Credit, Monetary Policy, Depressions, and More!

[DuncanONeil]

I was kind of hoping that the discussion would not head in this direction. Many of those "targets" were imposed by an entitiy without the banking industry!

The Making of the Credit Crunch.

The trouble with the MBSs you describe is not that they were based upon mortgage loans, but that some of the loans that were packaged up should never have been made in the first place. This was entirely the fault of bankers who encouraged people to buy properties they could never afford. They had targets to meet: so many loans a week, or $/£ hundreds of thousands each month would produce a tasty commission for the adviser (who probably thought he was giving good advice according to his company's criteria). But scant attention was paid to the ability to repay ... perhaps it was thought that the usual provisions for bad debts would suffice, despite the careless lending policy being followed.

Now MBSs were bought by banks all over the world, believing each other's assurances that these were safe investments, backed by property, whose value was almost certain. It seems, in fact, that the amount of these investments the banks were holding was phenominal - Icelandic banks holding more than the whole population of their country could afford, for example. As the reality began to dawn on these bankers (cockney rhyming slang for something very uncomplimentary) they began to put up the shutters and stop lending against such securities. They also found they could not raise money against them, and so the crisis began, affecting one country's economy after another.

This is a gloabl problem affecting almost every economy in the world. It requires a global solution, which means international agreement and co-operation. It would be wrong and self-defeating to adopt isolationist, beggar-my-neighbour policies, because, as we have seen, if the banks ruined themselves by refusing to assist each other, so too will nations.

[SadisticNature]

If money *was* a store of wealth, then there could be no such thing as a mutually beneficial trade. All free trade would be neutral at best as the amounts of wealth exchanged would at best be the same (as only a fool would knowingly pay more wealth for something than he received).

Agree with all of your post up until here. Mutually beneficial trade can exist through exchange of equal amounts of wealth. Trading wealth in the form of money for raw materials to do work can be useful for both the producer of raw materials and the manufacturer. The manufacturer reduces their store of wealth to acquire the capacity to do valuable work, while the miner sells their end products increasing their store of wealth. This can easily be mutually beneficial trade under an idea of money as a store of wealth.

[SadisticNature]

Personal opinion: All the above is true but one important thing was neglected - the role of the media.

Now, I am all for free speech (I would not, for example, say that any piece of news should be suppressed or censored) but it did seem to me that the media in this case turned a minor credit crunch into what is now an official recession. By stirring up people who did not fully understand the economy (and I don't pretend to fully understand it and I think few do who do not already work in the financial industry) into panicking over the 'impending recession due to the credit crunch' they caused them to make rash decisions, withdraw funds and do other things which, in effect, speeded up the development of said recession.

At the risk of using Dilbertesque managerial cliches: The financial market goes in cycles or boom and bust, often quite rapidly. One thing I have never understood is people not seeming to realise this. Ok, stock prices are low, house prices are low.... this means it is a time to buy and hold onto said stocks/property until the market recovers when you sell at a profit. It seems quite simple... but then I suppose there is the problem if everyone holds onto these stocks then the market suffers...

If everyone holds on to their stocks than people placing offers to buy can't buy, so the stock prices are driven upwards as the buy values go higher so the market doesn't suffer it recovers. The panic makes things worse because people are willing to sell off their undervalued stock, keeping the buyers trying to find those lower prices and resulting in the stock price staying low.

As for people not realizing this, many people do. People often react emotionally rather than intellectually in a lot of these situations, and make unwise decisions even though on a rational level they know those decisions are unwise. We've been taught all our lives to fix our mistakes and learn from them, but this is exactly what one doesn't want to do after the fact in a stock market.

[SadisticNature]

I was kind of hoping that the discussion would not head in this direction. Many of those "targets" were imposed by an entitiy without the banking industry!

The regulations you've mentioned in previous threads on this topic didn't apply to the institutions purchasing, bundling and reselling the subprime loans.

The banks were making loans because they could make a quick profit on them by reselling them to the investment banks who could bundle them into a clever security which increased the investment grade and enabled them to resell it at a profit. This is the epitome of free market transactions, every step along the way is justified by profit.

[DuncanONeil]

In the short term maybe. But it is not a true transfer of wealth. The raw material of the miner has more value than it state as ore.

Agree with all of your post up until here. Mutually beneficial trade can exist through exchange of equal amounts of wealth. Trading wealth in the form of money for raw materials to do work can be useful for both the producer of raw materials and the manufacturer. The manufacturer reduces their store of wealth to acquire the capacity to do valuable work, while the miner sells their end products increasing their store of wealth. This can easily be mutually beneficial trade under an idea of money as a store of wealth.

[DuncanONeil]

Banks were making the loans because regulations had been passed forcing them to do so. Anything that grows out of the forced applied by the regulatory action of Congress is a direct result of the force applied.
Said force put the banks in a weakened position. The markets that you decry as a sole product of evil greed were efforts to remain a viable business. Mayhap even in some cases to enable the banks to comply with other regulations with regard to reporting and required reserves.

The regulations you've mentioned in previous threads on this topic didn't apply to the institutions purchasing, bundling and reselling the subprime loans.

The banks were making loans because they could make a quick profit on them by reselling them to the investment banks who could bundle them into a clever security which increased the investment grade and enabled them to resell it at a profit. This is the epitome of free market transactions, every step along the way is justified by profit.

[TantricSoul]

Posts about the topic are appreciated.

Subtle or not so subtle personal attacks are not.

Keep it on topic and keep your posts about the issues not the other posters.

~Tantric