Economy question

[KrazyHorse]

MBS is Mortgage Backed Securities, ie one of the things that got us into this mess in the first place.

Don't be silly. The instrument itself is actually a really good idea. Relying on flawed models of how these should perform is a really bad idea.

Saying that MBS caused the financial crisis is like saying that joint-stock companies caused previous financial crises.

[Unimatrix11]

My objection would be: They issue cash. Period. I issue crap. Period. Just like i cant take anything in return for what i have to ´issue´ anyways, so they should not. If the economy needs more money, the FED should issue the ammount needed, pass it (for free - no interest, that can not be covered anyways!) to the gov, who then puts in on the accounts of everybody in equal amounts - done. Then competition can set it, for that money, for all i care, by the free market. Actually, they should acompany that move with the invalidation of all currency issued upto now - i think this is called a currency reform.

Hit the reset-button and do not care about the whining of people, who, upto now, never cared for anyone else´s whining before either. The new currency, should work differently than the one´s we have now, mainly by being interest-free. From Aritoteles to Jesus to Mohammed to Gisell and Einstein - everyone knows, interest is bad, and a society with a currency based on interest can not be good, but will always be at war, the longer the system lasts the more, with itself and its environment. The latter actually being a fact, that i did not even get an indication (not even once!) of by studying environmental sciences for more than 10 years, despite the fact, that every effort towards an ecological and sustainable society is like fighting windmills in a system that is based on exponential growth and relies on it. That is probably also the reason, why the ´Club of Rome´ gives the following in its 30-year update of its famous ´limits to growth´:

´We only look on the material economy, the real things, for which the limits of the earth apply, not on the monetary economy; that is a sociatal invention, which does not account for the limits of our planet´
(translated back from german:„Unser Schwerpunkt liegt auf der materiellen Wirtschaft, den realen Dingen, für welche die Grenzen der Erde gelten, nicht auf der Geldwirtschaft; diese ist eine gesellschaftliche Erfindung, die die physikalischen Grenzen unseres Planeten unberücksichtigt lässt.“, page 37)

I could rave for hours on the stupidity and probably deliberately chosen ignorance reflected in this sentence, but yet, it´s like the bible of environmental scientists.

And if i talk to people about this, they just dont want to know. It´s like, if you dont know already, you wont believe me. Seriously, even my mom, i tell her, and she is like, yeah i believe you, but then again... falls back into the old categories when the news is up on TV at the latest. Personally i am in a state of hitler-esque frenzy and sarcastic resignation like in:

Tears of the feeble
Hands of the slaves
Skin of the mothers
Mouths of the babes
Building the towers
Belongs to the sky
When the whole thing
Comes crashing down
Dont ask me why

Under the shelf
The shelf of the sky
Two eyes, two suns
Too heavenly blinds
Swallowing rivers
Belongs to the sea
When the whole thing washes away
Dont run to me

Ill be going down
For the rest of the slide
While the rest of you
Harvest the gold

And the wreck of you
Is the death of you all
And the wreck of you
Is the break
And the fall
Im the wreck of you
Im the death of you all
Im the wreck of you
Im the break and the fall

Under the red
Break of the lights
Heroes in stretches
Inch to the site
Blowing the pieces
Belong to the wind
When the whole thing
Blows away
I wont pretend

(Soundgarden - Limo Wreck, pre 2001 btw, if you look at the ´towers´)

[KrazyHorse]

My objection would be: They issue cash. Period. I issue crap. Period. Just like i cant take anything in return for what i have to ´issue´ anyways, so they should not

You can take whatever someone's willing to pay you for what you "issue". Many people want the stuff that the Fed prints. Nobody wants what you expel out of your ass. So it raises a distributional issue. How should the Fed decide which people get how much of the newly created money? Also, how should the Fed decide how much new money to issue?

Right now the Fed distributes the money (in normal times) to people who are willing to trade the Fed a certain type of asset (short term government debt) for it. The Fed decides how much money to issue (and retract!) by targeting a very specific interest rate (the yield on those assets). It decides what the yield on those assets should be by black magic (targeting inflation and other economic indicators which the yield it controls has an effect on).

Firstly, I have no idea how you think the Fed should decide how much new money to issue. Secondly, I don't understand what benefits you think would accrue from this program rather than from the current arrangement. I also don't understand why you want to conflate monetary and fiscal policy like this rather than keeping monetary policy in the hands of technocrats and fiscal policy in the hands of politicians.

[KrazyHorse]

By the way, I'm all in favour of the government distributing cash on a per-person basis. But I want it funded by tax receipts. Not by monetization. How much new money is created is a separate issue from how much redistribution we should be doing.

[notyoueither]

Don't be silly. The instrument itself is actually a really good idea. Relying on flawed models of how these should perform is a really bad idea.

Saying that MBS caused the financial crisis is like saying that joint-stock companies caused previous financial crises.

I think there are a lot of problems with them as implemented.

[KrazyHorse]

I think that's actually true. And I think that the same is true of joint-stock companies (control mechanisms are too weak for my tastes).

Firstly, I think that many of these contracts should be put on exchanges rather than traded OTC. Exchanges will standardize contracts so you don't need a team of lawyers to understand the asset you are looking into buying. Exchanges will also impose margin requirements on a lot of these derivatives that would have built a cushion into the system.

Secondly, I do think that some of the control mechanisms in MBS cause them to be excessively rigid.

[notyoueither]

In what way excessively rigid?

[KrazyHorse]

Renegotiation of original mortgage contracts forbidden. Should be allowed to be voted on by a majority stake in the mortgages.

[notyoueither]

OK. I thought you might have had something arcane that I would like to know.

It seems that management of those things is a really big problem. I've read that in some cases they no longer have possession of the original mortgages. The paper has been lost in the various shuffles. That can be a problem when they need to demonstrate that they have a claim, like in forclosure. The problem seems not to be uncommon.

There's also the problem of how to assemble the mortgages for the package. You're depending entirely on middlemen who know they will have nothing at stake. Lenders who hold their own have enough problems with fraud. What happens when you eliminate the imperative for the initial lender? That's an engraved invitation for shenanigans.

It may be that home mortgages are not a suitable material for this sort of financial product. I don't know. If I knew what these things do that conventional investment in a single mortgage enterprise could not, then I might be more positive about reforming them rather than banning them along with CDS's on entities where there is no financial relationship, along with other 'reforms.'

[notyoueither]

On the topic of CDS's as a speculative tool, can you give me any reason that Congress should not consider voiding all of them where the holder has no financial claim on the insured?

[KrazyHorse]

If I knew what these things do that conventional investment in a single mortgage enterprise could not, then I might be more positive about reforming them rather than banning them along with CDS's on entities where there is no financial relationship, along with other 'reforms.'

These are both quite silly, kneejerk reactions.

MBS allow smaller players a crack at the mortgage market on a competitive basis with the big dogs (who can hold large amounts of mortgages with different maturities, different borrower demographics and different locations).

CDS allow entities to hedge against credit risk due to a wide variety of financial relationships which may not be as simple as "I hold company X's bonds". What if an aircraft parts manufacturer wants to hedge against a decline in the aircraft business as a whole? He can buy CDS on debt with Bombardier, Boeing, Airbus and Embraer and use this to reduce his exposure to overall market conditions.

Like I said, these things should be on an exchange. That would have prevented in large part the unbelievable amount of outstanding CDS that AIG wrote (through margin requirements) and would have provided a very smooth road to unwinding their position when they began to appear insolvent.

Oh, and I would like to once again reiterate the saying: regulation is a financial engineer's best friend. Good luck trying to outwit people whose entire job is thinking up new financial products. Should take about a month to come up with a workaround.

[KrazyHorse]

On the topic of CDS's as a speculative tool, can you give me any reason that Congress should not consider voiding all of them where the holder has no financial claim on the insured?

Uh, you plan to invalidate with a stroke of a pen hundreds of billions of dollars of contracts negotiated in good faith between private parties?



Yeah, that ought to do wonders for public confidence. Welcome to the United States of Zimbabwe.

[notyoueither]

Uh, you plan to invalidate with a stroke of a pen hundreds of billions of dollars of contracts negotiated in good faith between private parties?



Yeah, that ought to do wonders for public confidence. Welcome to the United States of Zimbabwe.

I'm asking what legitimate justification there is for taking out insurance on your neighbour's house.

[Naked Gents Rut]

That's a terrible analogy, even for you.

[notyoueither]

If I knew what these things do that conventional investment in a single mortgage enterprise could not, then I might be more positive about reforming them rather than banning them along with CDS's on entities where there is no financial relationship, along with other 'reforms.'

MBS allow smaller players a crack at the mortgage market on a competitive basis with the big dogs (who can hold large amounts of mortgages with different maturities, different borrower demographics and different locations).

I would think they could buy shares in or bonds from Mortgage Company X.

Or, they could get into the secondary market.