Financial Crisis

[kEiThZ]

So it comes down to right leaning political policies of deregulating industries that cannot control themselves. Harper & Tories believe in deregulation. It's strange that people elect leaders to run their government who outright tell them they do not like government. The bad results of this kind of voting can be seen in the last 8 years of incompetence in the US.

I don't think it was any ideologically driven policy that brought about the current crisis, in so much as a lack of policy and the timing of events. It's simplistic to say that the Republicans or Democrats were responsible for this. Even now, for example, politicians on both sides of the aisle need tax breaks to pass the bailout package. That's bad policy. I think the crisis is a result of an inflow of the extraordinarily high savings from overseas (particuarly Asia). Capital has to go somewhere. Add that, to Greenspan's attempt to avoid deflation (a genuine concern during the end of the Clinton era) and you have the ingredients for today's crisis. Even saying it was deregulation is difficutlt. It wasn't so much as deregulation as a lack of rules on how to handle new products like mortgage backed securities. With all the capital flying around, it would have happened anyway. In the long run, what's needed is policies encouraging Americans to increase their savings rate and an end to tax write-offs for mortgages. Simplistic attempts to blame one or the other political party is hardly going to prevent another crisis in the future.

 

[Mot]

I said right leaning policies caused the crisis which can be applied to both Democrats and Republicans, neither of which I would label myself as I am far too left to identify with either of those parties. I just used the last 8 years as an example of my observation.

 

[cuzzin_elias]

I am curious, if American Banking became more like Canadian banking then why do we not have the sub prime mortgage mess here?

American banking differs greatly from ours. For one, we don't offer ARM type mortgages that allow people to pay interest only while the principal increases. It's also much harder to qualify for a loan here, what happened down south is outright fraud with lenders aggressively loaning money to people they knew would never pay back and then in turn sold these junk securities on the market as AAA debt.

 

[cacruden]

I said right leaning policies caused the crisis which can be applied to both Democrats and Republicans, neither of which I would label myself as I am far too left to identify with either of those parties. I just used the last 8 years as an example of my observation.

Deregulation is both bad and good, regulation is both bad and good. The minimum regulation needed should be implemented.... which is not always the easiest to figure out.

The problem is that over time, the tendency is to add regulation to cover each individual "problem" that occurred, which leads to a mess of regulation which reduces the efficiency (and can cause a lot of stupid litigation) especially in the United States - which is very costly.

An example of stupid over-regulation that I ran into when I was on the condo board. The lights in the hallways and garage had to be kept very bright (and therefore waste electricity), legally you cannot have them attached to a motion detector - you cannot dim them at night (night lights) - or - turn off some of them - probably because something happened once and a new regulation was added. We had a problem with the company that we were contracting for cleaning, there contract was up for renewal - so we went with another company. Under law - that company had to offer those positions to the current crew from the other company. So we ended up with the same people that caused the problem in the first place. This happens everywhere and in everything. Health Canada is one of my biggest complaints with this -- in one case forcing a small specialty yogurt manufacturing out of business - because they dared to sell unpasturized yogurt.

Basically over time everything tends to get regulated to death.

Instead of saying deregulation or over-regulation is the problem - do some research to back it up and identify what change in regulation (if it was the cause) caused the problem (identify the regulation - and the reasons).... don't just parrot political spin.

It is quite possible that illegal behaviour at Fannie Mac and Fanny Mae - was the root cause of the problem. It might not be the regulation in the first place. Like many things - you cannot stop criminal behaviour - just punish it afterwards.

 

[Glen]

So if there is a well run company (or crown corporation) that is willing to accept higher risk and charge appropriate premiums to do so, they should not be allowed to do that? How is that capitalistic? Should we also disallow second mortgages as well? Just ban it all. Unless you are a cookie cutter case, no mortgage for you!

Who gives a shit about being 'capitalistic'. The markets already except such measures. The are all sorts of regulatory infringements on 'capitalism', and for good reason. No naked swaps, futures margins etc.

How is demand for health insurance inelastic? In the Canadian socialist paradise maybe. But in most of the world, you get what you pay for: higher premiums for better health care.

Not the insurance, the product that is being insured. Cheaper health insurance does not make people sicker. More expensive car insurance has a disproportionate effect on making people drive better.

There's no such thing as an average downturn. In the current slowdown, prices are dropping by 20% or more in the US. Even under your threshold, defaults would be high.

The average decrease in the US has been 16.5% so far. Do the math.

You are missing the role of the banks and the MBS. Simply setting the bar to 20% would not necessarily have prevented banks from offering teaser rates or selling off bundles of risky mortgages as securities and it would not have prevented AIG from insuring these bundles. All that would still have happened if the bar was set at 20%. The only difference, perhaps, is that the impact might have been lessened and more spread out over time as there would have been fewer people playing the housing market.

Everyone got carried away. Do you really think that people behave as rationally when they can buy a house for no money down as they do when they face the potential loss of their deposit? Can you not see how, by any and all the measures discussed (0% down, teaser rates etc.), the market was over stimulated, and that that stimulation helped further increase prices?

 

[kEiThZ]

Everyone got carried away. Do you really think that people behave as rationally when they can buy a house for no money down as they do when they face the potential loss of their deposit? Can you not see how, by any and all the measures discussed (0% down, teaser rates etc.), the market was over stimulated, and that that stimulation helped further increase prices?

Fair enough. The market was over stimulated. But it's rather simplistic to say that it was just one policy: the 100% mortgage, as if the teaser ARM rates/subprime mortgages, interest only mortgages, the lack of credit checks, cases of outright fraud, the builders who overbuilt (by some projections a decade's worth of housing stock in some areas), all had nothing to do with it. I am willing to bet that all those latter points had far more to do with the crisis than the 0% down mortgage.

I think it's ridiculous to say that someone with a good job, no debt, good credit rating should not have a shot at buying a house early, even with insurance to cover the risk of a depreciated asset received from his/her default. That is the smart decision after all....buying a house instead of paying rent. Yet we should make it more difficult to do that, for some vague fear that a crisis might result from that one singular decision? Even the argument about people walking away does not hold water. I think it's only a small percentage of people who would walk away and risk a bad credit rating. And remember that in Canada, this tends to have far more serious consequences than the US owing to reduced competition for lending. And if times were truly bad in a recession, then you would more than likely get defaults anyway regardless of the owner's downpayment. If he can't pay, he will walk away.

One of the other issues, that hasn't come up is the nature of the homebuilder's business in the US. In Canada, many firms are smaller and family owned. That's not the case in the US where many builders are listed on the NYSE. The incentive to overbuild is probably stronger when shareholders are pushing you to gain market share and increase profitability in the short term, whereas smaller tightly controlled companies would likely take the long view.

 

[cdr108]

9000 DOW by 2009.

 

[jade_lee]

The financial institutions are still calling the shots, this is apparent in the bailout.
The "banking" crisis has offered up a threat to the people on Main Street, they say they can't afford to lend money even to each other and as a result the credit market will be squeezed to the max with tightened up lending practices etc. Bailouts by definition are useless without a plan.....what is the plan?
What happened to those record profits posted this past decade by the financial institutions who are now manically trying to convince the American tax payer to save pampered leaders (aka captains of industry) who have engaged in fraudulent selling of risk to others all bundled to appear highly rated as sold American derivatives?
This is a problem of the wealthy investors who have manage to hold a symbolic gun to all of our heads...if they fail we fail and clearly they care about themselves.

 

[kEiThZ]

Bailouts by definition are useless without a plan.....what is the plan?

The plan is for the government to absorb the bad debt, essentially boosting credit ratings of various financial institutions to the point where they start lending to each other again. In a nutshell, the fed is injecting liquidity through the backdoor....

What happened to those record profits posted this past decade by the financial institutions...

They went to shareholders.... which also include many a regular joe who owns bank stock and has mutual funds.....

 

[afransen]

Well, billions also went to the people responsible for the mismanagement, in Manhattan and London, and elsewhere.

 

[kEiThZ]

Well, billions also went to the people responsible for the mismanagement, in Manhattan and London, and elsewhere.

And they should be prosecuted for it.....but it's hardly an indictment of capitalism that many (jade_lee for example) make it out to be. What is really needed to combat these issues though is more shareholder powers.....and more activist shareholders.

 

[afransen]

I'll agree. It is indictment of the culture of management and ownership, executive compensation, deregulation or 'misregulation' (an ideological failure).

 

[kEiThZ]

I'll agree. It is indictment of the culture of management and ownership, executive compensation, deregulation or 'misregulation' (an ideological failure).

Sadly, we'll make rules for this crisis...and in a decade we'll have another crisis when these rules fail. Many of the so-called poor regulations are a result of previous regulations that tried to address other problems....when salary rules for CEOs were tightened, stock options became the norm, encouraging more risk taking that would drive the stock up, probably contributing to today's problems. That's why I look at all the alarmists today pushing for new rules and it makes me shake my head. Let's sort this out first. It's idiotic to be arguing about who started the fire and how to prevent the next one while the roof is burning above you.

 

[afransen]

It seems to me that executive compensation should be based on the performance of the firm something more like five years down the road and not six months.

I agree that crying about this is spilt milk. That's why I haven't really paid much attention to the furor, other than delaying my RRSP contributions until I sense a bottom and markets stabilize somewhat.

And if anything, at this point I am concerned about the rapidly mounting government debt in the US, and the long-term negative repercussions.

 

[Mot]

Instead of saying deregulation or over-regulation is the problem - do some research to back it up and identify what change in regulation (if it was the cause) caused the problem (identify the regulation - and the reasons).... don't just parrot political spin.

It is quite possible that illegal behaviour at Fannie Mac and Fanny Mae - was the root cause of the problem. It might not be the regulation in the first place. Like many things - you cannot stop criminal behaviour - just punish it afterwards.

It is not fair or smart to chide me for saying right wing policies allowing free markets (predatory lending as an example) to do whatever they want caused the mess. While your response to me is "it's quite possible that illegal behaviour..." which itself means you didn't do the research. So please continue spinning for our enjoyment.
Sadly, I was learning from you until you showed me you don't really know at all.