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Discuss Hey skipster, I thought the market knew what's best at the Politics & Religion within the Wrestling Talk Forums; There's nothing extreme about your postion. You present the availabilty of money as an either/or ...
  1. #10
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    Default Re: Hey skipster, I thought the market knew what's best

    There's nothing extreme about your postion.

    You present the availabilty of money as an either/or proposition. I wonder where this comes from. It's more complicated than that, and the reality has changed signficantly over time.

    It used to be (oh, probably at least through the 80s) that low-income neighborhoods had trouble getting financing, even for credit worthy folks. A specific practice of not lending to certain neighborhoods was called red-lining,
    and it was outlawed.

    The state and federal laws regarding mortgage lending have changed periodically. In or around 1996, there was a federal law (D___) that overrode state usury laws. Proponents of the law said it was necessary to free up loan money being squeezed by then high interest rates. In the aftermath of this law, came the subprime lenders, who specifically marketed bad loans (high interest, excess fees, hidden feeds, high loan to equity ratio, equity seeking) to traditionally poor people. Hence, we had something called reverse red-lining.

    I'm not sure just how this arose, but at some point, these loans were bundled and sold to Wall St investors, insulating local lenders from their shady practices (traditionally a banker had to live with the loans he made in the community where he lived. Not any more). This marked the recent era of expanded loans. Instead of unduly restricting loans, they were marketing to people who should not have had loans, or people were offered mortgages that exceeded their ability to pay (exploding ARMS).

    The homeowner has a role in choosing a mortgage or not, but we're talking about a situation where the parties have unequal bargaining power. Home financing is a sophisticated deal. I'd say most people with college educations do not understand the financing. Part of the bargain (especially for the less educated) involves faith in the other party (the lender).

    The principle of the unequal bargain is why you can't hold a minor to a contract.

    We have decades of shady lending practices (not all lenders are, but the shady ones have been there all along), and when the deal goes bad, you have nothing to say about the party holding all the cards and the knowledge, but you're all too ready to lay blame on the party who's out on the street.

  2. #11
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    Default Re: Hey skipster, I thought the market knew what's best

    There is no freeing up of loan money. A new mortgage is not a loan taken against existing assets. A new mortgage is the instrument used to create new money into the system. The mortgage (debt) creates the new money in the system used to purchase the house, or car, or other goods. The note is the asset. New money is created by a promise to repay a debt.

    In 1971 with the collapse of the Bretton Woods system of backing a portion of the currency with gold reserves we are left with a system of fractional reserve banking where the only real assets are the promise of debtors to repay their loans. It is a shaky house of cards that can come crashing down when some borrowers either can not or will not repay.

    The feds around the world know this and thus the half a trillion dollars of stabilizing money that was pumped into the reeling financial markets in the 4 day period that ended last Monday. Much more is being pumped in every day along with a cut in the bank lending rate to try and get us through this.

    As bad as this is there is another looming cloud overhead with bank equity financing. There is a lot of downside in this segment that will cause chaos it values drop. These were considered blue chip loans as they had asset backing. How many people will continue to payback this type of loan when the asset becomes worth much less then the asset loan? Many sectors in the market are heavily invested in these types of securities

  3. #12
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    Default Re: Hey skipster, I thought the market knew what's best

    "The problem goes way deeper then low income sub prime loans. These are the ones that are being felt today because most of them only had a two year fixed sub prime rate. There are many more out there that went to people with good credit ratings that took ARMs that were fixed for longer periods."

    I agree completely. I live in a semi high-end area in Northern California, and I'm seeing it begin to happen to high-income individuals. I was only addressing low-income borrowers because I was trying to make a point about the availability of loans to the low income strata.

  4. #13
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    Default Re: Hey skipster, I thought the market knew what's best

    I'm reminded of a line from a book that went something like this:

    "If I owe you a million dollars, I'm in trouble. If I owe you a billion dollars, your in trouble."

    Are unqualified homeowners the reason why a myriad of lending institutions are going out of business?

    We had a brilliant talk on the subject at the Cleveland City Club this past friday. The speaker was the Cuyahoga County Treasurer Jim Rokakis. Our area, and Ohio in general, has of course been incredible hard hit by this.

    What was great about his speech is it was a "subprime lending for dummies" where he layed out the history and what has happened. He also repeats some of the points that Matclone has already cited. The City Club I think archives their speeches (either throught their website or on WCLV radio's site). I would encourage anyone interested to listen to it. The numbers are stunning.

    In it he notes how everyone played a bad part. especially including "rating services" (for bonds and other securities), Wall Street, and the Federal Reserve. As a member of a state wide task force he butts heads with the powerful financial lobby.

    BTW, the headline in Saturday morning's Cleveland Plain Dealer: "Cuyahoga County lowers home valuations." Reassessments for real estate tax purposes total one billion dollars.

    This has been Big's dreaded word (capitalistic) "GREED" on full display.

    Again I am left to wonder how anyone can believe that corporations should be allowed an unencumbered role in free markets. How free the markets are seems to be in inverse proportion to the size and resources of the corporations participating.

  5. #14
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    Default Re: Hey skipster, I thought the market knew what's best

    It looks as though I have accomplished all I ever wanted in life -- I have a wrestlingtalk thread written about me and morethan a page of text is written without me even knowing it!! Life truly is good!

    Anyhow, the arguments have been laid out quite well. Flop has done a fantastic job of telling it like it is. Bottom line, the market economy preserves freedom, so it has done the only thing it has ever sought to do -- it allowed people to enter into agreements. The market makes NO warranty as to the suitability of those agreements for any particular purpose. If you want to enter into a sub-prime loan situation, why should anyone stop you?? Perhaps that situation is what's best for you. Two of my co-workers bought vacation homes using sub-priem mortgages and it worked out quite well for them. They refinanced at the right times, locked in decent fixed rates, and saved a bunch of money during the sub-prime period. And these are guys with $40,000/yr incomes and families.

    The market operates in black and white. It is a series of dichotomies, nothing more. It doesn't care if you are rich or poor, because everyone is treated the same. The lender's responsibility is to provide all the information possible (not necesarily conclusions or judgments, like if a particular product is suitable for you) and the borrower's responsibility is to understand that information and make the decisions that best suit himself.

    Some problems that have occurred are when lenders purposefully hids information or disseminate false information. The market does not tolerate that. Law can come into play or, if the market deals with it, the business will eventually take losses or go out of business, which we saw sub-primes take a BIG hit nearly a month ago.

    Let's think of it like this: I ask to borrow $5000 from you and agree to pay it back at a price of $100/mo, then don't pay at all. Later, I ask to borrow another $5000. If you agree to lend it, who is the dummy? Where is the money? HOw do you get it back?

    This is what is happening in the sub-prime world.

  6. #15
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    Default Re: Hey skipster, I thought the market knew what's best

    Skipster,

    "Law can come into play or...."

    Yes, that would appear to be the situation we are in now.

    Hasn't it been the case that there are (free) markets and then there is the financial market? The financial market has needed oversite up the kazoo.

    "Where is the money? HOw do you get it back?
    This is what is happening in the sub-prime world."

    From the stanpoint of the equity business. From the standpoint of communitites, there is no money (except real estate taxes). There is property and who owns it. There was a short-term illusion of ownership by unqualified individuals and now there is foreclosure and subsequent ownership, and payment of property taxes, by who????

    Hardcore,

    "These were considered blue chip loans as they had asset backing."

    Some would say (and, I think ARE saying) those who rated them "blue chip" were myopic. Moody's, Standard, ect.

    Interesting discussion. I'd like to hear more from Hardcore and Flop-the-Nuts.

  7. #16
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    Default Re: Hey skipster, I thought the market knew what's best

    The big problem now is that the herd has lost its direction. It is no longer an easy task of following the money to make money. Losses must be covered and the losses are throughout the market. If the causes of this correction had fully run its course then just riding out the instability would be the wise choice. It has worked in the past so shouldn't it work now? It might if this was not just the tip of the iceberg. It appears that the market can make it through the sub-prime mess but what about when the better grade ARMs start to adjust up? Can the equity market hold its own over the next couple of years? If real estate values can stabilize or even appreciate in enough regions around the country then we might avoid the next major correction. If not?

    There are two major players that will make it or break it for us. The first is the Fed. Under Greenspans leadership the Fed for the most part seemed to be able to fend off major troubles in the market in a quick fashion. The two times that events unfolded of such great magnitude that there was no quick fix, the dot com bust and 9/11, Greenspan was able to get the markets back on track in a determined and steady manner. His successor, Dr Bernake, is a brilliant economist. He is held in high regard around the globe for his work on monetary policy and debt crisis management. The question is can he lead the Fed to react as quickly as Greenspan did to market changes? He has a different approach then Greenspan did, he wants to respond to economic shifts by using sophisticated forecasting tools. Will these new forecasting tools predict violate market changes correctly and if so will they give him the lead time needed to calm the markets? If not the Fed will either over correct or it will react with to little to late. Either way can be disastrous. I sincerely hope that he is able to exceed all expectations and succeeds at his daunting task.

    The other major player is the government. If things do get out of hand then they might feel the need to step in to protect certain sectors. This is a recipe for disaster. If firms like Countrywide go under due to poor risk taking decisions then they should be allowed to go under. Other better run companies will take their place. If they intervene in the markets it will only prolong the duration of any correction or recession as was the case during the Great Depression. It is believed that government intervention during that period extended the length of the crisis by years. With a major election cycle in '08 the temptation for them to step in and helpwill be great. Just have to hope that they stay on the sidelines.

    Some are saying that this is a time of buying opportunities, others are saying that its time to circle the wagons. As I am approaching my retirement years in the not so distant future I am staying on the path that I have always taken. Invest in long term value. The herd might make more money in the short term but they can end up losing it just as quick. True value holds its own in good times and bad.

  8. #17
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    Default Re: Hey skipster, I thought the market knew what's best

    The discussion continues in two different directions. One: the effect on markets. Two: the effect on individuals and communities.

  9. #18
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    Default Re: Hey skipster, I thought the market knew what's best

    We need a return to fiscal sanity. The sub-prime meltdown is an example of the powers to be ignoring market constraints. Since when did high risk people get low cost loans? This is absurd. Fancy financing for martages is absurd also, people have been lending money for 6000 years, we know how to do it. The whole sub-prime fiasco was doomed from the beginning, hold the bastards accountable.

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