Global Economy

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SaraLax
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Re: GLOBAL ECONOMY

Post by SaraLax »

Acharya wrote:
http://www.progressivehistorians.com/20 ... ntons.html
The two key questions that need to be asked are:
1) If Bill Clinton had not repealed Glass-Steagall would the current crisis not have occurred or been less severe? and,
2) Do we need to bring back Glass-Steagall? To understand the answers to both questions you need to know exactly what Glass-Steagall prohibited and how the bill that repealed it changed those prohibitions. In short, You need to know a bit of history.
Thanks for the link !.... i found the below pasted from one of those related links in that web page useful
Carter Glass, that old foe of banks entering into the stock market insured that the Banking Act of 1933 contained four key provisions:

* Section 16 - restricted commercial national banks from engaging in most investment banking;

* Section 20 - prohibited any member bank from affiliating in specific ways with an investment bank;

* Section 21 - restricted investment banks from engaging in any commercial banking; and

* Section 32 - prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.
Now the question...
- Is there any similar legislation in India which prevents/restricts/controls the Investment banks and commercial banks joining hands and their interests (or one organisation donning both roles) from attempting to swindle money from the common depositors under severe business scenarios ?.

(I see that banks like ICICI, HDFC, Kotak - are present in all sorts of finance businesses like retail banking, investment banking, corporate banking, PE business, Insurance, Venture Capital-atleast ICICI, Mutual Funds, Securities, Retail broking & etc.)

These guys seem to be already an 'all-in-one' organisation similar to what might be the outcome of the BoFA+Merill Lynch merger.

There is always a possibility that, fooled in to ideas of invincibility after years of continuous rapid growth - these organisations could get carried away in their businesses when there is liquidity boom and do the unthinkable where a few arms of their business can blow away all the money (ofcourse illegally by cooking the books and to attempt salvaging their reputation) brought in by the other arms (retail - specifically) of their business. { badly mauled UBS and Citigroup of present days - could be referred to as a some what less intense analogy to the situation that i am stating above }

What legislations exist in India presently to keep such super-finance organisations under leash and prevent them from bringing down the whole economy crashing when they go down after indulging in reckless lending and insuring business practices ?.

Knowledgeable people - Please help enlighten us with some answers for above queries.
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Re: GLOBAL ECONOMY

Post by John Snow »

from wikepedia
The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. Other major mergers in the financial sector had already taken place such as the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination in the mid-1990s. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Acts by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.
Robert Riech the under seceratery of Bill C was saying the other day this act is precisely the problem of current crisis. COmmercial Banks having Investment and Insurance arms.

Hope India has the restrictions, opening up Insurance in India to commercial banks would lead to simiar problems, IMHO.
Hope TATA AIG is ok
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Re: GLOBAL ECONOMY

Post by Singha »

India's issue has never been lack of legislation or good intent - the monitoring and enforcement
part is weak.

Chanda Kocchar of ICICI bank went to TV today to assure people that ICICI is in good shape.
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Re: GLOBAL ECONOMY

Post by svinayak »

In India these banks are still small and they dont constitute a significant part of the Indian GDP.
Mortgages and speculation are still small percentage of the total GDP and the exposure to speculation is still only for about 20-50 million people in India out of 1.2B people.

http://business.timesonline.co.uk/tol/b ... 769532.ece
Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobber’s pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.

Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Today’s broker-dealers have no skin in the game – they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.

The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchant’s compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.


It’s difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bank’s balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directors’ service agreements – with generous severance terms – and joint and several liability.

Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.
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Re: GLOBAL ECONOMY

Post by SwamyG »

As long as India has vibrant and thriving unorganized sectors, all domino effects can be controlled.
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Re: GLOBAL ECONOMY

Post by Singha »

bw:- :eek:

In hard times, tent cities rise across the country

By EVELYN NIEVES

RENO, Nev.

A few tents cropped up hard by the railroad tracks, pitched by men left with nowhere to go once the emergency winter shelter closed for the summer.

Then others appeared -- people who had lost their jobs to the ailing economy, or newcomers who had moved to Reno for work and discovered no one was hiring.

Within weeks, more than 150 people were living in tents big and small, barely a foot apart in a patch of dirt slated to be a parking lot for a campus of shelters Reno is building for its homeless population. Like many other cities, Reno has found itself with a "tent city" -- an encampment of people who had nowhere else to go.

From Seattle to Athens, Ga., homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation.

Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007, according to a report by the National Coalition for the Homeless. The group says the problem has worsened since the report's release in April, with foreclosures mounting, gas and food prices rising and the job market tightening.

"It's clear that poverty and homelessness have increased," said Michael Stoops, acting executive director of the coalition. "The economy is in chaos, we're in an unofficial recession and Americans are worried, from the homeless to the middle class, about their future."

The phenomenon of encampments has caught advocacy groups somewhat by surprise, largely because of how quickly they have sprung up.

"What you're seeing is encampments that I haven't seen since the 80s," said Paul Boden, executive director of the Western Regional Advocacy Project, an umbrella group for homeless advocacy organizations in Los Angeles, San Francisco, Oakland, Calif., Portland, Ore. and Seattle.

The relatively tony city of Santa Barbara has given over a parking lot to people who sleep in cars and vans. The city of Fresno, Calif., is trying to manage several proliferating tent cities, including an encampment where people have made shelters out of scrap wood. In Portland, Ore., and Seattle, homeless advocacy groups have paired with nonprofits or faith-based groups to manage tent cities as outdoor shelters. Other cities where tent cities have either appeared or expanded include include Chattanooga, Tenn., San Diego, and Columbus, Ohio.

The Department of Housing and Urban Development recently reported a 12 percent drop in homelessness nationally in two years, from about 754,000 in January 2005 to 666,000 in January 2007. But the 2007 numbers omitted people who previously had been considered homeless -- such as those staying with relatives or friends or living in campgrounds or motel rooms for more than a week.

In addition, the housing and economic crisis began soon after HUD's most recent data was compiled.

"The data predates the housing crisis," said Brian Sullivan, a spokesman for HUD. "From the headlines, it might appear that the report is about yesterday. How is the housing situation affecting homelessness? That's a great question. We're still trying to get to that."

In Seattle, which is experiencing a building boom and an influx of affluent professionals in neighborhoods the working class once owned, homeless encampments have been springing up -- in remote places to avoid police sweeps.

"What's happening in Seattle is what's happening everywhere else -- on steroids," said Tim Harris, executive director of Real Change, an advocacy organization that publishes a weekly newspaper sold by homeless people.

Homeless people and their advocates have organized three tent cities at City Hall in recent months to call attention to the homeless and protest the sweeps -- acts of militancy, said Harris, "that we really haven't seen around homeless activism since the early '90s."

In Reno, officials decided to let the tent city be because shelters were already filled.

Officials don't know how many homeless people are in Reno. "But we do know that the soup kitchens are serving hundreds more meals a day and that we have more people who are homeless than we can remember," said Jodi Royal-Goodwin, the city's redevelopment agency director.

Those in the tents have to register and are monitored weekly to see what progress they are making in finding jobs or real housing. They are provided times to take showers in the shelter, and told where to go for food and meals.

Sylvia Flynn, 51, came from northern California but lost a job almost immediately and then her apartment.

Since the cheapest motels here charge upward of $200 a week, Flynn ended up at the Reno women's shelter, which has only 20 beds and a two-week limit on stays.

Out of a dozen people interviewed in the tent city, six had come to Reno from California or elsewhere over the last year, hoping for casino jobs.

"I figured this would be a great place for a job," said Max Perez, a 19-year-old from Iowa. He couldn't find one and ended up taking showers at the men's shelter and sleeping in a pup tent barely big enough to cover his body.

The casinos are actually starting to lay off employees.

"Sometimes I think we need to put out an ad: 'No, we don't have any more jobs than you do,'" Royal-Goodwin said.

The city will shut down the tent city as soon as early October because the tents sit on what will be a parking lot for a complex of shelters and services for homeless people. The complex will include a men's shelter, a women's shelter, a family shelter and a resource center.

Reno officials aren't sure whether the construction will eliminate the need for the tent city. The demand, they say, keeps growing.
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Re: GLOBAL ECONOMY

Post by Singha »

Putnam Fund closes after investors pull cash

By MARK JEWELL

BOSTON

Putnam Investments on Thursday suddenly closed a $15 billion money-market fund and announced plans to return investors' money after institutional clients pulled out cash despite the fund's lack of exposure to troubled financial firms such as Lehman Brothers Holdings Inc.

The move, believed to be unprecedented in the $3.5 trillion money-market fund industry, came a day after asset managers sought to reassure investors in the wake of a massive pullout from large retail fund Reserve Primary Fund. The run on that fund caused its assets to plunge in value by nearly two-thirds and fall below $1 for each dollar invested.

While Boston-based Putnam said its Prime Money Market Fund continued to hold $1 in assets per dollar share as of Tuesday, it "experienced significant redemption pressure" on Wednesday.

The firm's trustees voted to close the fund and distribute all assets to investors as quickly as possible -- an action Putnam said was "not related to the portfolio's credit quality, but was instead a reaction to marketwide liquidity issues."

When a fund suffers a sudden rush of orders to pull out money, fund managers must sell assets -- typically at a loss when it must be done quickly, and especially amid this week's market turmoil.

Putnam said, "Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities. In the face of these challenges, the trustees determined to close the fund to ensure equitable treatment of all fund shareholders."

Putnam also asserted that the fund, like its other money market funds, had no exposure to securities of Lehman Brothers, Washington Mutual or AIG at the parent-company level.

The four-year-old fund, limited to institutional investors making initial investments of at least $10 million, held $15.4 billion in assets as of Aug. 31, according to Putnam's Web site. The fund's list of top holdings included several financial firms, led by Unicredito Italiano, and such banks as Royal Bank of Scotland and Bank of America.

Putnam's move to suddenly close the fund because of an investor pullout appeared to be unprecedented in the nearly 38-year history of the money-market fund industry, said Don Phillips, a managing director at fund researcher Morningstar Inc., and Connie Bugbee, managing editor of iMoneyNet, publisher of a weekly newsletter called Money Fund Report.

"It's a very shareholder-friendly move to make," Phillips said. "If you see you a redemption run in a fund, you end up with this bizarre situation where if people get out early enough, then the fund can sell the most liquid assets off first, and the investors end up whole, with a dollar per share invested.

"But later on, when others pull out, the fund has to sell under duress, and unload the less-liquid securities at low prices. And that causes people to suffer losses."

Institutional investors, Phillips added, "tend to move in herds, and they move big sums of money."

Despite the Putnam fund's lack of exposure to the hardest-hit financial firms, Phillips said "a lot of institutional clients don't want to have any money-market funds with corporate exposure, and opt for funds exposed to safer government debt.

"The scary thing is, we don't know whether we might see these things play out at other funds, and what kind of pressure that will put on the money-market fund industry," Phillips said.

Putnam, founded in 1937, managed $163 billion in assets as of Aug. 31, with $96 billion for mutual fund investors and $67 billion for institutional clients. In August 2007, insurance broker Marsh & McLennan Cos. sold Putnam to Canadian mutual fund company Great-West Lifeco Inc. for $3.9 billion in cash. Great-West Lifeco is controlled by Canada-based Power Financial Corp.

Also Thursday, State Street Corp. tried to reassure investors that its money market funds are stable. The company said its Global Advisors' funds never fell below a net asset value of $1 and are not exposed to the troubled firms of Lehman Brothers, Merrill Lynch & Co., Washington Mutual, Wachovia and Morgan Stanley.
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Re: GLOBAL ECONOMY

Post by Vipul »

svinayak
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Re: GLOBAL ECONOMY

Post by svinayak »

http://www.blonnet.com/2008/03/19/stori ... 080900.htm
Nationalisation of losses?

In his later article on March 11, 2008, Wolf says, “The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.” Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over?

But how to nationalise only losses? To keep the ownership with those who lost others’ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system — first covert and then explicit — as the next step to the financial meltdown.

Obviously the US Government is seen as the saviour for the faltering — or better, collapsing? — financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself.

QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious.
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Re: GLOBAL ECONOMY

Post by svinayak »

Positions from Jul 2008

Image
Sanjay M
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Re: GLOBAL ECONOMY

Post by Sanjay M »

Wow, they're launching an RTC, just like they did for the S&L scandal back in the early 90s:

http://money.cnn.com/video/#/video/news ... 8.cnnmoney

Bush Sr still lost the election due to the ensuing recession.
(Remember "it's the economy, stupid"?)
Sanjay M
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Re: GLOBAL ECONOMY

Post by Sanjay M »

The problem is that this sets a precedent (or repeats one) so that the next time, it will become more tempting to have the govt do this again -- it could even become an expectation.

Just like that unprecedented Fed-backed arrangement for Bear Stearns and JP Morgan set an expectation for Bank of America when it was negotiating for Lehman Bros. This stuff is a slippery slope.
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Re: GLOBAL ECONOMY

Post by geeth »

>>>QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious.

As one angry commentator put it, what is happening right now in Amreeka is that "profits are always privatised (i.e., if the company makes profits, it goes to shareholders) and losses are being socialised (Fed picking up the bill as in the case of AIG).

Name it whatever you want, I feel what these smart kids in wall street did was same as what the 'blade' companies in Kerala always do - take money from public, give fat returns for a few months to the unsuspecting customer and distribute the balance capital as profit to the shareholders. Afterall, it is a zero sum game!
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Re: GLOBAL ECONOMY

Post by kumarn »

SwamyG wrote:Some more 101 stuff for inquisitive minds:
How We Got Here: It's Housing, Stupid
Question for the Gurus: Everyone says that the current crisis is due to the housing bubble. I understand how this housing bubble led to the present crisis. But what caused the massive rise in the home prices in the first place?

I was watching an interview with Bill Clinton and he was implying that there was a massive rise in liquidity in the late 90's and in the early part of this century and there was no place for this liquidity to go other than into the housing sector, and there it went, apart from into increased consumer spending. And that led to the housing bubble. Is that correct?

Then the second question that comes to my mind is how was there such a rise in liquidity.

Could someone please explain this economic novice in simple terms. Mucho gracias in advance!
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Re: GLOBAL ECONOMY

Post by Singha »

one reason could be the US kept on printing dollar notes at a rapid pace but
as worlds reserve currency, they could enjoy both high injection of $$ and
high growth with low inflation. PRC took care both of supplying goods cheaply
and recycling the $$ back into T-bills which meant the US Govt kept on
getting what its consumers were sending to the PRC.
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Re: GLOBAL ECONOMY

Post by kumarn »

Singha wrote:one reason could be the US kept on printing dollar notes at a rapid pace but
as worlds reserve currency, they could enjoy both high injection of $$ and
high growth with low inflation. PRC took care both of supplying goods cheaply
and recycling the $$ back into T-bills which meant the US Govt kept on
getting what its consumers were sending to the PRC.
Thanks sir jee, that would explain it. But why did the US keep on printing dollars? Sorry, if that is very obvious, but I don't understand Economics.
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Re: GLOBAL ECONOMY

Post by Tanaji »

Also, it was a vicious cycle: demand for mortgage based derivatives from banks resulted in increased "demand" for mortgages that were supposed to back these derivatives. Thus banks lowered their lending standards to include people who would have normally not qualified. Add to this the massive collusion of appraisers and estate agents who both artificially inflated prices purely to get a huge commission. The appraiser was supposed to be a "neutral" entity, however in most of the cases, he was pressured by the lender and estate agent to appraise the house at a higher value than should have been so that the person buying the house would go in for a higher loan -> more commission to everyone. Add to that 100% loans to people with poor FICO credit scores like 520, resulted in more demand for houses. More demand + artificial inflation => higher prices.

Just my reading of the situation. I am not an economist.
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Re: GLOBAL ECONOMY

Post by Nayak »

New York state could lose 40,000 jobs, $3 billion in tax revenues
19 Sep 2008, 0821 hrs IST,AGENCIES
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NEW YORK: A new projection shows Wall Street's meltdown could cost New York state up to 40,000 private sector jobs and $3 billion in tax revenues over the next two years, two state officials said on Thursday.

The revised numbers in the snapshot of worst case estimates was done Wednesday at the highest levels of New York's state government.

The internal projection stated that New York job losses could reach between 25,000 and 40,000 private sector jobs and tax revenues could drop as much as $2 billion to $3 billion.

The projection is worse than Gov. David Paterson predicted just Tuesday when he said the state could lose some $1 billion in revenue because of upheaval in the financial sector.

Wall Street is a major economic force in New York state, generating one-fifth of the state's revenues each year.

The officials spoke on condition of anonymity because they weren't authorized to comment on the fiscal analysis.

Both hits would be substantial. The total New York state budget including federal funds is about $120 billion, and the state has about 7.25 million private-sector jobs.

State officials used the model of the fiscal damage to New York after the Sept. 11, 2001, terrorist attacks. Then, Gov. George Pataki said it was the worst financial hit to New York since the Great Depression 70 years earlier.

The new analysis includes the stock market drop, lost revenue from transactions and projected lost income tax revenue from Wall Street jobs.

Three of the five major US investment banks, Bear Stearns, Lehman Brothers and Merrill Lynch, have either gone out of business or been driven into the arms of another bank. The two remaining banks, Goldman Sachs Group Inc. and Morgan Stanley, are under siege.

Paterson's office issued a statement late Thursday saying there was no new projection for public release.
Toi(let)

Hmmm, expect more starbucks to down their shutters.

Seriously after this fiasco, who would take traders and anal-(c)ysts, with their hi-fi phoren degree take them seriously ? All those fancy MBAs are as good as maulvi-stamped degree from Binori madrasa.
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Re: GLOBAL ECONOMY

Post by Singha »

indeed. self-serving, reckless, prone to herd instinct and incompetent. ego's are going to be
really deflated and those $2000 bottles of wine in london restaurants will age a while longer.

M&A = maulana approval
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Re: GLOBAL ECONOMY

Post by Tanaji »

But thats not the point... these people have already made their money. Their paychecks were already in the 250K range, with equivalent bonuses. They have had a good run for the past 3-4 years.

The only thing is that for such types money is never enough. It is the thrill, and the ability to plonk 2000$ for wine bottles that they will miss. The next 2-3 years will be tough, but realize these are quite intelligent folks... they will move to other pastures. Life goes on...
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Re: GLOBAL ECONOMY

Post by John Snow »

Swamy G ji the prices went up for two reasons
a) because of low intrest rate and easy availabity of funds

b) because speculative.buyers entered the market because house values were appreciating nation wide more than 6 percent and money from stocks started flow into housing

Typing from blak berry can go into more
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Re: GLOBAL ECONOMY

Post by cdbatra »

I rekon now it would be GM's turn on the russian rullete. Heard they had record losses for last three quarters.

:-? http://thehill.com/leading-the-news/big ... 09-17.html
Last edited by cdbatra on 19 Sep 2008 17:18, edited 1 time in total.
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Re: GLOBAL ECONOMY

Post by kumarn »

John Snow wrote:Swamy G ji the prices went up for two reasons
a) because of low intrest rate and easy availabity of funds

b) because speculative.buyers entered the market because house values were appreciating nation wide more than 6 percent and money from stocks started flow into housing

Typing from blak berry can go into more
John Snow ji, could you please expand on how sustained low interest and huge fund availability happened?
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Re: GLOBAL ECONOMY

Post by Vikas »

Also if easy money was available, why did not the inflation numbers go up in last 4-5 years.
Normally if there is easy availability of liquid in the market, the inflation numbers should go up. We didn't see anything going up other than housing prices.
Is it that the all liquid in the market was absorbed by housing bubble only ?
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Re: GLOBAL ECONOMY

Post by John Snow »

Inflation did go up.
Dont go by govt figures watch the gas , bread, and milk price they are true indicators of inflation at the street level not LCD plasma prices.
Busy now into a meeting to get pink slips :mrgreen:
achy
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Re: GLOBAL ECONOMY

Post by achy »

VikasRaina wrote:Also if easy money was available, why did not the inflation numbers go up in last 4-5 years. Normally if there is easy availability of liquid in the market, the inflation numbers should go up. We didn't see anything going up other than housing prices..?

Is it that the all liquid in the market was absorbed by housing bubble only ?
Easy money is available when interest rates are low. And easy money will drive up the inflation only if it 1. increases demand 2. supply is constrained. Both were not the case.
As you have conjenctured, substantial portion of liquidity was absorbed by housing sector so consumer demand increase (fancy cars, caviar and champagne dinner, weekend golf in Europe, etc.) was not in line with liquidity increase.

Also supply kept pace with whatever demand increased. That is where the role of china and Japan comes in. china's currency is pegged vs dollar while yen for all practical purposes is also pegged. What it means is that china, Japan kept supplying goods to American consumers at low prices. Also, whatever greenbacks they earned, they kept investing back in T-bills and M&M's ( Freddie Mac'N' Fannie Mae) as there was no other place they could have parked this export earnings. This in turn kept the worldwide interest rates low, thus completing the cycle. Thus China was the major reason, why, world, and not only US, had such a benign condition of low interest rates and low inflation for so long.

As we all know, it was too good to last.
Last edited by achy on 19 Sep 2008 19:15, edited 1 time in total.
achy
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Re: GLOBAL ECONOMY

Post by achy »

John Snow wrote:Inflation did go up.
Dont go by govt figures watch the gas , bread, and milk price they are true indicators of inflation at the street level not LCD plasma prices.
Busy now into a meeting to get pink slips :mrgreen:
Infaltion started going up only when the bubble burst. till then it was low int rate and low inflation.
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Re: GLOBAL ECONOMY

Post by SwamyG »

Some of my Conservative friends tell me it is all because of the Democrats. Clinton made changes to Community Reinvestment Act (CRA) in 1995 that made the mortgage companies to offer loans to poorer communities. This they say caused the mortgage companies to lower their standards and give out loans to unqualified borrowers. So this channeled money specifically into the housing market.
CRA from Wiki

But Liberals (read Democrats) argue otherwise. Here is one essay that takes the counter point Robert Gordon

I don't think there is really any one thing that could cause such a big havoc.
Tanaji
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Re: GLOBAL ECONOMY

Post by Tanaji »

German bankers transfer £500 mil to Lehmann

http://uk.news.yahoo.com/afp/20080919/t ... 2056d.html
svinayak
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Re: GLOBAL ECONOMY

Post by svinayak »

September 18, 2008, 5:44 pm
A Modest Proposal to Help to Save the World

Posted by Dennis K. Berman

It is about trust. Banks don’t trust one another to lend. Individuals are increasingly fearful of trusting, too, scared of putting their cash in money-market funds that lubricate the entire economy.

The root of all this panic lies, of course, in the deflating prices of mortgage assets and their gruesomely-twisted derivatives such as collateralized debt obligations, and synthetic-CDO-squareds.

The problem is that banks, hedge funds, and insurers aren’t too inclined to talk about the prices of these securities–what is known as their marks, in part because they don’t want anyone to know what they are. And that makes them just as suspicious about their own counterparties. If I’m fibbing, then everyone else must be fibbing.

The mistrust and misinformation feeds on itself, and before long the system grinds to a halt.

But what if there were a simple way to make everyone honest? And wouldn’t that honesty help clean up the markets, as everyone could see the prevailing market prices–for better or for worse–and get to the business of buying and selling?

That step would be to strongly ask (or perhaps even require) that banks, insurers and maybe even some hedge funds contribute their market prices to a fully transparent, searchable database of pricing data. This could be easily organized, because each security has a separate identifying number–called its CUSIP number–that makes for easy tracking.

In other words, everyone shows their hand, for better or for worse.

The markets rallied this afternoon on the expectation that the government would go one step further–and collect all these bad assets into a central clearinghouse. Taxpayers would, of course, pay a monumental price to absorb all the losses. And there could be lots of objections from market players who would be fearful of where their marks would stack up against competitors.

With the markets pleading for some sort of federal bailout, such a simple step may get trampled underfoot. But the interim step of price discovery may go a long way to establishing a market without immediately spending taxpayer money.
Satya_anveshi
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Re: GLOBAL ECONOMY

Post by Satya_anveshi »

Acharya ji,

Do you see this mess having roots in the old world order vs NWO and if so, who is cleaning whom? There were so many subtle psy-ops performed recently that London is ahead of Wallstreet in trading and capital is moving out of US blah blah. Is this consolidation a means to control and punish the people who were ready to dump one for the other?

It is also surprising that this financial equivalent of 9/11 is happening at around the same window of Bush regime (albeit at the trailing end ). Is this timing just a coincidence or a deliberate move from Bush and his cohorts?
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Re: GLOBAL ECONOMY

Post by CalvinH »

I have question for the gurus here

The excess liquidity was absorbed in the RE market and drove demand and thus prices upwards, leading to housing rush, sub-prime loans, further increase in demand and further increase in prices

What bought this cycle down. Why suddenly house values started to go down...was it resetting of ARM after some time due to which people couldnt pay and foreclosures began

I want to know what was the trigger that stopped this cycle and started a downward spiral.
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Re: GLOBAL ECONOMY

Post by svinayak »

Satya_anveshi, Your answers
http://blogs.wsj.com/deals/2008/09/19/m ... of-course/
September 19, 2008, 10:35 am
Mean Street: A Wall Street Conspiracy? Of Course.

Posted by Deal Journal

You know things are desperate when Wall Street honchos start reverting to conspiracy theories.

Three days ago, Morgan Stanley CEO John Mack saw no good explanation for his stock’s death spiral. He didn’t have to say “conspiracy,” but you knew what he meant.

meanstreetAt the time, I thought, “The nerve of Mack! Conspiracy theories are supposed to be for the little guy.”

Like me. When I spent a year as a day trader, I had a conspiracy theory for everything. Who was to blame for the late day sell-off? “They” were. The short squeeze? “They” did it.

Just who are “they”? Market-makers? Hedge funds? Quants? Some clueless day trader and his buddies? Apparently neither I nor John Mack really knows.

But we love our conspiracy theories, especially when we run out of explanations for why things turn against us. That is exactly the genesis of Wall Street’s and Washington’s current witch hunt for short-sellers.

Somebody is pushing the U.S. financial system into the abyss.
And it has to be a conspiracy of short-sellers. Or does it?

Thursday, Wall Street and Washington pledged to find out.

SEC Chief Chris Cox put in place new short sale trading rules and announced plans for greater hedge-fund disclosure. New York Attorney General Andrew Cuomo opened investigations into short-sale abuses.

Meantime, Jim Cramer appeared on CNBC and raised the specter of “financial terrorism.”


John Mack worked the phones to lobby for a full ban on short sales of all financial stocks. And Thursday night, Mack got his way. The SEC went further and banned short-sales in 799 financial stocks.

Conspiracy? It certainly felt like one–but a conspiracy to squeeze the shorts, not destroy Morgan Stanley. And the timing was beautiful.

Around 1 p.m. eastern time, the U.K. Financial Services Authority banned the short sale of any financial stock until early 2009. Shortly before 3 p.m., and just in time for the pivotal last hour of trading, the Treasury let the media know it was considering an RTC-type bailout.

That was enough to set the shorts running to cover their positions and drive the Dow up more than 400 points.

Here is a mind-bending conspiracy theory: A conspiracy of the longs to drive out the conspiracy of the shorts. And both conspiracies are probably impossible to prove.

It does seem very likely that there has been some monkey business in the short-selling of financial stocks. The volatility in certain shares has been astounding. Lehman Brothers and American International Group disintegrated in a matter of days.

But as of Sept. 16, less than 3% of Morgan Stanley and Goldman shares were sold short. Is it heavy short selling or just panic selling that is driving the shares down? Or just the two feeding off each other?

It will be interesting to see what Cuomo’s investigations turn up. He probably will find something. A rumor here or there. Piling on by hedge funds in momentum trades. Perhaps a trade in the credit-default-swap market that produced a panic effect in the shares.

Whether any of what he finds is illegal is another matter.

It is, of course, delicious irony that the broker-dealers may be the victims of abusive short-selling. They founded the hedge-fund revolution by arming ex-traders of theirs to the teeth with capital, leverage and trading technology.

But when the children of the revolution turned on the founders, the founders ran to Washington for protection. The brokerage industry fought regulation at every turn, pleaded for regulators to leave the hedge funds alone and asked for the removal the uptick rule. Leave us free to trade, they demanded.

Nowadays, the freedom of the markets isn’t so attractive. It’s scary. And when people are scared, you always get a conspiracy.

So good luck to Cox and Cuomo as they set off to find and punish the guilty short-sellers. It may be a long and fruitless journey.

But it could still be a success. Like all witch hunts, it is really a convenient distraction. The real mission of the short-seller conspiracy is to buy time for Wall Street and Washington to line up taxpayer money to pay for the sins of the past.
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Re: GLOBAL ECONOMY

Post by svinayak »

CalvinH wrote:I have question for the gurus here

The excess liquidity was absorbed in the RE market and drove demand and thus prices upwards, leading to housing rush, sub-prime loans, further increase in demand and further increase in prices

What bought this cycle down. Why suddenly house values started to go down...was it resetting of ARM after some time due to which people couldnt pay and foreclosures began

I want to know what was the trigger that stopped this cycle and started a downward spiral.


Financial Shock A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis
by Mark Zandi (Author)



The subprime financial crisis is the decade's #1 financial story. What happened? How did it occur? And how can we prevent similar crises from happening again? Dr. Mark Zandi answers all these critical questions - systematically, carefully, and in plain English. Zandi begins with a fast-paced "history" of the crisis: where it started, how it spread, and where the fallout has landed. Next, he illuminates its deepest causes, ranging from the psychology of homeownership to Alan Greenspan's missteps. You'll watch the "flippers" at work and the real estate agents who cheered them on. You'll learn how Internet technology and access to global capital transformed mortgage lending, helping irresponsible lenders "drive out" good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide growing risks and shows how global investors eagerly bought in, despite key warning signs. You'll discover how homebuilders contributed to the crisis, and how flummoxed regulators and policymakers failed to prevent it. Zandi offers indispensable advice for investors who must recognize emerging bubbles, policymakers who must improve oversight and citizens who must reduce their risks, so they can survive whatever comes next.

Back in the middle of 2007 when the sub-prime problem first surfaced......I remember a talking head on TV saying the sub-prime issue would not become a problem. His rationale was that sub-prime only represented a single digit percentage of the total mortgage market......and therefore it would have no major impact on financial markets......even if all sub-prime debt went bad. Boy was he wrong!! I have been curious how the sub-prime fiasco almost brought down the entire world financial markets.

Another disclaimer is that I have not personally been involved much with mortgage loans. My first mortgage was back in 1978. It was a 30 year fixed mortgage, and since I only put 10% down, it was mandatory to have mortgage insurance......until my equity reached 20%. I got additional 30 year fixed mortgages in 1980, 1994, and 1995 due to job location changes. In 1999, I got a variable rate loan on a new home.......put 50% down......and then converted to a 15 year fixed rate in early 2007. I also live in Illinois, not one of the national hotbed markets for sub-prime lending.

Zandi says there has been a financial markets panic about every 10 years. He predicts the next one will involve U.S. government debt with all our under-funded liabilities. Other authors have said there is a stock market crisis about every 25 years........because it takes this long for the "burned" generation to retire and be replaced with youngsters who have no memory of the last bubble.


Zandi explains the sequence of the sub-prime fiasco like this:

1. Fed lowered interest rates after 9/11 to stimulate the economy
2. Fed was not worried about creating inflation because the shift in manufacturing to China actually threatened deflation, not inflation
3. With returns on savings accounts being so low, plus the stock market going nowhere after the Tech stock bubble burst.......people chose to invest in their homes
4. Foreign countries could not get decent returns on fixed income investments due to low interest rates......so they chose to buy slightly higher yielding mortgage backed investments
5. Local banks changed from being prudent lenders holding mortgages to simply financial intermediaries driven by loan processing fees. Since they no longer held any mortgages, they didn't have to worry about making sure they were issuing loans that homeowners could really afford.
6. New companies jumped into the mortgage lending market ...with the same motives as the banks. The majority of borrowers did not even realize how risky their new loans were....especially if home prices declined.
7. Wall Street created exotic mortgage backed financial instruments and marketed their higher returns.
8. The Federal Reserve Chairman and all the regulators were asleep at the wheel.
9. Financial rating firms completely missed the boat on how risky these new financial instruments really were.
10. Eventually the music stopped.....there were no people left to keep bidding up the prices of homes. The house of cards came tumbling down.


Zandi points out that sub-prime mortgages peaked at ½ of all mortgage originations.

A way was found to avoid the mortgage insurance if you put down less than 20%. You simply borrowed 80% on the first loan, then immediately took out a 2nd loan for the remaining 20%......apparently mortgage insurance is not required on either the 1st or 2nd loan.

Verification of income also went out the window.

Zandi points out that Americans lead the world in terms of how much housing cost we incur. Americans spend 33% of spending on their homes, while New Zealand spends 25%, France 20% and Japan 14%.

Zandi points out that at the peak of the boom in 2006, foreign investors owned 1/3 of all U.S. mortgages.

Zandi also points out that the price-to-rent ratio is a good bubble indicator.......analogous to the PE ratio in stocks. This ratio has been about 17 the last 25 years......but it peaked at 25 at the height of the boom. For this ratio to return to its 25 year average of 17, national U.S. house prices must drop 25%........and the hottest markets must drop 35%.

The author says the sub-prime bubble is 4 times as bad as the S&L fiasco ($1 Trillion versus $250B).

The author has some recommendations to avoid another sub-prime crisis including:

1. Lenders must verify income and assets
2. Lenders must verify borrowers are able to pay back the loan
3. Mandatory escrow for taxes and insurance
4. Start teaching personal finance in high school

I found the book easy to read and entertaining. However, I got very frustrated with the color coding of his charts. I could not distinguish what the variables were in most of his charts. Maybe he made them in color, and then the black-white conversion process made them illegible.

Given my background, I am shocked at how loose the lending process has become compared to 20 or 30 years ago. As the author points out, everyone in the lending food chain assumed "the other guy" had checked out the quality of the loan made...and in reality nobody checked it out.

After reading about the Tulip bulb and South Seas bubble......plus living through the 1989 S&L crisis, the 2000 Tech wreck, and the 2007 sub-prime fiasco.........this book has help give me a better idea of how to recognize the next financial bubble.

Some of the key indicators of bubbles include:

1. "It's different this time"
2. TV shows and advertisements on speculating including store owners who sell stock instead of their normal goods (Tulip craze), ads showing taxi drivers who quit hauling passengers and day-trade (Tech Stocks), and TV shows dedicated to flipping houses
3. Historic valuation ratios are far exceeded (Tulip bulbs, PE ratios of 100 for Tech Stocks, Price-to-rent ratio for housing)


All in all, I thought the author did a good job of exposing the role of each member in the housing loan food chain had in creating the sub-prime mess.
Suraj
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Re: GLOBAL ECONOMY

Post by Suraj »

CalvinH wrote:I have question for the gurus here

The excess liquidity was absorbed in the RE market and drove demand and thus prices upwards, leading to housing rush, sub-prime loans, further increase in demand and further increase in prices

What bought this cycle down. Why suddenly house values started to go down...was it resetting of ARM after some time due to which people couldnt pay and foreclosures began

I want to know what was the trigger that stopped this cycle and started a downward spiral.
Prices are just a value assigned to a product. 'Excess liquidity absorbed in the RE market' just means that the houses were serving as a the target of a bubble, and the prices getting inflated beyond their intrinsic value. Further, many of those who bought the houses did so on credit without having sufficient means to service that credit. Naturally it would all unravel. ARMs resetting was just a sideeffect, and not the primary reason. The primary reason prices went down is that ... the houses were not worth so much.
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Re: GLOBAL ECONOMY

Post by SwamyG »

Suraj wrote:The primary reason prices went down is that ... the houses were not worth so much.
Suraj: Can I rephrase that as "The house prices just went out side the reach" ?
Suraj
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Re: GLOBAL ECONOMY

Post by Suraj »

Define "reach" - is it prime reach ? Alt-A reach ? liar reach ? :lol: Point is, reach is a relative term.

As I said above, a massive number of houses were not worth their dollar prices, regardless of whether it was affordable to a given person. It is that simple.

The only reason their prices rose is that the a glut of liquidity made it possible for both the lender and borrower to try and game the system, and the bidding drove up the price despite the value of the house being nowhere commensurate.

People bought houses they could not afford, on the basis of nothing more than the ability to afford its initial payments. The historically low interest rates drove a lot of unscrupulous lenders to resort to volume to shore up revenue, to the extent of allowing people to lie on their loan contracts.
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Re: GLOBAL ECONOMY

Post by Satya_anveshi »

Truth is that US found it is more convenient to sell some hooye assets to foreign lenders, who without doubt invested in US, than getting returns on their loans here at home. In many ways, foreign lenders were more trusting of US than their own countrymen.

On the other hand, this whole fiasco can also be seen as ripping-off those foreign lenders' wealth (this is just good old going back to roots for the WASPs; plunder and bring home the riches of foreign lands). Minus the military power, this mess would be a deathknell for the nation.
Last edited by Satya_anveshi on 20 Sep 2008 00:12, edited 1 time in total.
SwamyG
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Re: GLOBAL ECONOMY

Post by SwamyG »

Suraj: Got it. thanks.
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Re: GLOBAL ECONOMY

Post by vina »

The New York Times

September 20, 2008
Talking Business
A Hail Mary Pass, but No Receiver in the End Zone
By Joe Nocera

It was the end of the worst week for financial markets since 1929, and Treasury Secretary Henry M. Paulson Jr. looked sleep-deprived.

He had begun the week agreeing to let Lehman Brothers go bankrupt, arguing that the government had to stop putting taxpayers’ money at risk. Then, midweek, he brokered a deal to rescue the American International Group with an $85 billion loan from taxpayers — arguing that the risk to the financial system was too high to allow the world’s biggest insurer to fail.

Neither move had done anything to stop the financial tsunami. So on Friday morning, just as the markets were opening, Mr. Paulson unveiled the government’s latest attempt to stop the bleeding. Maybe it was because he was so tired, but there was none of the glass-half-full blather that is de rigueur for a cabinet secretary. Instead, his flat, just-the-facts-ma’am voice and weary body language conveyed an unusual sense of urgency.

The core issue, he said — the mistake that had led to all the other mistakes — was that “lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing.” True. As for Wall Street, toxic mortgage-backed securities had become “frozen on the balance sheet of banks and financial institutions.” He added, “The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.” True again.

And that really is the crux of the matter — the financial system has seized up. But so far, the government’s actions haven’t helped. Letting Lehman go bust may have sounded good at the time, but it has had disastrous consequences.

It has led to complete chaos in the multitrillion-dollar market for credit-default swaps and was a crucial reason Morgan Stanley was forced to scramble to stay alive this week. It is also why questions were raised about the viability of Goldman Sachs, a firm with a pristine balance sheet and almost none of the bad assets that are bringing down other firms.

The rescue of A.I.G. further undermined confidence because, within the space of several days, the government did a complete about-face. The bailout suggested the Treasury Department was as confused about what to do as the rest of us.

So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence.

Nobody understands who owes what to whom — or whether they have the ability to pay. Counterparties have become afraid to trade with each other. Sovereign wealth funds are no longer willing to supply badly needed capital because they no longer know what they are investing in. The crisis continues because nobody knows what anything is worth. You simply cannot have a functioning market under such circumstances.

Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission — to make life more difficult for short sellers — is a shameful sideshow. A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses.

That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.

And the third solution — the big megillah — is Mr. Paulson’s plan to create a new government mechanism to buy mortgage-backed securities from big banks and investment houses. Once they are off those companies’ books, life can return to normal — or so Mr. Paulson hopes.

He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.

It is a weird tribute to the scale of this crisis that Mr. Paulson felt he had no choice but to rush this proposal out, because as the day progressed it became increasingly clear that the Treasury Department didn’t yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.

Let’s take a closer look at the government’s latest response.

KILL THE SHORT SELLERS It’s understandable why people get upset at short sellers in tough times. As President Bush put it Friday, short sellers are “intentionally driving down particular stocks for their own personal gain.” But that perception is more myth than fact, and in any case, it’s not the dynamic here. Stocks are falling because companies made huge mistakes that have caused them a heap of trouble. Indeed, in July and August, short interest in financial stocks declined by 20 percent. Why did the stocks continue to go down? Because there were too many sellers and not enough buyers: it’s that confidence thing again. Blaming the shorts is classic blame-the-messenger behavior.

The S.E.C. jihad against short sellers, which includes the banning of short selling on 799 stocks and forcing disclosure of large short positions, is nothing more than playing to the crowd. It is simply appalling that as one firm after another vaporizes — firms, let’s remember, that the S.E.C. was supposed to be regulating — the only thing the agency can think to do is flog the shorts.

There were so many better moves it could have made. After Bear Stearns fell, it could have sent SWAT teams into all the other financial firms to assess their mortgage-backed paper. It could have then announced to the world the health of each firm, which would have helped the market regain some confidence. It could have forced firms to disclose their mortgage-backed holdings so that counterparties could evaluate them. It did none of these things.

Then again, maybe the S.E.C. is trying to cover up its own culpability in this crisis. Four years ago, the agency pushed through a rule that allowed the big investment banks to take on a great deal more debt. As a result, debt ratios rose from about 12 to 1 to more like 30 to 1. Guess what Lehman’s debt ratio was when it went bust? Yep: 30 to 1.

SAVE THE MONEY MARKET FUNDS The precipitating event here was the news that the Reserve Fund, a money market fund that caters to institutions, had “broken the buck” and was paying investors 97 cents on the dollar. That is only the second time that’s ever happened, and it had to scare investors, because most of us have come to think of money market funds as being the equivalent of bank savings account — perfectly safe.

In the aftermath, investors in the various Reserve money market funds pulled $58 billion out in the space of a week, leaving the firm with only $7.1 billion. If that same fear had spread across other money funds, it could well have led the funds to stop accepting short-term commercial paper. That would have been a disaster, because big companies rely on the commercial paper market to finance their day-to-day needs.

Under the circumstances, insuring the money market funds probably makes sense. It will calm investors and keep the commercial paper market functioning. But think about the moral hazard! It bails out poorly managed money funds — the ones most likely to break the buck — at the expense of funds that haven’t taken the extra risk that causes a sudden drop in value.

And then there’s this: If you have your money in a bank account, only $100,000 is insured. But if you have it in a money market fund — which usually has a slightly higher yield precisely because it has a small element of risk — you now have unlimited insurance. It’s the world turned upside down.

THE BIG MEGILLAH For the last few weeks, a growing chorus of voices has called for the establishment of a new Resolution Trust Corporation, the entity the government devised in the wake of the savings and loan crisis to take over, and eventually sell off, the assets of failed S.& L.’s. On Wednesday, that chorus got its most powerful voice, when Paul Volcker, a former Federal Reserve chairman, co-authored an op-ed article in The Wall Street Journal.

That crisis, however, was very different from this one. Most of the assets in the S.& L. crisis were real estate — which are always going to have value. And the government didn’t have to acquire them; it simply took them over and, over time, sold them. This time, the assets are complex derivatives of uncertain value that the big firms will actually be selling to the government.

But how is the government going to assess these securities — and what price will it pay for them? In many cases, these securities aren’t being sold because they are still overvalued on a firms’ books. That is, their mark-to-market price is unrealistically high. Will the government buy it at the too-high price? If it does, the firms won’t have to take additional write-downs — but it will constitute a huge, unjustified bailout of Wall Street. (More moral hazard.)

But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.

Finally, there is the question of how much it will ultimately cost. “Institutions so far have written down $550 billion globally of bad debt,” said Daniel Alpert, managing director of Westwood Capital. “We think that when you add up all the problems in the residential housing market still to come — further erosion of housing prices, mortgage foreclosures and so on — we are going to need another $1 trillion of write-downs.”

In other words, for all the toxic securities that Wall Street has acknowledged holding, there will be yet more mortgage-backed paper that will go bad as the housing market continues to fall. As much as we all hope the worst is over, it’s probably not.

And as much as we might hope that the government finally has the answer, it probably doesn’t.
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