Bankrupting America

[Kidlicious]

Originally posted by Aeson
Not when the insurers have less capital to back their guarantees than those who need the insurance.

It's patently obvious that a bank which doesn't have the capital requirements to cover the risk, can't just pass that risk off to another entity which has even less capital, and expect the risk to be covered.

So you are saying the same thing that Spiffor is, that they didn't calculate the risks correctly. Why do you say that?

[OneFootInTheGrave]

actually the (high) risk was pretty obvious, but the financial industry is skewed towards short term profits and obligations, so noone could really sit on the side and watch the others "rake in" billions while they are just being usually risk averse... so most of the financial organization went into it, and all that it entails...

the house has unravelled now, and well now we are all counting the dead... but this is the nature of capitalism - if an obvious system loophole is not regulated (in this case for the most part by uneducated investors who went and bought toxic waste for minimum premium as it was rated AAA while yielding slightly more + too high faith in rating agencies who did not do their job as they should have), it will be exploited to the maximum leading to natural consequences that we are enjoying now...

not the first time nor the last, but that the people who were devising those schemes did not know that this is the very likely outcome - that is simply not true, it was clear that the whole business was "clear as mud" without much or any transparency or accountability and that was the actual attraction... but we all hope for the best especially if you are making millions in bonuses during selling such stuff, it is only the lazy investors/institutionalized investor advisers who sucked it up for a minimum instant gain... if you leveraged your investment out of proportion... you know that traditionally this is a weak position, but if at the same time you are making record quarterly profits, and you are getting millions of real dollars out of it - surely that is the reason to keep up with the good current strategy. In the end the worst that can happen it to lose the job with millions in the bank...

So the people who knew did not have any reason to disclose, or more importantly try to clear up the "murkiness"... while the ones whose jobs it is to do so, had no reason to push as either they were too confident in the system/relations they have thus being complacent (investors), or just plain old making money by not adjusting to the new developments for which there was no pressure to adjust - rating agencies... and all in all while gold flowed they all together got personally rich (investment bankers, advisers, etc... ) and now the confidence is naturally in the dumpster, inflated baloon is up and history repeats itself once again... nothing unusual - all in all too much bureaucracy and not enough accountability as usual.

[Spiffor]

Originally posted by Kidicious
So you think bankers are not cautious, ok.

Bankers have been usually cautious in the past 200 years. In the past decade, however, American bankers have lent like crazy, believing they had a miracle recipe that made their loans pretty much no-risk. There's a reason I use the word "craze" when talking about subprime mortgages: because logic and caution were thrown out of the window at the time.
Exactly like during the tech bubble, logic and caution which are to be expected from investment funds were thrown out of the window, as IT-shares rose through the roof, fueled by outworldly expectations.

Is there any reason to think that, beside the fact that they were wrong in their predictions of the economic future.

The excellent ratings offered by the notation agencies to subprime-backed assets. The almost complete lack of discrimination between borrowers. The surprise when the crisis happened. Heck, that one alone is a reason enough to suppose they weren't aware of the risk they were taking.

How would you be different?

First of all, I'm not a guy who's dedicated his life to private finance, so my behaviour would be little more than common sense:

1. Read macroeconomic analysis. When the FED rate is 1%, and when the past decade of growth has been fueled by mass government and trade deficit, as well as joyful monetary creation, expect the ****ing FED rate to come back to reality sooner than later.

2. Think about the housing market. When the prices explode, prompting many constructions and having the households make an increasing effort to pay for housing, you can expect the trend won't last forever. I probably wouldn't have expected such a spectacular crisis, but I would definitely have expected the prices to drop at some point, at least progressively. So, I wouldn't have given too much credit to the idea that if the poor can't pay their loan back, I'd still ake a profit by selling their house.

3. Calculate what my customers will have to pay in case of a rate increase (different scenarios, as I wouldn't know how far the FED rate would increase, obviously). And then, warn my customers about those risks.

4. Reject borrowers with whom I'm confident I won't see the money back. Remeber, you asked me what I would do as a banker in the current capitalist system.

I certainly wouldn't have signed as many contracts, I certainly wouldn't have been the employee of the month. I certainly wouldn't have contributed to maximize the bank's profit-of-the-hour.
But at least my bank and my customers would have made decisions based on something else but hype, my customers wouldn't be homeless now (or would have to blame nobody but themselves as they were warned), my bank wouldn't have tanked. Also, my bank nowadays wouldn't be as paranoid about lending as it used to be a spendthrift.

[chequita guevara]

Originally posted by snoopy369
Because it is a sensible law.

Hardly. It was a law paid for by the Credit card companies to fix a problem that didn't exist. The people used as the excuse to pass this law accounted for around 5% of total bankruptcies.

Targeting people who make less than the median seems fair on the face, but these aren't the people who generally go bankrupt. It's usually middle income folks.

[Kidlicious]

Originally posted by Spiffor



Bankers have been usually cautious in the past 200 years. In the past decade, however, American bankers have lent like crazy, believing they had a miracle recipe that made their loans pretty much no-risk.

I'm sorry but the fact is that they've lent what they had to lend. What do you expect, the money to sit in the bank? Sure if the federal reserve increases the reserve requirement, which they actually decreased. If you want to blame someone blame the Fed. It's there job to prevent this sort of thing. The bankers made loans for the money that they were told to. And they did so by evaluating all the risks envolved in each one I can asure you.

There's a reason I use the word "craze" when talking about subprime mortgages: because logic and caution were thrown out of the window at the time.

That's just wrong.

Exactly like during the tech bubble, logic and caution which are to be expected from investment funds were thrown out of the window, as IT-shares rose through the roof, fueled by outworldly expectations.

No. It's nothing like the tech bubble. Banking is very regulated and carefull deliberation is made in every deal. The tech bubble was the result of no organized deliberation at all. It was caos.

The excellent ratings offered by the notation agencies to subprime-backed assets. The almost complete lack of discrimination between borrowers. The surprise when the crisis happened. Heck, that one alone is a reason enough to suppose they weren't aware of the risk they were taking.

Again, we agree that they were aware of the risks. As if said there is always risk involved. The scientifically determined that the risk was tolerable.

First of all, I'm not a guy who's dedicated his life to private finance, so my behaviour would be little more than common sense:

So you wouldn't use scientific models that you would have learned in finance school. You would just use common sense. That would work out great I'm sure.

1. Read macroeconomic analysis. When the FED rate is 1%, and when the past decade of growth has been fueled by mass government and trade deficit, as well as joyful monetary creation, expect the ****ing FED rate to come back to reality sooner than later.

That's amazing that you can predict what the FED rate will be in the future. Care to make a predict of what it will be a year from now?

2. Think about the housing market. When the prices explode, prompting many constructions and having the households make an increasing effort to pay for housing, you can expect the trend won't last forever. I probably wouldn't have expected such a spectacular crisis, but I would definitely have expected the prices to drop at some point, at least progressively. So, I wouldn't have given too much credit to the idea that if the poor can't pay their loan back, I'd still ake a profit by selling their house.

So you don't think they thought about the housing market when they were making home loans. REally?

3. Calculate what my customers will have to pay in case of a rate increase (different scenarios, as I wouldn't know how far the FED rate would increase, obviously). And then, warn my customers about those risks.

So you don't think they calculated that either? REally?

4. Reject borrowers with whom I'm confident I won't see the money back. Remeber, you asked me what I would do as a banker in the current capitalist system.

Don't think they did that either?

I certainly wouldn't have signed as many contracts, I certainly wouldn't have been the employee of the month. I certainly wouldn't have contributed to maximize the bank's profit-of-the-hour.
But at least my bank and my customers would have made decisions based on something else but hype, my customers wouldn't be homeless now (or would have to blame nobody but themselves as they were warned), my bank wouldn't have tanked. Also, my bank nowadays wouldn't be as paranoid about lending as it used to be a spendthrift.

I doubt you would have done any better Spiff. Soz, but you haven't really told me that you would do anything different, except you seem to think that you have the ability to make economic predictions better than experts.

[chequita guevara]

Originally posted by Arrian
I can't help but think such stats are meaningless, because the vast majority of financial problems have no single cause.

Did a person go bust because they got fired, or because they got fired and had no savings? Both, of course.

That's true for some folks, but not all. Medical expenses tend to wipe out any savings you had. So does losing a job.

But for the middle class - and there's plenty of credit card debtors in the middle class - the problem with managing personal finances is real.

People buy too much **** they don't need and cannot afford.

True, but if they hadn't, the world would be a lot poorer. Buying all that **** they didn't need has been the engine of economic growth on this planet for the past several decades, and has kept capitalism from reaching its big post-war crisis. That elasticity, borrowing from the future to pay for today, seems to be reaching its breaking point. Probably would have been able to keep going a little longer if the Feds hadn't wasted over half a trillion dollars murdering the Iraqi people. It's in the interests of the rest of the world to keep feeding out irresponsible buying habits, because that's what keeps them in business.

[snoopy369]

Originally posted by chegitz guevara


Hardly. It was a law paid for by the Credit card companies to fix a problem that didn't exist. The people used as the excuse to pass this law accounted for around 5% of total bankruptcies.

Targeting people who make less than the median seems fair on the face, but these aren't the people who generally go bankrupt. It's usually middle income folks.

Perhaps you want to respond to my detailed explanation of why your criticisms of this law are unfounded? IE, the 'means test'...

[Spiffor]

Kid:

I will stop arguing with you.

Upon reading my posts, you systematically understand something different from what I'm trying to write. This results in quite a bit of frustration, so I'd rather leave it at that.

There are other posters in 'Poly who have the same ability not to understand what their counterpart is trying to say. The rules bar me from telling who, but I have also stopped trying to even argue with them - at most, I answer to honest questions I feel I can reply to, or I add data I feel adequate, but no actual argument with them anymore. Same with you.

[chequita guevara]

it would take to long

[Kidlicious]

Originally posted by Spiffor
Upon reading my posts, you systematically understand something different from what I'm trying to write.

Ok, well sorry.

[VetLegion]

Spiffor this crisis doesn't demonstrate that capitalism is not a viable system and that we have to replace it.

We just have to fine-tune the banking regulations a little. Banks have served us well historically.

[chequita guevara]

Originally posted by VetLegion
Spiffor this crisis doesn't demonstrate that capitalism is not a viable system and that we have to replace it.

Yes it does. Capitalism could only keep going with this irresponsible deficit spending, but sooner or later, the bill has to be paid. That either means more borrowing or reducing spending, which reduces demand, which means recession.

[VetLegion]

Regarding credit cards. One thing I have noticed is that the interest rates on them is much higher in the US then in my country and perhaps the rest of Europe.

One reason for that is that we have usury laws which allow for a maximum yearly interest rate of 15% on any contract.

My credit card has a 12% interest rate. It's high, but not impossibly high. I use it here and there, mostly for investments (if I can earn more than 12% on some short term investment, I will not hesitate to use it. This has happened) and not consumption.

US credit cards have rates in the 30% range when all costs are included and the figure annualized

[Kidlicious]

Yes, and they can change your interest rate on the balance that you already owe if your credit rating changes.

[Dinner]

Originally posted by Spiffor
The rules bar me from telling who

Spiffor doesn't like me.