.... F--A--I--L--I--N--G

Quote :

"Phil Gramm, one of John McCain’s chief economic advisors and a chief architect of deregulating the banking industry while a US Senator, has called us a nation of whiners. This is a man who is currently the vice chairman of UBS bank, making in excess of $500,000 per year in compensation. I wouldn’t be whining if I made more money than 99.9% of all Americans either. He has certainly earned that pay. His employer has written off $37 billion of mortgage debt so far. Stockholders are probably thrilled with his performance, as the stock has collapsed from $62 to $19 in the last year. Sounds like he is Treasury Secretary material in a McCain administration. Of course, there are Democrats who are at least as financially illiterate as Mr. Gramm. Senator Chris Dodd from Connecticut showed his financial acumen when questioned about Fannie Mae and Freddie Mac. "They have more than adequate capital, in fact more than the law requires. They have access to capital markets. They're in good shape. To suggest somehow they're in major trouble is not accurate." Later that day, Hank (Mr. Bailout) Paulson committed our tax dollars to save these horribly run institutions. Fannie Mae has lost $7.7 billion in the last 9 months. Freddie Mac has lost $5.2 billion in the last 9 months. They are leveraged 60 to 1. As the current housing crisis continues to expand, these two companies will have to write off billions more in loans and are effectively insolvent. Mr. Dodd is lying to the American people because he doesn’t think we can handle the truth. The taxpayer will again be responsible for bailing out two of the worst run organizations on the planet. This bill will be a whopper. Jim Rogers, famed investor, said, "They’re ruining what has been one of the greatest economies in the world. Bernanke and Paulson are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this." --Jim Quinn - Senior Director of Strategic Planning, The Wharton School, University of Pennsylvania "

And Ron Paul weighs in....

Quote :

" The two GSE's have been disasters waiting to happen, as I and many others have warned over the years. It was bad enough that Fannie and Freddie were able to operate with significant advantages, such as lower borrowing costs and designation of their debt as government debt. Now, the implicit government backstop has turned out to be an explicit backstop, just as we feared. The Greenspan reflation of the economy after the dot-com bust pumped additional liquidity into an already-skewed housing market, leading to an unsustainable boom that from many accounts has only begun to unravel. With a current federal funds rate of two percent, and inflation at over four percent, the Fed is currently sowing the seeds for another economic bubble. At the heart of this economic malaise is the Fed's poor stewardship of the dollar. The cause of the dollar's demise is not the result of a purely psychological response to public statements on US dollar policy, but is rather a reaction to a massive increase in the money supply brought about by the Federal Reserve's loose monetary policy. Every government bailout or promise thereof leads to moral hazard, the likelihood that market actors will take ever riskier actions with the belief that the federal government will bail them out. Bear Stearns was bailed out, Fannie and Freddie will be bailed out, but where will the line be drawn? The precedent has been established and the taxpayers will end up footing the bill in these cases, but the federal government and the Federal Reserve lack the resources to bail out every firm that is deemed “too big to fail.” Decades of loose monetary policy will lead to a financial day of reckoning, and bailouts, liquidity injections, and lowering of the federal funds rate will only delay the inevitable and ensure that the final correction will be longer and more severe than it otherwise would. For the sake of the economy, I urge my colleagues to resist the temptation to give in to political expediency, and to oppose loose monetary policy and any further bailouts. "

We are truly heading for a "Dark Night" (apologies to Batman), if we keep allowing the gov't to interfere in the free market. Politicians constantly try to manipulate the economy to benefit their potential voting base, and the rest of us eventually pay the price.

7/18/2008 9:54:26 AM

I don't think we saw the dollar inflate so much over time until after we started the federal reserve system and went off the gold standard. It's scary that money is only backed up by the people's faith in the government to cover its debts. I think we'd be a lot better off if we got rid of the reserve banking system and went back to the gold standard, all reserve banking does is create phantom money out of thin air, with nothing of intrinsic value to back it up.

7/18/2008 2:08:33 PM

I wonder how high Interest rates would be if the FED didnt artificially lower them.

My bet is I could put money in savings accounts and actually SAVE up money to buy things I want instead of having to buy things on credit.

7/18/2008 2:21:58 PM

Dude, saving money is just un-American.

7/18/2008 2:23:33 PM

yeah, maybe if i just rack up a lot of debt the FED will bail me out.


It will have to be $TEXAS though, I need to be "too big to fail"

[Edited on July 18, 2008 at 2:33 PM. Reason : $CHINA ]

7/18/2008 2:31:47 PM

from http://www.baltimorechronicle.com/2008/060908Lendman.shtml (conclusions from the article may be a bit exaggerated though)

7/18/2008 2:52:48 PM

May they rest in peace.

7/18/2008 3:43:04 PM

Quote :

"I think we'd be a lot better off if we got rid of the reserve banking system and went back to the gold standard"

You do realize we still had fractional reserve banking under the gold standard, right? All the gold standard did was turn recessions into "deflationary re-adjustment periods."

And that graph is skewed by magnitude. If the dollar devalues by 50% in 1945 it jumps up 3 pixels. But if the dollar devalues by that same 50% in 2000 it jumps by 300 pixels.

7/18/2008 3:43:17 PM

^
Fractional reserve banking is a different animal than the U.S. Federal Reserve system. Granted, fractional reserve banking is easy to mis-use with a gold-standard or any other type of system.

The real comparasion is a fiat system where paper money is worth what Ben Bernanke says its worth..vs a commodity system where the people decide how much the money is worth.

..I'm assuming that, even though you don't care for the graph, you would still admit that the dollar's spending value has dropped over 95% since the Fed has been "protecting it".

7/18/2008 7:09:13 PM

Quote :

"you would still admit that the dollar's spending value has dropped over 95% since the Fed has been "protecting it"."

Another completely random fact: The US economy has grown 1200+% since the Fed has been protecting it

7/18/2008 7:36:30 PM

^^The Fed does not set prices, people do. As such, between the two options, under a gold standard Congress dictates the price of gold. Under the current system, people are free to charge whatever they want for anything, even gold.

7/18/2008 9:20:46 PM

[Edited on July 18, 2008 at 9:22 PM. Reason : dpost]

7/18/2008 9:21:12 PM

i officially hate this thread for making me spend 5 hours on Wikipedia. damn you

7/18/2008 11:15:13 PM

Quote :

"We are truly heading for a "Dark Night" (apologies to Batman), if we keep allowing the gov't to interfere in the free market. Politicians constantly try to manipulate the economy to benefit their potential voting base, and the rest of us eventually pay the price."

I was under the impression that decreased government "interference" (under Bush) was a contributing factor in their failures. Not the other way around.

7/19/2008 12:35:13 AM

Bridget, you're out of your element.

7/19/2008 12:39:58 AM

^^

Quote :

"“What’s happened kind of speaks for itself,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “You had this effort to weaken the government’s role. There was this conscious effort to turn things over to the private sector, and it failed.” But there is a parallel narrative, the story that critics and competitors of Fannie and Freddie have told for years: how the two companies exploited their pedigree as entities backed by the government to secure an unfair advantage over the private sector. They swelled into highly leveraged behemoths, it was said, on the implicit guarantee that the government would step in and rescue them if they ever got into trouble. This allowed them to borrow money more cheaply than their competitors could, enabling them to make loans more cheaply. That secured more business and rewarded their shareholders, along with their handsomely compensated executives. It emboldened them to trade in highly risky investments. “They were using their privileged position as favored children of the government to dominate the market, and taxpayers were on the hook for substantial risk,” said Martin N. Baily, a chairman of the Council of Economic Advisers in the Clinton administration. “You couldn’t possibly say this was a pure unfettered market.” The government was getting something for its protective largess. It was using Fannie and Freddie to pursue the social goal of broader homeownership, particularly among racial minorities."

http://www.nytimes.com/2008/07/14/washington/14guarantee.html

7/19/2008 12:44:06 AM

Also, Chinaman is not the preferred nomenclature.

7/19/2008 12:50:58 AM

Walter, this isn't a guy who built the fuckin' railroads here. He peed on my rug.

7/19/2008 1:08:12 AM

...tied the room together...

^^^So, according to that, we've got two stories:

Story #1 involves increased private natures and decreased regulation.

Story #2 involves undue government protection and decreased regulation.

Both stories involve decreased regulation (decreased government "interference").



I can't walk away from this thing thinking GOVERNMENT = BAD when we've seen similar collapses in entirely private institutions where government protection wasn't an issue.

7/19/2008 2:26:13 AM

Quote :

"“They were using their privileged position as favored children of the government to dominate the market, and taxpayers were on the hook for substantial risk,” said Martin N. Baily, a chairman of the Council of Economic Advisers in the Clinton administration. “You couldn’t possibly say this was a pure unfettered market.” "

Didn't lonesnark just say that all banks have this access, and this is business as usual. Fannie/freddie's safetynet isn't what caused them to make bad decisions, it was because (or so i've heard-- as bridget seems to think as well maybe) a new deregulation allowed lenders to offer a new type of ballooning interest rate that was disallowed before because they knew this kind of thing would happen.

7/19/2008 2:35:50 AM

If I did then I was mistaken. Fannie and Freddy have an open line of credit with the Government to borrow money without putting up any collateral. What private banks have access to is the discount window where they can take out loans provided they have sufficient collateral to cover it.

Now, the Fed has expanded what it will accept as collateral to AAA rated mortgages, but it still requires collateral. As such, if a private bank owes money to the Fed and goes belly up the tax payer will take possession of the collateral, losing out on nothing but costs and interest. If Freddy or Fanny go belly up the Government loses not only costs and interest, but principle as well.

Investors are quite perceptive. As far as markets are a prediction of the future we have known since their inception that Fannie and Freddie were going to fail eventually and have the government bail them out. We know this from their lower rate debt; investors have always known this would happen. As such, if it did not happen now then it would just happen later.

BridgetSPK, but when those private institutions collapse they only take their own investors down. When Freddie and Fannie collapse they take the Government down with them. For example, as Fannie and Freddie debts are now tied together explicitly, their troubles have dramatically increased the anticipated risk of federal bonds. That is right; whatever trouble occured in private sector institutions our government remained beyond reproach; not now: the price to insure a U.S. Treasury bond against a default by the U.S. Treasury just doubled.

7/19/2008 9:52:52 AM

Quote :

"Now, the Fed has expanded what it will accept as collateral to AAA rated mortgages, but it still requires collateral. As such, if a private bank owes money to the Fed and goes belly up the tax payer will take possession of the collateral, losing out on nothing but costs and interest. If Freddy or Fanny go belly up the Government loses not only costs and interest, but principle as well."

Didn't you mean

"AAA rated" mortgages? Those same mortgages that were fraudulently rated by the Moodys, etc?

7/19/2008 9:58:53 AM

If the ratings have been reduced to something other than AAA then, as I understand it, they would no longer qualify as acceptable collateral for the Fed at this time. I don't remember reading anyone having trouble keeping their Fed loans collateralized, maybe you have?

That said, because the Fed by law gets first dibs over company assets in the event of bankruptcy, I do not believe anyone in history has ever not eventually paid back a Fed loan in full.

[Edited on July 19, 2008 at 2:06 PM. Reason : .,.]

7/19/2008 2:05:10 PM

Uh...EQUITY, as I understand it, is not acceptable collateral to the Fed.

*hoom hoom*

7/20/2008 5:07:01 AM

No one said it was, so why?

7/20/2008 10:33:40 AM

This is WAMU mortgage pool is just one example, but it is a random example. 92.6% of the fund was rated AAA when it was issued, and currently, 91.7% of the fund is STILL rated AAA.



As you can see, as of June, more than 32% of the fund was 60 days delinquent or worse, including 14.82% currently in foreclosure, and 10.48% that has been reposesed by the bank.

It has been followed sense December at Mish Shedlock economic blog, see: http://globaleconomicanalysis.blogspot.com/2008/07/fannie-and-freddie-waterfalls-are-too.html

Don't let any talking heads fool you, AAA mortgage pools contain plenty of garbage.


[Edited on July 20, 2008 at 1:44 PM. Reason : Fixed Image]

7/20/2008 1:40:33 PM

^ Most AAA-rated MBS are the upper tranches, which don't take hits to principal until all subordinate tranches are wiped out. This, coupled with over-collateralization and other credit support, keeps the principal from being hit even with high default rates, so the stats on the underlying pool are not always foretelling of expected losses on the upper tranches. That said, it's still possible these AAA tranches should be downgraded; however, given the information at hand, it isn't as easy to simply point to the default rates as evidence that a downgrade is needed. S&P, Moody's and Fitch have been watched meticulously by the Fed and the SEC lately, so I seriously doubt they would keep a AAA rating on securities that are blatantly not AAA. They have every incentive now to be as conservative as possible in order to avoid regulation.

[Edited on July 20, 2008 at 4:07 PM. Reason : .]

7/20/2008 4:06:05 PM

Quote :

"The Fed does not set prices, people do. As such, between the two options, under a gold standard Congress dictates the price of gold. "

I'm not talking about the price of goods, I'm talking about the value of the currency. Average citizens cannot flood the market with fiat dollars like the Fed. does. The gov't has allowed a banking cartel to weaken the value of our currency by inflating the supply.

Quote :

"The US economy has grown 1200+% since the Fed has been protecting it "

That doesn't change the fact that everyday that goes by, the money in your pocket is becoming more and more worthless.

7/21/2008 1:35:33 AM

^^ I'm not too knowledgeable on Mortgage based securities, so I may be missing something.

But, the way I look at that, 25.3% of the mortgage pool is currently either in foreclosure or owned by the bank, and that number is still rising. Meanwhile, only 8.3% of the fund is rated something other than AAA. That makes it hard for me to see how the AAA principal is not going to take a significant hit.

That, and I'm not sure I put too much faith in the rating agencies, considering their in-actions with MBIA and Ambac.

7/21/2008 10:24:28 AM

Quote :

" That doesn't change the fact that everyday that goes by, the money in your pocket is becoming more and more worthless."

I don't care if the money is more worthless as long as everything else is becoming more worthless too - which is the case if we follow your Libertarian logic.

7/21/2008 10:31:07 AM