If you don't understand the financial crisis
moultano
Creator of ns_shiva. Join Date: 2002-12-14 Member: 10806Members, NS1 Playtester, Contributor, Constellation, NS2 Playtester, Squad Five Blue, Reinforced - Shadow, WC 2013 - Gold, NS2 Community Developer, Pistachionauts
Creator of ns_shiva. Join Date: 2002-12-14 Member: 10806Members, NS1 Playtester, Contributor, Constellation, NS2 Playtester, Squad Five Blue, Reinforced - Shadow, WC 2013 - Gold, NS2 Community Developer, Pistachionauts
in Off-Topic
<div class="IPBDescription">listen to this.</div>These are the best explanations of what's going on that I've found.
<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355" target="_blank">http://www.thisamericanlife.org/Radio_Epis...spx?episode=355</a>
<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365" target="_blank">http://www.thisamericanlife.org/Radio_Epis...spx?episode=365</a>
<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355" target="_blank">http://www.thisamericanlife.org/Radio_Epis...spx?episode=355</a>
<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365" target="_blank">http://www.thisamericanlife.org/Radio_Epis...spx?episode=365</a>
Comments
<a href="http://www.brasschecktv.com/page/187.html" target="_blank">http://www.brasschecktv.com/page/187.html</a>
Once upon a time in a place overrun with monkeys, a man appeared and
announced to the villagers that he would buy monkeys for $10 each.
The villagers, seeing monkeys in abundance, went out into the
forest and started catching them. The man bought thousands at $10 each
and as supply began to diminish they became harder to catch so the
villagers stopped their effort.
The man then announced that he would now pay $20 for each one. This
renewed the efforts of the villagers and they again started catching
monkeys. But soon the supply diminished even further and they were ever
harder to catch, so people started going back to their farms and forgot
about monkey catching.
The man increased his price to $25 each and the supply of monkeys became so
sparse that it was an effort to even see a monkey, much less catch one.
The man now announced that he would buy monkeys for $50! However, since
he had to go to the city on some business he sent his assistant to buy
on his behalf.
While the man was away the assistant told the villagers. "Look at all
these monkeys in the big cage that the man has bought. I will sell them
to you at $35 each and when the man returns from the city, you can sell
them to him for $50 each."
The villagers rounded up all their savings and bought all the monkeys.
They never saw the man or his assistant again and the village was
overrun with monkeys once again.
Now you have a better understanding of how the stock market works.
<a href="http://www.gmu.edu/departments/economics/wew/articles.html" target="_blank">Professor Williams</a> sums it well:
<!--quoteo--><div class='quotetop'>QUOTE</div><div class='quotemain'><!--quotec--><b>A MINORITY VIEW</b>
BY WALTER E. WILLIAMS
RELEASE: WEDNESDAY, OCTOBER 8, 2008, AND THEREAFTER
<b>Lessons From the Bailout</b>
In my more cynical moments, I think that we Americans deserve what we get from our politicians, many of whom can be generally described as nothing less than loathsome. You say, "Williams, that's a pretty heavy putdown." My question to you is how else would you describe these congressmen who are now blaming the financial mess on the failure of the free market? Starting with the Community Reinvestment Act of 1977, that was given more teeth during the Clinton administration, Congress started intimidating banks and other financial institutions into making loans, so-called subprime loans, to high-risk homebuyers and businesses. The carrot offered was that these high-risk loans would be purchased by the government-sponsored enterprises Fannie Mae and Freddie Mac. Anyone with an ounce of brains would have known that this was a prescription for disaster but there was a congressional chorus of denial.
Five years ago, Congressman Barney Frank (D-Mass.) vouched for the "soundness" of Fannie Mae and Freddie Mac, and said, "I do not see any possibility of serious financial losses to the treasury." In 2004 congressional hearings, where the Bush administration sought greater oversight over Freddie Mac and Fannie Mae, congresswoman Maxine Waters (D-Calif.) said, "We do not have a crisis at Freddie Mac and particularly at Fannie Mae," adding that "the GSEs have exceeded their housing goals." Congressman Gregory Meeks (D-N.Y.) said, "There's nothing wrong with Fannie Mae and Freddie Mac." In these hearings Barney Frank said that he doesn't see "anything in the reports that raises safety and soundness problems." Earlier this year, Sen. Christopher Dodd (D-Conn.) praised Fannie Mae and Freddie Mac for "riding to the rescue" to help people get home mortgage loans, adding that they "need to do more" to help high-risk borrowers get better loans.
The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans. They were forced to by the heavy hand of government. The solution is not a taxpayer-financed bailout. The solution is to let them fail and allow the people who invested in them, as well as the people who purchased homes they couldn't afford, suffer the losses. Of course that takes a level of political courage that is in short supply. There are other measures that should be taken as part of a second-best solution.
In 2002, when the Enron and WorldCom scandal broke, the Congress held hearings and some chief executives were jailed. Who did what was the big story in the major news media almost every night. Congress rushed to enact the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002. The act placed unnecessary, onerous and costly accounting standards on American businesses. The Enron and WorldCom debacle is a drop in the bucket compared to the financial mess that Congress has created through Fannie Mae and Freddie Mac, in the name of "affordable" housing. Have you heard Congress calling for hearings? They haven't called for hearings because many of them, both Democrats and Republicans, receiving hundreds of thousands of dollars, were in cahoots with Fannie Mae and Freddie Mac. If Americans are going to be on the hook to bail out these government-sponsored enterprises, at the minimum congressional hearings ought to be held to find out who did what and when.
Corporations employ accounting practices promulgated by the Financial Accounting Standards Board (FASB) that established Generally Accepted Accounting Principles (GAAP). Fannie Mae, Freddie Mac and government agencies have accounting practices that don't come close to, and never did, the honesty of private accounting practices. Accounting fraud and deception are the dominant features of government agencies. If a private business kept and cooked the books, like government agencies do, the top executives would go to jail. Shouldn't the accounting standards businesses have to meet be applied to Washington? My answer is yes and if a congressman says no, I'd like for him to tell us why.
Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.<!--QuoteEnd--></div><!--QuoteEEnd-->
<a href="http://www.gmu.edu/departments/economics/wew/articles.html" target="_blank">Professor Williams</a> sums it well:<!--QuoteEnd--></div><!--QuoteEEnd-->
That's an interesting ideology, but Fannie and Freddie are a miniscule portion of the problem. The biggest problem at the moment is the infinite chain of undisclosed, unregulated, credit default swaps. The reason banks are hoarding their cash is that they don't have enough information to evaluate the credit-worthiness of any company, since these hidden liabilities have saturated the financial markets.
And I agree that Capitalism is an interesting ideology.
B) An ex-financial analyst and friend of my family is stocking up on canned goods and is looking into buying a home defense gun. <img src="style_emoticons/<#EMO_DIR#>/tounge.gif" style="vertical-align:middle" emoid=":p" border="0" alt="tounge.gif" />
BRING THE ZOMBIES ON! <img src="style_emoticons/<#EMO_DIR#>/asrifle.gif" style="vertical-align:middle" emoid="::asrifle::" border="0" alt="asrifle.gif" />
I don't agree with your assertion that Congress has been threatening lenders, but it's irrelevant anyways. No matter how many bad mortgages were given out, if their risk was properly reported by the credit agencies this never would have happened. Unfortunately the credit reporting agencies weren't sufficiently independent from the firms whose assets they were rating to assess them properly. They were calling bundles of bad debt AAA securities, which is the same rating as government bonds.
That's just what set the dominoes falling though. They were set up by these infinite chains of credit default swaps that allow the folding of one company to bring down 100 banks. This is only possible because there was no regulation requiring these liabilities to be disclosed.
Capitalism only functions when all parties have good information, and that requires regulation.