Economy
 

Forgive me, I am a total n00b when it comes to this stuff. I quit my job a few months ago (bad idea) and now can't find part time work anywhere. I see everywhere people are taking pay cuts or are getting let go because of the economy. What make an economy bad? I always thought that if people were spending money then everything is good. So why can't people spend more money? Is it the fact that food and everything is getting more expensive?

Please no politics involved.

Watch how fast I can move this thread:

8 Yeas of The Bush Administration makes the economy bad.

Off to the DC with lightning speed!

I was originally going to post it in DC, but since I wanted no politics in it I posted it here.

well, it really can not be talked about without politics

Sure. That'll work.

A workforce that speaks like that.

I have no idea.

If I had to guess, I would say its because too many people spent money that they didn't have.

Before jumping the lil stump man remember he's in high school and is just asking an open, honest question.

My open, honest answer stump is that the people who have the most money of us all are greedy and want more. Since they've bled it for everything it's worth, they're trying to scare us out of more. So far it's working.

With people running scared, those that still have disposable income are less likely to spend it and more likely to save it "just in case." As a result, consumer spending goes down, companies lose sales and revenue and wind up having to adjust in the easiest way of all, with their payrolls.

This is the problem with being a consumption-based economy, if people don't spend the whole thing freezes up. That is the reason for those 2 rebates, to try to get people to spend money to keep the wheels going.

Beyond that you are getting into political territory. If you want to learn this stuff in more detail, go get dirty in the DC forum. There are some pretty smart, knowledgable people over there believe it or not.

Thanks for the input.

What if people started spending money again, instead of "saving it for bad times?" Wouldn't that help?

Saving money is the same as investing money. The money doesn't just sit in a coffee can on the shelf.

Actually, IMO, that's what got us into this mess in the first place. All spending and no saving.

One word made it all happen, GREED

so how do you fix it

You don't want politics and ask this question? I am not sure it would be possible to answer without large political fights.

This.

People purchasing houses they could not afford. The American Dream was telling them to spend more than they had, same with credit card use.

When people spend money it does make the economy grow and expand, but the USA has been growing for years now and people got comfortable spending ungodly amounts of money on a credit card. Keeping up with the Jones' became a way of life, and now its biting these folks in the butt.

People are scared, and are therefore not buying new cars, houses, boats, etc. This forces businesses to use the cash they have on hand to pay their employees and the electric bill and not expanding their business. This causes growth to come to a grinding halt. People are pulling money out of the stock market, and it just becomes one big domino effect. Trillions of dollars on paper, have disappeared.

People who are of retirement age can't even retire, because their nest egg has been hit so hard. My dad has lost 25% of his retirement fund.

Hope that helps, its a tough question because there is SO much involved with the economy.

Short answer with no politics: Let the markets correct themselves. It will be bumpy for a while, but it'll even out. A lot of politics can be inserted in the long answer.

Honestly, I don't understand macroeconomics at all. It's always seemed to me like an inherently unstable system. If everyone spends more, the economy is better, which gives everyone more money to spend even more. If everyone spends less, the economy is worse, which impels people to spend less. I think the whole concept of the economy is a scam perpetrated on the American public by the University of Chicago.

It wasn't greed, it was stupidity. This entire economy is built around trying to make more money for yourself.

Stupidity in the lending industry led to a paper loss which sent people into a panic.

The media has made things infintely worse by telling people that everything sucks. Think about it: Everyone said we had to pass that stupid bailout or the banks would collapse. 700 billion in debt is rammed down our throat, none of it is doled out (Paulson's sitting on it) and yet the banks are still here.

How could that be?

Answer: the stupid stimulous wasn't needed...ever. The banks weren't crashing, the debt service wasn't going to make us sell off Alaska. Things were pretty good outside of a few bad banks and a handful of really cruddy regions where land prices were way too high and an adjustment was necessary. But once that sucker went through, the folks that control most of the country's money realized we'd just made a large mistake and pulled out of the market.

The economy wasn't actually as bad as it was made out to be. When the media tells everyone that the place is going down in flames, it's a self-fulfilling prophecy. Nobody hires, nobody spends, the multipliers don't work and we stall out.

[begin politics] Had the media not been so hell-bent on painting everything as dire and horrid to get Obama in office, we'd be out of this thing by now. The big 3 meltdown (again arguable) and every other true major drop has been a reaction to a non-existent panic. The only actual problem was the real estate market when sub-prime fell. What nobody mentions is that most of the losses were centered among land speculators/developers. A bunch of idiot land speculators taking a bath on real estate does not fuel an economic crisis, jackass manipulators in the media do. [/end politics]

Bottom line: The media and a stupid federal government (both sides of the aisle) screwed us on this one. They created a recession from an isolated market correction.

Post-depression laws were wiped out less than a decade ago, deregulating the banks... that was one thing that led to banks/lenders handing over lots of money to people so they could buy houses they couldn't afford. As more people got approved, demand went up, which means housing prices went up, which means lenders handed over even more money, now to people who really couldn't afford it. After a few years, people suddenly realized this wasn't a good idea ( :doh!: ), but it was too late... people can't pay their mortgages and banks start going under because of the awful investment.

Banks stopped lending money to stop the bleeding. Consumers now can't get loans for big purchases like houses and cars, which are obviously a huge part of the economy. Large corporations use loans to operate, and now can't get them, so they start laying off people. So now you have people who couldn't pay for their house to begin with are now unemployed, too. Corporations also react to their stock price (even if they shouldn't), which is going down because of the fear of a recession due to everything above, which means even more layoffs and budget cuts.

Look dude, Bush is pissed that you didn't support the war so he is giving you the business Beave.

Bush is just dumb, if only he would have pulled the green lever instead of the red one, then everything would be okie dokie right now.

I wonder how this is all going to affect student loans. I have one year left of school and I'll be applying for financial aid in the next month.

I had my 5th highest gross sale on Saturday, and almost everyone asked me how I was doing in this bad economy.

Go figure? :shrug:

Maybe it is all that funny money they are pumping into the system right now?

Don't do it. Donate plasma for tuition, and sperm for books.

Maybe in a bad economy people eat pets.

I am sorry, I didn't want it to turn into a political war where everyone said it was so and so's fault and only so and so could fix it.

Eh, the only comment was from Bunnytdr, and it was sarcastic. But you'll find it hard to discuss a tanking economy without politics involved.

I'm not being a smart ass, just saying sorry for not clarifying what I meant.


We have been discussing this topic a lot and it amazes me how everyone has some way to fix the economy, not two people had the same idea. It was, new government, spend money, don't spend money. I never really followed politics or anything like that so I had no idea what was going on and didn't really believe this "recession" we were going through until the past few months where I have looked for a job and can absolutely not find one. Seems here a lot of people have different opinions as well on how to fix this problem. I am just curious, that's all.

The large national debt is killing us
China loaned us most of it so we have to import
dogfood with anitfreeze in it and children's toys with lead paint

I have told my sons many, many times that if they want to learn a foreign language, Mandarin Chinese would be a good idea. It is always better to be able to communicate with your masters.

Time and patience will get us out of this eventually, the market has to correct itself. But this whole mess was a whallop to the US economy and other economies around the world, so it will most likely be a long recession.

I'm not of the opinion shared by some that the sky is falling. Jobs get lost and business go out of business, its the ebb and flow of economics. This has just been exasperated by an over excess of free spending. It's hard to generalize this whole fiasco without trivializing the dramatic effect it has on real people's lives, i.e. those that have lost their jobs, or homes. It's a sensitive subject for a lot of people. Hell, even people that did the RIGHT things are being penalized by higher credit card rates and job losses.

I really hope it ushers in a new era of responsibility, but I doubt it will. The American Public have a very short memory for lessons such as these.

We don't make stuff in the US anymore. Real goods means real money. Only so many people can make money shuffling paper debt or in a service related capacity.

Publicly traded corporations have their stocks upgraded or downgraded based on earnings expectations. Who does the grading? Banks. The bulk of the corporations are still generating income. The primary stockholders (the ones that can sell their options, buying company stock at a huge discount vs market price) are the ones the most influence on employment. Those folks' discounted stock price comes at the expense of those who are employed at the corporation.

Check the board of directors of most the corporations, and you'll find that they hold a board seat at other corporations. Many, many, people are losing jobs because of the choice few that hold those seats of companies that still can earn income will full work forces in those companies.

So far as you personally, LiL stumppy, there's no shame in attending trade school in lieu of college, and there's no shame in joining the military.

See Mark M above, much better than anything I'll offer

I would call that a smart move
always be a need for carpenters*
electrians - plumbers - mechanics ect

First of all, it'd be nice if people posting here would share their experience in this area -- blaming the issue simply on housing or the media does nothing but display a stunning lack of knowledge of the larger issues.

I write financial education articles, keep track of and do summaries on financial and banking industry news, and a whole host of other writing and researching duties for a financial services company.

I am not, however, an economist. So keep that in mind.

Now that's out of the way ... ;) :)

The nowhere near short, fairly-non-political answer is the following:

1. America, and an increasing part of the world, runs on credit. So much so, that we have a negative savings rate in this country (people are spending more than they save).

2. Banks and investors package all of this debt -- credit card debt, mortgage debt, etc. -- and sell it off to other banks and investors, offering them a certain rate of return.

3. For a while, all of that packaged debt was zooming in value ... even though no one actually had any freaking clue what it was worthy, and no regulators were ensuring those selling the investments were giving honest disclosures.

4. A lot of the debt in #2 was mortgage debt, which was making TONS of money because housing prices were skyrocketing (a.k.a. a bubble). This has happened before, such as with Internet company stocks in the 90s: people think something is worth a lot, even though there's no real way to tell what the value really is. But folks are making money, so what the hell?!

5. A lot of those mortgages from #4 were "subprime" (a higher interest rate product for those with high risk of not paying) or adjustable (payments start low, and then go up after a few years). A lot of subprime folks lied about their income or were swindled into loans they couldn't afford, so they defaulted. A lot of adjustable mortgage folks had their payments go up after a few years to levels they couldn't afford, so they defaulted.

6. Since people weren't paying their debt, the investments based on that debt started to go south. Folks who were making tons of money were suddenly losing it.

7. Banks and businesses and pension funds and mutual funds and lots of other people also started to see their investments go sour.

8. Accounting rules for banks state that any investment on the books must have its value recorded as what the investment is worth right now (called "mark to market"). So banks that once looked great because those investments were making money in 2003, now looked unstable because they had to report the value of the investments after people stopped paying their debts in 2008.

9. Due to #8, dozens of banks suddenly lost billions of dollars in value because the investments they had come to rely upon were worthless. So they stopped lending to other banks (which they do all the time, and what the Fed Reserve is discussing when it lowers or raises rates), to businesses, to people ... everyone.

10. Since Americans and an increasing part of the world relies on debt, once lines of credit dried up for everyone -- even those with great credit -- the whole system started to collapse.

Now, that's a really 50,000 foot view. Regulations were changed and/or ignored ... lots of people used their homes as ATMs and got second mortgages for a boat and a jet ski and other crap ... people relied too much on credit cards instead of paying cash ... and the "free market" once again proved that it does not self-correct -- it takes as much as it can, ensuring to privatize the profits and socialize the losses.

Don't get me wrong -- free market theory is wonderful. But unfettered free market capitalism in reality has been proven to do major damage. We really need a middle ground -- free market ideas and spirit, but with enough guidance to avoid exploitation, yet at the same time also not horrifically constrictive.

Again, that's my understanding of it based on my professional experience. Take it for what it's worth ...

MM
~~:shrug:

:clap: Simply wonderful, and something that has to be part of any "recovery" (for lack of a better word).

:thumb:

In many ways, college is ridiculously overrated. I loved it, but there are times I wish I had gone to Wyoming Tech and built cars for a living.

One must also note that attending college and getting an education are NOT necessarily the same thing.

MM
~~:)

I wish I had taken autobody
could have taken a half day in highschool
but nooooooooooooo

Excellent post :bravo:

However I would add a 4.5 in there...

4.5 These securitized debts (repackaged into investments that could be sold), were then leveraged into credit derivative swaps. I seriously don't know what the **** that really means despite reading about it, but as far as I can tell it's a side bet placed on whether or not the original debts will be paid. However we allowed side bets worth far more than the initial debt. So maybe you had 50 billion in actual mortgage debt out there, but with 500 billion in side bets on whether or not it would be paid. AND these finance wizards BORROWED to make these side bets.

EDIT: Here's a nice explanation of credit derivatives that Lehman brothers put together in 2001. Oh this is just too ironic:

http://www2.wu-wien.ac.at/vgsf/curri...0Explained.pdf

I'm a motor man myself -- still want to learn how to rebuild a carburetor.

Although, I can spell "carburetor," so I got that going for me ...

MM
~~:D

Meh. Not really.

I've read articles which read the same terminology and that's the clearest explanation I've seen so far. Not quiet crystal clear but better.

Rep

That's actually a quite decent explanation of derivatives. :clap:

It makes my brain hurt just thinking about how many people made -- and then lost -- so much money, and were that leveraged, without anyone saying a ****ing word about it.

Well, not anyone who was listened to -- those guys were called "alarmists."
Although history might call them "prescient."

I'm just glad I have another 30 years or so before I plan on retiring. I just may make up all I lost by then ...

MM
~~ROFL Oh, wait ... :sulk:

Hang in there dude, just be glad you are in HS and you aren't like alot of people who are struggling.

It sucks lately i had a job interview (a really nice one) and then heard from them that i had to wait longer cause there was a hiring freeze....i was pretty pissed...so i play the waiting game

Are they even making carburetors any more? Everything is injected now.

As long as he's interested in the lucrative field of lawn mower repair, he's golden.

You can't even buy a carb from GM anymore. They're all discontinued. You have to take a number off the body and call an aftermarket place like O'Rielley's.

Best post on here. Many in this thread contain errors, oversights or are just garbage.

Keep in mind something else that I haven't seen stated yet -- capitalist economies are (or at least historically have been) cyclical in nature. We have yet to figure out a way to remove the cyclicality of the economy, even though we had (we thought) developed systems to reduce the duration and depth of economic downturns.

First, it's everyone, not just Americans. Second, it's fundamental human nature.

mmm....securitizations are perfectly valid lending arrangements. Swaps are generally designed to limit risk, not increase exposure, but maybe there is a nuance there that goes beyond what I know.

Securitizations packages are in their simplest form not all that complicated.

Let's say that you start a hardware store. It grows into something big -- a chain. You want to offer your customers a credit card because they're profitable for you to run. Here's the problem -- your customers are buying your stuff and walking off with the goods, but all they have given you is a promise to pay in return. And the promise is that they will pay not tomorrow, but within 30-60 days, on average.

So a guy buys a hammer and pays you in 60 days. Fine. But now you're down a hammer, and of course Stanley or whoever made the hammer expected to be (and was) paid within 30 days of selling you the hammer 6 months ago. So first you had to carry it on your shelves for 5 more months without getting paid for it, and now you hav eto wait up to another 60 days before you're going to get paid for it.

And -- oh yeah -- now you need to get another hammer from Stanley to put on the shelf to replace the one you sold, and you'll need to pay for THAT one within 30 days.

Multiply that by thousnads of hammers and stuff, and you've got a serious problem -- not enough money to cover all these costs while you're waiting to get paid for the stuff you've already sold. You know (and are correct) that you will make a profit on your credit cards if only you can afford all this.

So instead of waiting for 60 days to get paid, you get a loan to help you buy the new hammer and whatever else need while waiting to get paid. So what do you do? You collateralize the payment stream of all the credit card payments that are owed to you and take a loan against it all.

So you're owed $100K by all your credit card customers. You need money to restock your shelves. You borrow it. But not everyone has the same risk tolerance, and not every dollar owed is able to be borrwed at the same rate.

Using random number (I don't know the actuals), Bank A, which doesn't like risk, says "I will loan you $20,000 against the first $20,000 paid to you by your credit card customers. Because I get paid first, it's a low rate loan. I will loan you the money at 5%".

Insurance Company B says "well, I don't like risk much, but I can handle a little. I will loan $30,000 and be second in line behind Bank A. The loan will cost you 6%."

(total of $100K in receivables now has $50K of loans against it)

Insurance Company C says "risk isn't bad, and my portfolio is too boring anyway. I'll be third in line, for $20K, but the rate is going to be 7%."

Weird Lending Company D says "risk is great, but I learned all I know from Louie the Legbreaker. I'll loan you $20K, but the rate is 9.5%."

The last $10K -- nobody will loan against it. It's yours and yours alone. So now you can take loans of up to $90K to restock your shelves, pay a carrying cost and you're good. The late payments and other charges on the credit cards should about cover or exceed the interest rate payments you need to pay to your 4 lenders.

3-5% of your borrowers will default, so that money is lost, but overall, it's all good and profitable, and instead of paying 5% or whatever of your sales to Visa or MasterCard, you can issue your own credit cards and keep some of those profits.

Time and self discipline. People need to pay their bills. When that happens, banks will make more money and be happy again. Once they're happy they'll start lending us money again. If that sounds somewhat like slavery, IMO it is. But without any kind of political posturing there is no other solution.

I disagree that the free market does not self correct. It does, but in a brutal way. The impending collapse of the financial system was the free market correction. The impending collapse of the US auto industry was the free market correction. So far we are choosing government intervention instead of allowing the free market correction to take place. Largely because the free market corrections are too painful to bear. I agree with you that we need a middle ground. One problem we have now is that the same people who want free markets on the up swing (Wall Street and Detroit) want government intervention on the down swing. Then the have the audacity to want free reign to do what they want with the bailout money with no accountability.

No, but maybe they talk to them more. lmao.

First, one must consider the concept of micro vs macro economics.

In College, each is an entire semesters work and a differenet textbook to read.

Micro, is your own self interest, first person point of view looking out at the world.

Macro, is an aggregate look at the combination of everyones economics. IOW, the sum economic activity in the whole country.

Currently, our economy is somewhere near 10 trillion dollars a year in total gross domestic product(hey, there is a term, what does it mean?)

We are a free country full of self serving individuals, it is about as likely, that "someone" can "fix" this thing as it is for Al Gore to take a fart and reduce global warming, er, climate change.

No doubt, even a protracted stint at the Junior college is awesome during a downturn. Hopefully, the economy turns about the time you are graduating so you can enter the work force on the beginning of a new up leg in the next business cycle(OMG, there is another term to look up)

We have a fiat money system. It works until it doesn't. No fiat money system has ever worked over time... EVER!!! They'll baffle you with bullshit, but in the end it's just ink on paper.

As for the derivatives mentioned in this thread we need to clarify "derivative." Simple derivatives are options, futures, swaps, etc., and have been around for years. Over-the-counter derivatives are a whole different ball game. OTC derivatives have infected the markets to the tune of $20 trillion and are the play of the day. It made lots of people lots of money, yet here we are bailing out those same people with tax dollars. I sure hope they enjoy there million dollar home(s) in the Hamptons because you, Joe Blow, are paying for their big, fat, and expensive stupidity. Ain't it GRAND!!!

Sometimes in econ, perception is everything.

If your prospective boss perceives the economy getting worse in the months ahead, he OR she alters their current behavior by putting off investments in plant or equipment, reducing their variable overhead of which labor costs is probably the most expensive component.

This in turn, leads to a self fullfilling prophecy of sorts, because you now, have no part time job, and are not able to take sweet little mary jane to the soda shop for a malt. The soda jerk is now out of a job because there aren't any janes and johnnys hanging out there, and so on.

Of course, the demand side people "create jobs" by taxing the rich, and taking that mofo's money and "employing" people to do things like rake leaves, and work as customer service at the US Mint and any number of other government jobs such as postal workers etc.

The reason this always becomes political, is due to the size of government in our economy. Government seeks to insert itself wherever it sees fit, as if it has the answers to where scarce resources OUGHT to be allocated to serve the greatest "common good". They do this by taxing rich mofos until they leave for Switzerland and take a vacation.

Then, the government plays Santa Claus and doles money out to its constituents. Yes, they tend to allocate it to the people that elected them and keep them elected, AKA Pork barrel spending, or more recently "earmarks".

That's what I always though, that it was a type of self fulfilling prophecy. We keep saying it's bad so people get go into freak-out mode, whether it's really bad or not.

I am very glad I'm not struggling. We haven't been hit bad yet I guess (parents) but a lot of places in this area a closing down.

If you look past politics, while there are disagreements on how to fix the problem, there is pretty much a consensus on how it started: a large part of this is the piece about the subprime mortgage crisis, in which investors were paying for houses they couldn't afford and ended up defaulting, which decimated a lot of mortgage-based investments. But the bigger problem is the emergence of a popular investment called a credit default swap.

Basically, when a bank loans out complex debt to an investor, there is a high risk of default in which the borrower can't pay the bank back. Credit default swaps are basically a form of insurance to protect against that. The problem is, that lenders grossly underestimated the payouts from default which have been rising every year and the market has been unregulated. Think of it as insurance that was not regulated. And so, lenders need to pay out a lot more money than they are capable of paying. Hence, why AIG was bailed out--because the government knew that if AIG defaulted on their payments on these swaps, it would lead to a downward spiral of economic failures.

Another easier explanation for the down economy is that costs are rising, which are squeezing margins. When a small business has to pay outlandish fuel prices, that makes it harder for them to pay more money to invest in things like workers or machines (which take workers to produce).

These are pretty non-political explanations for the downfall of the economy, coming from a pretty moderate person. The solution to the problem is probably a mixture of both letting the market correct itself and taking some corrective action to fix the problem. You'll see a lot of politics in these matters, but I think you'll see a TON of politicians reaching across the aisle because they know that there's too much at stake to be jockeying for political position.

Yes, you're right on that. But there have been 45.5 trillion dollars of these sidebets made. And they were done poorly and the government did nothing to regulate them.

I wouldn't call it a "side bet." Think of it as insurance. To insure against a loss from damaging your car, you pay a premium to protect yourself. That's not really a side bet as much as it is a protection for assuming the risk... of driving. A credit default swap protects banks who loan risky debt to investors. By putting down a certain amount of collateral, these swaps combine all these to create a giant pool that can be drawn from in the event of a default.

Well, we all know that when stuff like this gets unregulated, there are always going to be people that find creative ways to make stupid investments and assume way too much risk, but make a handsome profit doing so. That's what happened. In addition, because there was an underestimation of the rate of default (and a lot of that is probably because they underestimated how much risk these "insurers" would take on), suddenly, you don't have enough money in the pool to pay out.

It's not insurance. An insurance player (AIG) thought it was wise to dive in. It's "party, counter party." Is your neighbor solvent when I want my money? Nope, for the most part. That's all it is. Most aren't solvent and need phony baloney printed digits (dollars).

Since we don't produce and real goods anymore, our economy has tanked. Notice how all our production has been outsourced? How many side-bets can you make on financial instruments, wherein the root value is so far removed fromt the market in which these are traded?

The insurance industry is predicated solely on the growth in value of financial instruments, such as stocks, bonds, and treasury notes. Without a firm base of real goods (and buyers of them), the house of cards goes up in flames.

The Golden Rule: "He who holds the gold, makes the rules."

Don't believe me if you don't want. I only hold an econ degree and a minor in math. The bad news I got in my senior year of econ was that those who own outright the land which yields those real goods (oil, coal, grain, iron ore, etc) and extracts those goods, are the winners; attempting to make side bets on the intrinsic value assets (stocks, bonds, notes based on real goods' values) is a recipe for disaster.

Is this is the early 80's? Are the Kansas City Chiefs the barometer of the economy? Look at the positive relationship between the Chiefs W/L record and the Unemployment Index, Stock Market, and interest rate indices. (LOL)

There have been a lot of excellent posts, but I think people have missed some key elements.

Basically, this economic downturn resulted from the system rewarding people for behavior that damaged the economy as a whole. When the behavioral pressures get too out of wack, we get into a downward spiral until adjustments are made. To put in specific terms:


The mortgage industry changed drastically over the last 25 years. Debt in general has become more "marketable", consequently, you rarely see the company that sells the home loan actually HOLDING that loan. Instead we have a system where one company specializes in selling mortages (retail mortgage lender), in between we have mortgage brokers who sell those instruments to larger financial institutions like banks, insurance companies and investment funds.

THe problems is, this fractioning of debt has created some counter productive incentives for individuals and corporations. Since the retail mortgage lender is going to sell that loan to someone else, there is little interest in actual ability to repay. The retail lender will get paid an immediate fee depending on the size of the loan. Consequently, that company's immediate interest is to sell as large a loan as possible, as long as they can somewhat justify the loan recipient's ability to pay. In fact, if the seller fudges the numbers or exaggerates the financial stability of the recipient, that's even better to maximize their fee.

The mortgage broker, meanwhile, takes a percentage to distribute these finance instruments in large blocks to larger financial institutions. Essentially, they find small gaps between what it takes to purchase those instruments and what they can sell those intruments for to make a profit. Again, they have little incentive to ensure the loan repcipient's ability to ACTUALLY pay those loans, as long as they can make the numbers look like they fit a risk model. (The risk model sets the price for the value of the loans).

The large institutions then hold those loans. Financial houses can include these loans in funds they sell to investors. They can also "hedge" the risk of these loans with OTC derivatives (which are the "bets" on whether or not those loans will actually be repaid). The problem is, these institutionas are WAY removed from the street-level loan.

Because the way mortgages are bought and sold has changed over the last 25 years, the historical risk data with respect to loan default has been out of wack. These newer loans are more risky than the historical data suggests because the people who sold the loans didn't have the same incentives to verify their abiilty to be repaid. Subprime mortgages are relatively new animals (before lenders wouldnt make such risky loans), and their risk models aren't supported by long historical data. Apparently, those risk models weren't accurate.

The end result is that we have way more than predicted defaults on loans. The credit markets are in a panic because they don't know the true value of the debt they have on their books. Consequently, these lending institutions don't want to issue more credit, which has caused a chain reaction in the economy.

Now, many believe we shouldnt' "bail out" the financial markets. They think the market should 'self correct" (which is basically a darwinian process in which institutions that can't fix themselves die off). One of the problems with "self correction" is that companies don't exactly work on a darwinian model. In some instances, top executives make MORE money by making decisions which ruin the companies for whom they work.

Lets take, for example, the CEO of countrywide (a large mortgage lender). In 2006, countrywide's CEO made 100million because of stock options at the height of the housing bubble. Even IF that CEO foresaw the underlying problems, he would actually harm his own income to prevent it. In 2008, he lost his job, but made 80 million in severance pay. In three years, he made over 180 million. What does he care if his company is now in ruins? IF CEOs receive such lavish rewards for making decisions which result in short term profit but long term disaster, we create a recipie for repeated corporate stupidity (but individual genious).

The reason a Darwinian model doesn't exactly work with companies is because the top decision makers can sometimes make MORE money by allowing their company to destroy itself. The "self correct" model works on the assumption that organizations that behave in a "healthy" manner will survive the current crisis, and continue their "healthY' behavior in the future (thus we will eliminate poorly run companies from the market). But, with this CEO compensation model, the incentives actually will favor self destructive corporate behavior so that there is no guarentee the executives who run these companies will contintue their policies in the future.

Project current market conditions and we notice even more disturbing realities. We now have loyal CEOs valiantly volunteering to take 1 dollar salaries OR we fire the current "rats" that got us into this mess (after they've already cashed in on their risky behavior). After the market recovers, the CEOs and top execs will make a new mint when stocks shoot up (on their stock options) even without any kind of extraordinary performance.

This reality actually ENCOURAGES a "boom-bust" model of corporate management, because the top decision makers actually profit maximize even though this behavior clearly HARMS their companies (and the nation as a whole). Consequently, CEOs are encouraged to IGNORE business models that get out of wack, rather than try to fix them.

This. People living outside of their means and not honoring their word. In other words, not paying their bills. The money that they borrowed and promised to pay back. We live in a society of finger pointing, and blame shifting. If more of us took a look in the mirror and focused more on that which we had control over, we would be much happier individually, and collectively.



Edit: IMO A lot of people should've never had loans to pay back. They should've never borrowed it in the first place. I assume that goes without saying, but I try not to assume people can read my mind.

Rampant greed can't become a problem without rampant stupidity.

I work for a mid to large sized bank in MO. Our president and CEO went to the American Banker Association meeting last month. They are anticipating the economy to continue on the downhill slide until mid 2010. Then things are supposed to start picking up.

personally I believe things with the economy will be on the downward slide till late 2010 then start to pick up. Seems the bank mgmt is always about 6-12 months late in their predictions.

McDonalds hires all; the time. And you can be a manager in 5 weeeks so i'm told

Americans have pulled back spending.

We have no leader that can embolden confidence and tell them to go ahead and spend their money instead of hoarding it.

If only this were true...

The country would be much better off without credit cards. People would be much less likely to get in over their heads.

spoken like a true ramsey-ite

Don't know who this Ramsey is but sounds like somebody I would probably agree with.:D

Credit is a good thing if used right. Unfortunately there are too many people that just plain should not be allowed to have it. Including the government.

dave ramsey-total genius

www.daveramsey.com

author of total money makeover

Just did his calculator. My personal plan came to the exact same amount as his suggested plan. Guess we do agree.:)

you should read his book its great

The best advice I can give you is to live within your means, good times or bad. Serve others as you would like to be treated, and you will do well in any economy.

lmao, Dave Ramsey for Secretary of the Treasury.

I want to be Secretary of Commerce. It should be an easy job now that there isn't any.

I saw a woman and man, with the man staying almost completely silent during the interview, whining about losing all of their money to that Madoff fool.

The government guy, kept reading off what he could do and she kept bitching that where was he when this fool was swindling her, as if she had absolutely no culpability for not doing any due dilligence on her own. She had that big victim card, the tv, and baby was she going to shout her hotflashes all over the screen, as if that were going to get her one cent tomorrow.
Don't put all your eggs into one Bernie Madoff basket. Oldest rule in the book. These people thought they were worth 1.6 million dollars, retired early, and were living the good life for the past 4 years. They really weren't woth 1.6, because that is what Bernie's statements told them, but hey, at least they got to live the good life for the last 4 years off of redemptions he had to pay in order to keep the scheeme going.

They want that 1.6 to be posted back up, but it ain't gonna happen unless they can come up with statements showing the hard currency going in, or securities statements. The broad had the nerve to say, we don't have statements and was screaming at the SIPC agent as if he were to blame for this.

I feel your pain lady, but damn, it wasn't his fault you got bent over.