In lame men's terms, WHAT THE FUCK IS GOING ON?

[RandomAccess]

Re: In lamemen's terms, WHAT THE FUCK IS GOING ON?

As I understand it, here's sort of a chain reaction, oversimplified:
Lending industry makes risky loans based on inflationary housing market.
Housing market bubble bursts.
Mortgages default.
Lenders face bankruptcy.
Lenders (banks) fail.
Wall Street reacts to tanking financial institutions.
Financial institutions lose more money in collapsing stock market.
And on.
And on.
And on (unless it's somehow stopped. . . as in, the Fed bails 'em all out)

 

[Orlandude]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

^^^^That's just about it...in a nutshell. The only thing I would add is that the lending industry was ALLOWED to make risky loans due to no oversight and running rampant, unregulated. There was no question that the housing "bubble" would burst and everyone knew it couldn't go on much longer. Borrowers took advantage of all of it and greed steered the ship that sunk. Wall Street greed is just as much to blame.

 

[G-Lexington]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

First off, it's "layman's terms", but I know what you're getting at.

Glenn Beck on CNN.com gave an interesting analogy which might get you in the ballpark of understanding what's going on. Glenn tends to be too far right for my tastes (apparently, this is the Democrats' fault somehow) but the analogy is still a good one.

It's just before Christmas,1996, and as you watch overeager parents trample each other to buy Tickle Me Elmo dolls for their kids, you see an opportunity. "This isn't a Tickle Me Elmo bubble," you think to yourself, "this is a long-term trend. Every person in America will soon own a Tickle Me Elmo, maybe even two. It's the American dream."

You approach your local banker about a loan and, naturally, he loves your idea. In fact, he loves it so much that for every $1 you have in your account, he's willing to lend you $34. Great deal, you think, as you max out your credit line and buy as many Tickle Me Elmos as you possibly can.

Sales are easy at first. People are lining up to buy your dolls and the prices are going far higher than you ever thought. The only person happier than you is your banker.

But the following year something unexpected happens: Kids stop asking for Tickle Me Elmos. You try to cut the price, but no buyers show up. You cut the price more, but your store remains empty.

Panic sets in.

You're pretty sure that this downturn is just temporary (after all, who wouldn't want a Tickle Me Elmo?) but you're quickly running out of cash. Your only option is to buy time and hope that Tickle Me Elmos start flying off your shelves again.

You visit every bank in town and, using your piles of Tickle Me Elmo dolls as collateral (which, of course, you purchased with money you didn't have) you get as much new capital as possible.

Soon that money is also gone. Even your friends and family refuse to give you any more loans. At the end of your rope, you go to your town council, which gives you a "bridge loan" to get you through the next few months (something that makes your Furby-selling competitors extremely upset).

Unfortunately, no matter how much you borrow, there's still one nagging little problem: No one wants to buy your stupid Tickle Me Elmo dolls anymore.

The longer you wait, the less they're worth. You sell some for pennies on the dollar, but pretty soon you can't even do that. Then things get even worse: News breaks that China is poisoning some Tickle Me Elmos before shipping them to the United States. Now your dolls are not just out of favor, they're toxic. You literally can't even give them away.

Soon the rest of your money dries up, as do the people who are willing to lend you any more of it. Now you're out of cash; out of a job, and, if not for the pile of poisonous Tickle Me Elmo dolls in your basement, completely alone -- which sounds kind of like the CEOs of Lehman Brothers and Bear Stearns.

Believe it or not, this ridiculous story may be far from reality, but it's not that far off from describing what these financial and mortgage companies did to themselves. Just replace the Tickle Me Elmo references with the once popular, then discounted, now completely toxic subprime mortgages and you're pretty much there.

In short, these companies began snapping up as many subprime mortgages as they could. After all, they were making quite a bit of money over the past several years, and investors want to make money. If one investment gives 5%, and another gives 30%, which one you gonna go for? So everybody went after the 30% one. And since everybody was scrambling for them, the rate stayed high.

But, as with tech stocks in the late 90s, and stocks in general in the late 20s, the price of these mortgages ramped up far too high. And, as is often the case, the bubble burst. Suddenly, all these subprime mortgages that were worth tons of money aren't worth a thing. Companies that did almost all subprime mortgages (Countrywide) were the first to hit the wall, but many others who shored up a lot of capital in them are now feeling the burn.

Lex

 

[CoolBlue71]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

First off, it's "layman's terms…

I think both lame men['s] and laymen are applicable.

 

[RandomAccess]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

Believe it or not, this ridiculous story may be far from reality, but it's not that far off from describing what these financial and mortgage companies did to themselves. Just replace the Tickle Me Elmo references with the once popular, then discounted, now completely toxic subprime mortgages and you're pretty much there.

That's a GREAT analogy! I gets into complexities that my explanation could not, and still was very easy to follow.

Thanks for sharing it!

And how the hell can he even attempt to lay the blame on Democrats? Is he a McCain butt-boy?

 

[andysayshi]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

^ That's coz namby pamby Democrats buy toys like Tickle Me Elmo, and Republicans are GI Joe all the way!

 

[Homoerectus]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

We can't forget the part played by bleeding heart politicians who 10-15 years ago railed against the mortgage companies for not making loans available for the poor and minorities who could ill afford mortgages. They pressured the banks to issue risky loans. After the first risky loans were issued, it became easier and easier for the banks to issue the next one. All they saw was $$$$ . The days of credit check was long gone. Many banks simply asked if you are employed, no proof necessary. They sold these poorly educated people "the American Dream" borrowed on adjustable rate mortgages which were poorly explained if at all. When rates went up, mortgage payments went up. When homes were foreclosed, banks didn't have sufficient capitalization to keep them in business. Finally, remember, shit rolls down hill and now you and I, the taxpayer, have taken over these huge brokerage banks and their bad debt. And the CEOs will bail out with their golden parachute bonuses. They get richer and you get screwed. What was the old song, "She got the gold mine and I got the shaft"? BTW, if you don't understand this you should really study the cause and effect. Everyone needs a reality check so they don't repeat the mistakes of other.

 

[Dobson73]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

G-Lexington, thank you. As a foreigner sitting on the sidelines and watching the US economy implode and take the rest of the world with it, I've struggled to understand why.

If only those bastards who gave the money lost a bit more than their homes in the Hamptons? They've dragged the world to the edge of a very scary precipice. Fortunately I'm currently in a position where I can still meet my mortgage repayments and our banks are relatively healthy, but who knows how long that will last for?

I honestly don't believe that there are too many heads heads of banks/investment firms/companies etc in the US who have any idea as to what impact their actions have on the rest of the world.

So yes, You guys sneeze and we catch cold. Right now it feels as if you've got the 'flu and we're catching pnumonia

 

[evanrick]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

this whole thing is probably being dramatized way too much in the international media.

 

[smelter]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

If only those bastards who gave the money lost a bit more than their homes in the Hamptons?

The really sad truth is those bastards are still in their Hampton homes and doing quite nicely, thank you very much. They might be a little poorer perhaps but smart enough to have exited their toxic stocks and investments before the common folk had a clue there was a problem.

 

[naked gent]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

We can't forget the part played by bleeding heart politicians who 10-15 years ago railed against the mortgage companies for not making loans available for the poor and minorities who could ill afford mortgages. They pressured the banks to issue risky loans.

I've heard this line of argument over the last couple of days and while I'm sure those bleeding heart politicians played their role I doubt they were at the root of the problem.

(as an aside I recall President Bush in one of his State of the Union addresses happily reporting that U.S. home ownership had risen to its highest level ever under his administration which leaves me wondering if some think him a bleeding heart pol)

First off to say the banks were forced to make loans to those who might not be able to pay them back and without government pressure would never have made them means we'll have to ignore the actions of many of these same banks in their credit card divisions.

While there was no government forcing them here they still gave credit cards to a sufficient number of people who could not pay them back to go to congress and have the bankruptcy laws changed. So giving money to people who might not have the capacity to pay it back, whether for a house or for consumer credit, is something the banks could very easily do on their own without any prodding from Washington.

That line of argument also does not address the rapid rise in the cost of housing which played an even larger role in this whole mess. If housing values had only increased by historical standards then most of this would have been avoided.

If conservatives wish to blame the whole mess on too much government regulation as opposed to not enough I fear they may end up looking sillier than usual.

Another thing that line of argument ignores is that, thanks to Alan Greenspan, there was a tremendous amount of liquidity in the market and as we learned from the dot-com bubble there are only so many good investments out there and when there is more money to invest than good investments some of that money ends up in bad investments.

Perhaps had Bush not given the rich such a large tax cut they would not have so foolishly invested their money.

My final thought is that in reading all the explanations given here so far one might come away thinking the banks which made these bad loans still had them on their books but, for the most part, they don't. The banks current problem is not that mortgages are defaulting but that credit has dried up and they are afraid to loan what money they have because they no longer have any confidence in the stated value of a particular asset.

The real problem Washington is trying to address is that fear has replaced greed as the motivating factor in the economy. By throwing money at the problem they hope to place greed back in charge.

 

[G-Lexington]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

>>>If conservatives wish to blame the whole mess on too much government regulation as opposed to not enough I fear they may end up looking sillier than usual.

They may look silly from our point of view, but it's this sort of thing that gets them votes. If they can throw the burden of blame for this onto the Democrats. that'd help secure more seats for them come November. That said, that's going to be very difficult for them to do. The American public pretty much pictures as banks and financial institutions as being almost synonymous with the GOP, and so it'll be tough to convince the rank and file Americans that this mess has the Democrats' fingerprints all over it.

Lex

 

[Kulindahr]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

Yes, there was pressure from the government for banks to make loans easier for lower-income buyers. As loans became riskier, government also looked the other way because rising home ownership figures were good to brag on. And as Lex' illustration showed, there's a bandwagon effect.
What hasn't been point out along here is that on every step of the credit trail, money comes into existence (someone more facile with economics can try to explain how that works). That money is put to work farther along the line -- but when the actual investment supporting that chain drops in value, that money disappears (that part's easier to understand: if a guy's house was worth $430,000 last week, but now is worth only $350,000, $80,000 has disappeared into oblivion).
In an economy, money is what does work. Vanishing money means vanishing ability to do work, and that means people get backed into corners, have to cut their losses... which makes more money disappear -- and so on.

 

[Kulindahr]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

RE regulation:

when you're dealing with accountants, there's no such thing as too much regulation. It doesn't matter how much you write for them, they'll find or invent new ways of doing things that your regulations don't touch. It's been happening throughout history, which is why there's the phrase "regulating for the last crisis". We'll do it again, writing rules to cover what went wrong this time, and then the accountants will find new tricks of their trade, and rush ahead with them, and there will be another crisis when the limitations of the new situation are reached and passed.

 

[Kulindahr]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

marley, the fault lies with something Abraham Lincoln warned us about: proliferation of law breeds disrespect for all law.
We have so many rules about so many things, so many laws we don't even know exist, that it feeds a mentality that seeks to get ahead by getting away with whatever can be done. Rules in multitudes stop being moral imperatives, or even moral cautions, and become merely parts of a game where the object is to not get caught. That's true of politician and capitalist alike -- especially so when the line between those two has been blurred, as it has by the fact that politicians control so bloody much money.
Historically, I don't know that there's ever been a way back from this morass. The trend is to try to fix it with more rules, which become just more elements to be juggled in the game -- and which incrementally increase the government's control of the country's money, which further corrupts politics and feeds corruption in business and further muddles the line between.

 

[Kulindahr]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

^I've always doubted that my tax dollars go to anything that benefits me, but the more I learn the more discouraged I become, and disgruntled about having to give my money away to people who are probably going to use it to fly their hookers first class.

I said it before, I'll say it again, I say we fire EVERYBODY and start from scratch. It amazes me to no end how many heads are stuck in the sand while Washington and our local and state officials play hot potato with our money.

You think in terms too small:

We don't just fire everybody, we eliminate the entire federal government except for what's explicitly authorized in the Constitution (that leaves us with the armed forces, I believe), after spinning off Social Security as a chartered not-for-profit authorized to dispense federal funds for people, and a similar structure for the National Parks.

Then we review all the laws, and any federal law that isn't plainly and explicitly serving the function of upholding and/or defending an individual right gets dumped.

Then we start over, electing a new Congress only from people who've never been in the federal government before (elected or bureaucrat).

 

[Sbaraglia]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

After doing as much homework as I could stomach on this crisis (and I much appreciated the educational posts in this thread), I figured that Paulson's plan is probably the best thing we can do to avert catastrophe - but I am troubled by this from today's lead story in the Los Angeles Times:

The dollar figure alone is remarkable, amounting to 5% of the nation's gross domestic product. But the most distinctive -- and potentially most controversial -- element of the plan is the extent to which it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress' traditional power of the purse.

"Nothing quite of this scale has happened since the early years of the country when Alexander Hamilton wrote the Treasury act to give him the power to borrow and intervene in markets," said New York University financial historian Richard Sylla. And in Hamilton's case, Congress quickly clipped his wings, and no successor -- not even under President Franklin D. Roosevelt at the height of the Depression -- exercised quite such unfettered power again.

"It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit," said Sen. Dianne Feinstein (D-Calif.), referring to Treasury Secretary Henry M. Paulson.

"He will have complete, unbridled authority subject to no law," she said.

 

[RandomAccess]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

After doing as much homework as I could stomach on this crisis (and I much appreciated the educational posts in this thread), I figured that Paulson's plan is probably the best thing we can do to avert catastrophe - but I am troubled by this from today's lead story in the Los Angeles Times:

Thank you for posting this, Sbaraglia! It has opened my eyes to a lot!

When Bush announced the bailout plan, he played the ". . .no time for partisan politics. . ." card. I thought that a surprisingly strong statement for what should be a no-brainer. This article, however, points out the items to which some legislators on the left may resist. Now he has provided himself the hammer with which to beat them for it. Namely, "partisan politics." As soon as someone cries "foul" now, it's "partisan politics."

Sorry for all the mixed metaphors!

 

[Sbaraglia]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

Thank you for posting this, Sbaraglia! It has opened my eyes to a lot!

When Bush announced the bailout plan, he played the ". . .no time for partisan politics. . ." card. I thought that a surprisingly strong statement for what should be a no-brainer. This article, however, points out the items to which some legislators on the left may resist. Now he has provided himself the hammer with which to beat them for it. Namely, "partisan politics." As soon as someone cries "foul" now, it's "partisan politics."

Sorry for all the mixed metaphors!

But it seems that folks on the right - "conservatives" - should be deeply troubled by this as well...I get the feeling that we're all stampeding, squealing with terror, over a cliff, driven by dire warnings of ultimate doom if we don't approve the administration's plan right away...remind you of anything else this administration has done? But then, I would have thought that "conservatives" would have opposed sending our troops unnecessarily into a foreign entanglement...

 

[Sbaraglia]

Re: In lame men's terms, WHAT THE FUCK IS GOING ON

sweet jesus...the Paulson plan is expanding...will no one stop this madness?

http://www.nytimes.com/2008/09/22/business/22global.html?hp

The financial crisis that began in the United States spread to many corners of the globe. Now, the American bailout looks as if it is going global, too, a move that could raise its cost and intensify scrutiny by Congress and critics.

Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.

On Sunday, the Treasury secretary, Henry M. Paulson Jr., indicated in a series of appearances on morning talk shows that an original proposal introduced on Saturday had been widened. “It’s a distinction without a difference whether it’s a foreign or a U.S. one,” he said in an interview with Fox News.