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Saturday, Jul 4, 2009
None of what I say here is meant to imply that the fundamentals don't stink, but the real problem is with the heavy hitters going on vacation.
Every couple of years, the high rollers in New York take a couple of weeks off. Usually it coincides with the New York Yacht Club's annual cruise. They pile onto their boats and head to Newport, Marblehead, Christmas Cove, and Bar Harbor. While they are gone the children get to run the store. Sometimes it works well, and sometimes it stinks. It's always back to status quo by September 15th. They always make money on the instability.
If you don't believe me... Check for the correlation between NYYC Cruises and tanking markets in August.
Or, as Gomer Pyle used to say: 'Surprise, Surprise, Surprise'.
Notice the date.
MARKET WATCH; Mortgage Markets Are Out Of Control
August 17, 2003, Sunday
By GRETCHEN MORGENSON (NYT); Money and Business/Financial Desk
Late Edition - Final, Section 3, Page 1, Column 1, 668 words
http://select.nytimes.com/gst/abstract.html?res=F10F16FE3F540C748DDDA10894DB404482
Greed is good. Except, of course, when it's not.
I think these guys ought to be regulated. Just a thought.
... for a lucid primer to a horribly complex fiscal mess. It's tempting to point to this notoriously hands-off (except when it comes to anything involving iraq, or women's reproductive rights, or ...) administration as being responsible, but clearly we've been headed this way for a long, long time. What I'm more interested in is how this ties in to our whole sick culture. Health care administrators whose job it is to make sure you DON'T get the treatment you need. Credit card companies whose primary goal is to make sure you DON'T pay off your balance each month.
What is the common denomenator here?
Thank you for writing this. As a casual but determined news hound, I find it difficult to find articles that explain the basics of the many news items that appear in the papers daily. The whole financial melt down would have gone over my head if not for your informative piece- thanks again.
Let's see, do I recall a series of articles in 2004 and 2005 about how foolish it was to be sitting on your home equity when you could be cashing it out and investing it in, well, MORE real estate! Yes, I believe I do. I remember gagging at the audacity of the financial retards in the pieces I read in newspapers and online who clucked over the ignorance of the boobs (like me) who let their home equity lie un-leveraged. Fortunately, my wife and I knew this was a pile of horse dung and burned the newspaper.
Unfortunately, millions of homeowners once again proved a fundamental tenet of human behavior: people will always believe that the way things are today is the way they will always be. Booms go bust; that's why they're booms. Yet Joe Homeowner turned his Beige Castle in the burbs into a wallet again and again, cashing out for the 64" plasma, the new boobs for wifey, and that new deck with the turbo-charged gas grill.
Oh, but then the ARM loan came due...and home values quit elevating like LeBron James...and we owe WHAT? And our house is worth WHAT? Oh dear. Oh my dear me.
The media bought and sold the real estate/Wall Street love affair just as it bought and sold the "new economic rules" of the dotcom boom, when whoring publications like Wired talked about the "Long Boom" to come. Pigeon-brains, the only long boom is the inevitable crash of housing prices. The media sold, we suckers bought, and what's always true will again be true. The folks who don't panic and do something stupid now will come out fine. The stock market will right itself. Home values will stabilize. Not tomorrow, but next year, probably. Some folks who got burned will learn and make wiser decisions next time around. But the people who freak out will take a bath. And the world will keep turnin'. Amen.
This is an excellent primer on Housing Busts and Hedge Fund Meltdowns by the New York Times:
http://tinyurl.com/337j9t
SEE ALSO:
Mortgage Originated Credit Crunch May Just Be Beginning
(Excerpt):
Under the new market structure today, fixed interest fund managers are not in the mortgage lending business like the banks were… They don’t have to buy mortgages. They could just as soon hold treasuries… What if most of the world’s big fixed interest fund managers suddenly decide to go risk adverse, and sharply slow, or even stop purchasing mortgage securities[?] The entire global mortgage market would seize up… The whole structure of the [mortgage] security presumes there will be… buyers of the low quality tiers. When [that] end of the market dries up, you can’t sell the higher quality tiers either. So the entire market just shuts down. (MORE)
http://usmarket.seekingalpha.com/article/44233
As far as I can tell (as a total layman), we are only at the beginning of this disaster. With the one-two punch of tightnening credit and impending ARM rate resets, more homeowners will go into default -- and I'm not talkin' subprime types, either. There is going to be a cascading effect of defaults, negative market reaction, a further tightening of credit availability resulting in fewer people buying (or refinancing) homes, in turn resulting in an ever-increasing glut of unsold homes and defaults, further exacerbating the situation and, on top of that, a slowing of consumer spending as this all comes unraveled.
If someone out there who is much more well-versed than I in the world of economics can disabuse me of such notions, please do.
You're not alone in doing this, but I'm disappointed to see yet another discussion of complex financial instruments reduced to an analogy with betting. This simply isn't useful in helping people understand what's truly going on. Most people have a subconscious understanding of betting as something dangerous, kind of shady, and inherently extremely risky (and often fixed). You're invoking all of that by using the analogy, even if it isn't valid.
Unless you believe all investing is equivalent to betting on the Super Bowl, this isn't a good way of explaining the relationship between risk and reward and how that's obfuscated.
These financial instruments are accumulations of real sources of income. At the bottom are a bunch of mortgages getting (hopefully) regular interest payments. It makes perfect sense to aggregate them and sell them. It's entirely reasonable to have the higher-risk mortgages pay higher interest rates in exchange for the increased risk. This is how financial systems work. It's no more betting than buying stocks is betting. It's just more complicated.
To make a sweeping generalization, markets go wrong in two ways: people ignore risk, or people lie about risk. When people ignore risk, they pursue the highest-paying investments, ignoring that there's a reason why they're high-paying. When people lie about risk, they deceive people into thinking an investment with greater gain potential has the same risk level as some traditional investment with less gain potential, and thereby draw money into their investment. That's the part of this story to focus on. Were people just ignoring the risk, putting too much faith in the idea that not all the mortgages will fail at once and hence the senior securities will be safe? Or were people lying?
Talking about betting does nothing to add clarity.
The Wasilla soap opera just gets weirder as Palin complains critics are "picking apart a good point guard"
The media outlet's use of Bush euphemisms sparks a much-needed debate on journalistic standards.
And so are his Fox News pals, who lambasted Sen. Al Franken's "stolen election"
An inflexible right wing is allowing the Golden State to drown in debt. But it's not alone
Thanks for sharing, Governor. Now please take a cue from Norm Coleman, and go away
Salon headlines in your mailbox
