Another financial crisis?

[BeenThere...DoneThat...]

May 30, 2011 12:44:26 GMT -5 @horatiolegrand said:

Have the causes of the previous financial crisis been resolved?

Can you list (in your opinion) the two or three main causes of the last financial crisis and describe if they are still a problem?

Here's an article on the subject.

www.bloomberg.com/news/2011-05-30/mobius-says-fresh-financial-crisis-around-corner-amid-volatile-derivatives.html

Thanks

...no...

1. people still think they can/should be 'bailed-out' upon request
2. people still over-leverage beyond their ability to absorb loss (see #1)
3. people still need to get a grip that we are just small specks in a ruthless universe (or however that saying goes)

...imo...

[Opti]

1) Biggest issue - derivatives

“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns
(From the article in the link.)

2) Both parties are willing to privatize gains of large companies and socialize losses in the US, so worse off than we were when it started, when there was a dim hope the majority of politicians didn't swing that way.

3) The too big to fail banks are larger than they were before so have no reason to play it safe and far more reasons to continue with risky investment and money growth strategies.

[BeenThere...DoneThat...]

<<< Can you be a little bit more specific about who the "people" are that you are describing? >>>

...just people... individuals... of whatever color/creed/culture... whether they are at the helm of great business enterprise or at the helm of a minivan... imo, our ambition, while powerful, must always remember our humanity... and if you exhaust more than your own resources for your own risks, mankind has a problem...
...imo...

[BeenThere...DoneThat...]

<<< 2) Both parties are willing to privatize gains of large companies and socialize losses in the US >>>

...yep...

[rovo]

Have the causes of the previous financial crisis been resolved?
NO!

Can you list (in your opinion) the two or three main causes of the last financial crisis and describe if they are still a problem?
In my opinion the major cause of the financial crises was (and still is) an extremely large balance of payments trade deficit.

[Savoir Faire-Demogague in NJ]

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns
(From the article in the link.)

The bigger question is, why were these loans non-performing in the first place, and why were they underwritten to begin with.

[Savoir Faire-Demogague in NJ]

Can you list (in your opinion) the two or three main causes of the last financial crisis and describe if they are still a problem?
In my opinion the major cause of the financial crises was (and still is) an extremely large balance of payments trade deficit.


A trade deficit for the most part, transfers wealth to the countries we have deficits with and devalues our currency with their currency.

[rovo]

I see most of the "reasons" being listed here as affects of the financial crises and not the cause of the crises.

Derivatives or even the underlying loans would not have been a problem had the housing market not reversed. The housing market would not have reversed if we would not have allowed such risky loans. Risky loans were allowed and encouraged by our government to foster the impression of a growing economy when the reality was quite different.

[Savoir Faire-Demogague in NJ]

The US has had trade deficits for many decades now. This is hardly a cause of the financial melt down.

[Savoir Faire-Demogague in NJ]

Risky loans were allowed and encouraged by our government to foster the impression of a growing economy when the reality was quite different.

Interestingly enough, FNMA was prohibited from getting into the sub-prime market due to the risk. In the late 90s, the fed govt forced FNMA to start buying these high risk mortgages.

[svwashout]

My guess is it comes from complacency. Managers who are optimistic to the point of being risk-blind succeed tremendously when things are going smoothly. Their doubter and nay-sayer rivals get swept aside when it comes time for promotions (hey look at all those free premiums I've collected!). Companies that hesitate lose and get bought out. So you end up with large amounts of money run by people who can't acknowledge that anything can possibly go wrong. After all they have the best track-record.

I read somewhere that the Forest Service used to have a zero-tolerance policy for small natural fires. Over time this led to the buildup of a large reservoir of dry tinder that blew up a few years ago. I understand this policy has changed. I wonder if anyone who's trying to wring out the fluctuations in the business cycle got the memo.

[rovo]

I'm sticking to my guns on the trade deficit being the root cause of the financial crises. Yes, the trade imbalance has been going on for quite a while and, yes, it has been glossed over for just as long.

A nation has a storehouse of wealth associated with it. We ran trade surpluses for decades since the end of WW2 and they started to swing negative around 1977 but the %, as measured against GDP, was very minor. Around 1983 they took a big dip to the downside but recovered in the early 90s (think computor exports). Since 1993 the trade deficits have been increasing steadily to a point of 5% of the GDP.

www.marktaw.com/culture_and_media/TheUSTradeDeficit.html

[rovo]

4.bp.blogspot.com/_pMscxxELHEg/SXu-IBM6k3I/AAAAAAAAEXE/Q2KYO8ce_9Q/s1600-h/TradeDeficitGDP.jpg

[BeenThere...DoneThat...]

<<< Since 1993 the trade deficits have been increasing steadily to a point of 5% of the GDP. >>>

...which, (relatively) shortly followed the explosion of TV sitcoms depicting blue-collar families living white-collar lifestyles... which, essentially, contributed to greater demand of imported (and cheaper) sundries...
...imo...

[rovo]

I'm not about to blame the trade deficits on the rise of sitcoms. People always have wants. Wants always exceeds one's ability to finance them. It's called dreaming and we all do it.

The problem arises when the government institutes policies that allow those wants to be met by allowing or fostering low cost loans.

A bigger question is whether or not the world has improved? Many countries and millions of people have benefited from our follies. Hundreds of millions have been pulled out of poverty by our trade deficits. Tens of millions in this country have been harmed but hundreds of millions have seen their standard of living improve. If you take a world view then it is a much better place. The USA? Not so much.

[Savoir Faire-Demogague in NJ]

The financial meltdown was in the fixed income, housing markets, and insurance companies insuring sub-prime loans. The trade deficit had nothing to do, even remotely with the collapse of these areas.

[BeenThere...DoneThat...]

May 30, 2011 14:31:43 GMT -5 rovo said:

I'm not about to blame the trade deficits on the rise of sitcoms. People always have wants. Wants always exceeds one's ability to finance them. It's called dreaming and we all do it.

The problem arises when the government institutes policies that allow those wants to be met by allowing or fostering low cost loans.

A bigger question is whether or not the world has improved? Many countries and millions of people have benefited from our follies. Hundreds of millions have been pulled out of poverty by our trade deficits. Tens of millions in this country have been harmed but hundreds of millions have seen their standard of living improve. If you take a world view then it is a much better place. The USA? Not so much.

...good questions...

...and I'm not knocking sitcoms, either... just observing and making conversation...

...I will/do oppose govt. interference with free market forces... credit markets are no exception...

...and a global worldview in our federal oversight ought to enhance our nation, not expense it... imo...

[cubefarmer]

Wall Street will always find a way to make money from nothing because they are greedy and because they can.

[svwashout]

Another opinion--
repowatch.org/2011/05/23/fed-scholars-a-run-on-the-repurchase-market-caused-the-financial-crisis-and-will-probably-happen-again/
Personally I see this as just a trigger event. On the low-cost loans, I suspect twin sisters Fannie and Sallie fed twin bubbles.

[rovo]

You think the govt should disallow low cost loans? Was the problem with the govt or with the loan providers?

Loan providers try to get 2% to 3% on the loans above their cost of the money. They always have and always will. The providers then sell the loans and pocket 1% to 2% on the loan. Rinse and repeat many times during a year and you have the profit for the lending industry. Allow them to finance 95% to 98% of a purchase and loan them money at 1% or 2% and you have the fixins for a disaster.

Has anything been done to prevent this being a problem a year or so from now? Student loans are low cost loans. Do you see them as a big problem going forward?

Student loans may be a problem going forward if they change the rules. I don't think these loans can be discharged through bankruptcy, but I'm not certain. If the loans can not be discharged, then there should not be a problem. A small problem can still occur if the repayment of student loans becomes onerous to the debtors. The payments could create lower spending by the debtors and thus affect the economy. If that were to occur then you could expect the government to socialize the losses. It only becomes a problem if the amount of outstanding student loans is enough to affect the overall economy.

[rovo]

Unlimited loans to people can be a disaster. I'd say 60% of the people in this country are financially stupid and half of that 60%, or 30% of the population, are financial idiots. At minimum the financial idiots should not have access to loans, period.

[BeenThere...DoneThat...]

<<< how would that be put into practice? >>>

...well, for one thing we can get the feds out of the loan guaranteeing business, so that lenders must own up to their own risk tolerance...

[rovo]

Has anything been done to make sure the country does not repeat the financial crisis we went through?

You're kidding, right? What even makes you think we are through with the current crises? If you want to segregate and say the previous crises is over, then we can look forward to a new and bigger one. Why? Because not enough has changed to prevent the next one. Not only have the seeds been sown but the shoots are beginning to pop through the soil. The economy is currently slowing again and by the end of this year we should begin to see some more serious problems.

[Gardening Grandma]

May 30, 2011 15:18:48 GMT -5 BeenThere...DoneThat... said:

<<< how would that be put into practice? >>>

...well, for one thing we can get the feds out of the loan guaranteeing business, so that lenders must own up to their own risk tolerance...

If lenders had to service the loans they made, there'd be a lot more incentive to only make loans that had a good chance of being reepaid as agreed. When they can make loans, then sell them, where is the incentive to screen would be borrowers?

[BeenThere...DoneThat...]

<<< If lenders had to service the loans they made, there'd be a lot more incentive to only make loans that had a good chance of being reepaid as agreed. When they can make loans, then sell them, where is the incentive to screen would be borrowers? >>>

...buyer beware applies to the new noteholder...

[rovo]

I don't see any problem with lenders selling their loans. If they can't sell the loans, then areas of the country experiencing high growth would suffer from lack of funds to finance the growth.

I believe a better alternative is to just raise the down payment requirement to 10% to 15% and to not allow any HELOC or second mortgages which would lower the equity below 30%.

[Savoir Faire-Demogague in NJ]

If lenders had to service the loans they made, there'd be a lot more incentive to only make loans that had a good chance of being reepaid as agreed. When they can make loans, then sell them, where is the incentive to screen would be borrowers?

Lenders are servicing these loans. You are talking about eliminating the fixed income secondary market. The lending industry was strong armed into making sub-prime loans.

[rovo]

But I still stand on my premise of the Trade Deficit being the root of the problem. The housing disaster was just an unintended consequence of the government program to mask the problems caused by the trade deficit.

[Savoir Faire-Demogague in NJ]

Here is an article supporting Rovo's position. I do not have time to read it in entirety, because I am heading into NYC. Just thought I'd toss it out.

www.huffingtonpost.com/pat-choate/trade-deficits-and-the-fi_b_500671.html

[mtntigger]

so what is the answer to that problem?

We need to get back into building and creating items. Bring back industry to the U.S., create an environment where discovering new ways to do things actually can benefit the creator and not just the company, and a new country-wide initiative (such as the space program was in the 60s) wouldn't hurt either.