Bailout, the $700 billion dilemma and world markets

[kgun]

I watched some of the videos.


What would happen if nothing is done? The credit market will implode. I have never heard that word used about a market. Aside from that, I did not see an explanation of what happened in Europe. There are two terms that are used in empirical finance:

• heat wave effect
• meteor shower effect

The heat wave hypothesis assumes that volatility has only country specific autocorrelations, while the meteor shower hypothesis allows volatility spillovers from one market to the next. So this credit / financial crisis is most probably a meteor shower effect.

Links:

Where Does the Meteor Shower Come From? The Role of Stochastic Policy Coordination

http://www.frbsf.org/econrsrch/workingp/wp99-09.pdf

[ctabuk]

I was skyping a good buddy of mine - the infamous Kevin Riley - he lives in Osaka in Japan and he told me that recession is already there. 3 Banks have gone, empty apartments, building projects scrapped and sites left abandoned.

$700 Billion is a sticking plaster over a mile long cut. It was greed that caused it and only one Country to blame. The USA - We had USA Lenders here paying massive procuration fees to brokers who were encouraged to break UK Law on Mortgage selling (I am a UK Broker and fought against it with National Press) they door to door canvassed and sold loans to people who simply could not afford to pay it back. There will be a crash and $700 Billion is in fact nothing more than a money printing exercise - and thet will create more doom and more gloom - not immediatly, there may even be a celebration period - but give it 6 months.

[crankydave]

Bailout, rescue... quite frankly I don't care what you call it it's little more than putting a small bandaid in something that requires stiches.

Anytime you remove the possibility of "failure" from the equation you remove something I believe to be critical to the decision making processs. Folks who believe that they are not going to be "allowed" to fail will do stupid things. I think we're seeing what's been over a decade in the making come to fruition.

My biggest issue with this whole "package" is that it depends upon the very same folks who caused or escalated this problem to begin with, not to make the very same mistakes again with no additional incentives or changes to disuade them from doing so. Greed is a powerful motivator and likely the most powerful influnce if folks believe that they're not going to be allowed to fail.

We even have banks not willing to lend to other banks. What does that have to say about the faith they have in their very own practices? Deregulation passing in 1999 literally allowed the financial sector to further invest in their own investments. Literally, banks loaning money and then investing in the securities of the very same money the loaned. No diversity. This adds up to one sector dragging all the others down with them with any downturn. One large basket and a whole lot of eggs and now that basket has a gaping hole in it.

Dave

[kgun]

House prices are now falling here too and for the first time in four years, house prices are falling in Singapore ("Asia's Switzerland"). It is a global problem.

I agree with David, USD 700 Billion is not enough to fix the problem. My own view is thay the biggest risk takers should go bust. Here the bad house loans (subprime mortgages) are compared to a man selling apples. He sells a box of rotten apples covered with a few good covering the top layer. Lehman Brothers had tons of mortgage backed securities that fell in value as house prices started to fall. Some of these loans were pushed by aggressive sellers / financial (dis)advisors.

The most critical issue is that the (global) credit market must function for the economy to function. So

1. Let the most irresponsible institutions / companies go bust. That is how a capitalistic system functions. There should be no free lunch. High risk has a high price.
2. Central banks must supply the necessary liquidity to the more responsible and risk adverse institutuions.

In my view, global deflation may now be a more serious threat than inflation. Sector deflation is a fact. There are downward pressure on energy prices and food prices may follow. Then it is a question of time before US domestic deflation is a fact and like a meteor shower it may spread across your borders to become a global problem. Cash is king in times of deflation.

[ctabuk]

We all appear to agree - that is cool. What is needed is for someone to listen to George Soros

http://www.guardian.co.uk/business/feedarticle/7842492

[crankydave]

The most critical issue is that the (global) credit market must function for the economy to function. So

1. Let the most irresponsible institutions / companies go bust. That is how a capitalistic system functions. There should be no free lunch. High risk has a high price.
2. Central banks must supply the necessary liquidity to the more responsible and risk adverse institutuions.

.

Agree.

Let's also not forget that in the US lenders are required by federal law that a certain percentage of their loans be high risk. I believe it's around 30%. Now, I understand the principle behind it but let's face it, some folks/businesses should simply not be extended credit. This needs to change.

Dave

[cw1865]

I agree, if you're in the business of extending credit, you should know who is credit worthy. Of course, 15 years from now, we'll be bemoaning the fact that poor people don't have access to the credit markets.

As much as I am ticked off here, it still needs to be put into its proper perspective. We are talking about mortgages here. Not gold mines; not highly leveraged stock plays....

I think an equitable long term solution would be to require 'deficiency judgment' insurance if you take out a mortgage with less than 20% down. In this way, if you're in a rising market and default, you can simply turn around and sell (and walk away with the profit), but if you're in a declining market (ie. upside down), you can sell and the bank is secured by the insurance, ie. you can sell and walk away.

This way you also have two entities assessing the credit risk - the bank and the insurance company.

Of course the insurance company needs to make an accurate actuarial risk calculation!

[ctabuk]

Speaking now not as a Mod in WPW but as a regulated Mortgage Broker to the UK Government Homebuy Scheme - A failsafe Insurance Policy would carry with it a commission - In order to have such a policy the Insurer would know in advance that the perspective buyer would be 'being sold a loan' as opposed to having gone looking for one. It's a total non starter - maybe the US has different insurability factors - but when I was 'at Lloyds' the basis of all insurance warranties is to have an insurable risk. Placing cover based on future house/property prices falls into a different remit entirely. You can index link upwards - but not downwards - the only avenue would be on a 'like for like' basis.

The US Lenders who operated in this Country used Brokers who 'used high pressure tatics' in order to force sales. Greed - it was always doomed to failure and I went on record on that years ago.

[kgun]

We all appear to agree - that is cool. What is needed is for someone to listen to George Soros

Business Feed Article | Business | guardian.co.uk

George Soros has many thoughtful provoking ideas worth listening to. Bloomberg is another that shared his view on Cnn yesterday. Warren Buffett calls this crisis a financial Pearl Harbor. I disagree, since it is first and foremost an internal American problem. Personally I have mentioned a negative saving rate as a main American problem that is intimately related to credit culture. My personal view is that USA will come out of this crisis with a stronger market economy. Part of the problem is also related to internet business. Aside from permission, what do you need to run an online bank? A small staff and some stable secure computers. Here http://www.webproworld.com/msn-searc...tml#post397324 is a related thread.

The US Lenders who operated in this Country used Brokers who 'used high pressure tatics' in order to force sales. Greed - it was always doomed to failure and I went on record on that years ago.

We don't need to go to the USA to find them. You find them here, too. Young well dressed men that give you a flower and disappear once the contract is signed.

This classic book was mentioned yesterday on Cnn:

Extraordinary Popular Delusions and the Madness of Crowds

"Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

- Charles MacKay, 1841

[cw1865]

The US Lenders who operated in this Country used Brokers who 'used high pressure tatics' in order to force sales. Greed - it was always doomed to failure and I went on record on that years ago.

I would say that virtually any risk is insurable. In the US, when you buy a house, you must also purchase 'Title Insurance' (if you're taking a mortgage), which is essentially insurance that the deed that you're getting is valid. The most common claim is on relatively minor boundary disputes, but in certain areas where land is expensive, minor boundary disputes carry with it a large price tag. The insurance company wouldn't be just insuring against future home values. Essentially they're insuring a sufficient debt/equity ratio when the home sells. It would definitely kill 'interest only' mortgages.

I have no idea how the UK performs a real estate closing, but in the US, the buyer is typically represented by an attorney and if you're getting a mortgage you're pretty much going to need an attorney if for nothing else but to be a conduit for the mortgage funds to get to the seller.

I have performed many real estate closings in NJ and as part and parcel with any contract, there will be a mortgage contingency clause which will contain specific provisions about what constitutes an acceptable mortgage.

Between initial offer and the actual date of the closing, there is a considerable gap of time. There is plenty of time to review everything; not sure where 'high pressure' fits into that equation. Nobody can sell you a mortgage until you want to buy a house.