[Pelagic]

Now...What the hell should i do with my term deposits in the bank?

[phiggins]

TaoJones very interesting analysis got me wondering what exactly derivatives were. A search of the internet and I found this very insightful article explaining what they are and why they are (were) a looming disaster. Interestingly this was written in Nov. 2005 and now seems to have come to past.

The Coming Disaster in the Derivatives Market:
Safe Haven | The Coming Disaster in the Derivatives Market

Paul

[skatastrophy]

Originally Posted by Pelagic

Now...What the hell should i do with my term deposits in the bank?

Make sure they're in FDIC insured vehicles.

With regards to future banking plans, local Credit Unions are a great bet during uncertain financial times:

The 15-Minute Tip: Making the case for credit unions - MarketWatch

[anotherT34C]

Originally Posted by David M

Gord,
Its called the Community Reinvestment Act which was voted on by a Democratic congress and signed into law by Jimmy Carter in 1977.

Community Reinvestment Act - Wikipedia, the free encyclopedia

It gave incentives to help low income borrowers get mortgage loans.

From WIkipedia:
Relation to 2008 financial crisis

See also: Subprime mortgage crisis In an article for the New York Post, economist Stan Liebowitz wrote that the CRA encouraged a loosening of lending standards throughout the banking industry despite warnings of default. Banks were allowed to loan to consumers who were not credit worthy with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." According to Liebowitz, the chief executive of Countrywide Financial said that in order to approve minority applications, "lenders have had to stretch the rules a bit."[42]

In a piece for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, partially attributed the current economic downturn to the Community Reinvestment Act, charging it with "forcing banks to lend to people who normally would be rejected as bad credit risks."[48]

A Wall Street Journal editorial on the 2008 financial crisis argued that "Washington is as deeply implicated in this meltdown as anyone on Wall Street" because politicians "promoted housing and easy credit". The editorial lists the CRA as one of the "subsidies and policies," and stated that it "compels banks to make loans to poor borrowers who often cannot repay them".[49]

In an article for the Wall Street Journal, Austrian school economist Russell Roberts wrote that politicians and policy makers created artificially high housing prices and artificially reduced the danger of extremely risky assets through requirements Fannie Mae buy ever increasing numbers of “special affordable” and often subprime loans, through strengthening CRA regulations and increasing bank loans to low- and moderate-income families, through creating a capital-gains exclusion for housing up to $500,000, and though the Federal Reserves’ unusually low interest policies.[50]


You may want see this video. Although it does have a political slant, it explains things quite well. As far as I am concerned, neither political party escapes some responsibility.

http://www.youtube.com/v/1RZVw3no2A4&hl=en&fs=1

What percentage of sub-prime loans were CRA regulated, vs those not? Isn't that an important piece of the blame puzzle you're putting together?

[Alexei]

Stan Liebowitz, economics Prof from U Texas, Dallas, wrote a good report on what happened.

Anatomy of a Train Wreck: Policy Reports: The Independent Institute


Interesting read.

[David M]

Originally Posted by anotherT34C

What percentage of sub-prime loans were CRA regulated, vs those not? Isn't that an important piece of the blame puzzle you're putting together?

I'm not putting together a "blame puzzle" I am referencing the law and what a number of experts believe. Go argue with the experts by presenting your own material which counters the experts. Thats the best way to debate the topic.

[GordMay]

I don’t think that repeating the opinions of ideologues, at either end of the spectrum, has much chance of educating us, nor changing anyone’s mind, about the causes of the meltdown (nor anything else).
Unsupported statements, including mine, certainly aren’t informative (except to reveal one’s bias), and shouldn’t even be considered argumentative.

[Maren]

Originally Posted by Pelagic

Now...What the hell should i do with my term deposits in the bank?

You’ve left too much unsaid to give you a real answer. Personally, I don’t think you should say too much more. To crystallize your thinking, however, answer these questions to yourself. Putting it out for everyone else here to read would possibly be foolish.

1.How much money do you have beyond your immediate needs at your current spending rate? A week, six weeks, six months?

2.What is the actual dollar figure taking into your employment security status and subtracting off a suitable amount for emergencies and unexpected expenses. 10k? 100k?, 1.5M?

3.What is your capacity for risk? Could you lose 10% of that and still not worry? Or is the number more like 5% or 60%. I think we see from the market, which is down 30% off its high, much more than about 20% is too much for most people.

4.Do you prefer to manage the money yourself or would you rather someone else manage it for you? Do you have the expertise and/or interest to manage it now?

5.Do you think there is a system out there that will be able to make good on (implied) promises of a particular rate of return beyond what you can get at a bank?

6.Are you the sort who believes you shouldn’t put all your eggs in one basket or are you the sort who thinks you should put all your eggs in one basket and then watch that basket very closely?

My only other comment is, if you are the person who said yes to number five above, you need to be very careful. You are in danger of proving the addage about a fool and his money still holds true. If you don't think that is the case, you still aren't off the hook. You now have to evaluate what is out there.

You may also wish to review TaoJones's thread 'The Black Swan'.

[sneuman]

I think it's naive to try to pin this on one party or the other. Yes, the Republicans have been on the deregulation path for decades, so it's partly their fault. The Democrats have fought for home ownership for lower income individuals, so it's partly their fault.

BUT, let's not be stupid. The mortgage lenders made these loans because it made them money. They flipped mortgages to Wall Street, who flipped them to Beijing and London. The U.S. mortgage market looked like a good deal because investors were working off old data ... data that didn't include all those NINJA loans. They were looking at numbers showing something like a 4% default rate, when the rate was closer to 50%

Fannie and Freddie's role amounted to backing what ended up being bad loans (for the lowest tranche).

This Public Radio International program is about the best I've heard on the subject:

This American Life

[Maren]

Originally Posted by sneuman

I think it's naive to try to pin this on one party or the other. Yes, the Republicans have been on the deregulation path for decades, so it's partly their fault. The Democrats have fought for home ownership for lower income individuals, so it's partly their fault.

Normally I would agree with you. And while some might come here to get away from the barrage of politics, others of us feel we have to try to inflict our opinions on each other in the bizarre hopes of influencing another person’s vote.
After all it’s the political silly season.

[skatastrophy]

Originally Posted by sneuman

I think it's naive to try to pin this on one party or the other. Yes, the Republicans have been on the deregulation path for decades, so it's partly their fault.

Preface: I'm not republican, so I'm not getting defensive or combative.

I think it's naive to think that regulation will fix anything. If you look at SOX (Sarbanes Oxley) as a knee-jerk reaction to Enron et. al. it hasn't fixed anything. It just costs corporations money and makes them less agile in business.

Regulation wouldn't have fixed the problems that are occurring right now. It would have just cost the taxpayers money and it would give us someone to blame.

/endLibertarianRant

[David_Old_Jersey]

Originally Posted by skatastrophy

Regulation wouldn't have fixed the problems that are occurring right now. It would have just cost the taxpayers money and it would give us someone to blame.

Regulation did prevent the current problems. For decades. Problem was allowing, encouraging and then defacto forcing banks to take part in nonsense.

Simple solution was to understand that a functioning banking system is a fundamental part of the Capitalist system. and for that you need banks and because it is fundamental you make damned sure you keep certain banks doing boring old banking (even with a few knobs on to keep folk from getting comatose ).........And let the Investment Banks / Hedge Funds etc alone try and become masters of the universe (with their own money or the money of investors, not borrowed via the boring banking system on an industrial scale) - and if (and when) some fail it does not fundamentaly matter. Expensive for some and messy but fundamentally not mattering (and in many respects a good thing ).....and the only way to create that situation was by Govt Regulation. Wayyyy too late now for that to be part of the fix. If their is one - "Buddy, can you spare a trillion?"

[sneuman]

Originally Posted by skatastrophy

Preface: I'm not republican, so I'm not getting defensive or combative.

I think it's naive to think that regulation will fix anything. If you look at SOX (Sarbanes Oxley) as a knee-jerk reaction to Enron et. al. it hasn't fixed anything. It just costs corporations money and makes them less agile in business.

Regulation wouldn't have fixed the problems that are occurring right now. It would have just cost the taxpayers money and it would give us someone to blame.

/endLibertarianRant

well, it would have to cost the taxpayers a HELL of a lot to make up for the insane cost of this bailout.

[Alexei]

Originally Posted by David_Old_Jersey

Regulation did prevent the current problems. For decades. Problem was allowing, encouraging and then defacto forcing banks to take part in nonsense.

Simple solution was to understand that a functioning banking system is a fundamental part of the Capitalist system. and for that you need banks and because it is fundamental you make damned sure you keep certain banks doing boring old banking (even with a few knobs on to keep folk from getting comatose ).........And let the Investment Banks / Hedge Funds etc alone try and become masters of the universe (with their own money or the money of investors, not borrowed via the boring banking system on an industrial scale) - and if (and when) some fail it does not fundamentaly matter. Expensive for some and messy but fundamentally not mattering (and in many respects a good thing ).....and the only way to create that situation was by Govt Regulation. Wayyyy too late now for that to be part of the fix. If their is one - "Buddy, can you spare a trillion?"

The only bone I'd pick with this is the assumption that everyone seems to be making that it was de-regulation that caused this problem.

I would ask why whenever there is an economic problem, we automatically blame it on de-regulation and the free market, but I already know the answer to that one (no education in basic economics in this country).

Look into what happened here more deeply (ie - beyond the sound bites on TV) and you'll find his wasn't started by de-regulation at all, but by government policies imposed on the industry. That ain't de-regulation, folks.