My first impression was that McCain won the debate narrowly. Although, upon seeing the replay I'm changing my opinion. I think the whole thing slightly favored Obama. Minute by minute I think McCain scored more points but there's a value that needs to be added. Because this debate was split between foreign policy and the financial crisis these need to be graded separately.
On the Foreign policy section McCain won narrowly. He repeatedly hit the point that Obama "doesn't get it" which is the common and effective critique of Barack. When the debate degenerated into a "he said he said" sort of thing McCain was at advantage because he simply is more experienced and has more credibility. Obama did okay and he was able to hit the Iraq war point repeatedly. McCain never did parry the "you supported the war and you were wrong" accusation made by Obama. I kept waiting for McCain to say "but this isn't 2003... it's 2008 and this debate is about what to do in Iraq now." Obama has some reasonable responses to that point too, but the successful rejoinder would have greatly helped McCain by muddying the issue. So Obama held his own but McCain won this part.
On the financial crisis Obama won narrowly. McCain was not able to take credit for bringing the house republicans into the fold because they refused to agree to a deal before the debate. As such Obama was able to imply that McCain was not demonstrating leadership by virtue of being unsuccessful. The fact that this argument doesn't strictly make sense doesn't matter... it's about results. As far as the plan itself Obama won because he never explicitly endorsed it as a good thing. The American people are against any sort of bail out by a significant margin! Yes, this is stupid, yes I thank whatever Deity(s) there might possibly be that we have a representative rather than direct democratic system, but no the bail out is not popular. By laying low the bail out in general becomes McCain's baby politically and not Obama's. Irresponsible as it might be to not support the bail out it will help get votes among the very people where Obama is weak. Populist minded blue collar, white males. McCain did fine on this section, he was able to score points and make his case but he didn't win.
So why did Obama win the debate in total narrowly when they discussed foreign policy for so much longer than the financial crisis? It's because people don't care about foreign policy! Now that Iraq is relatively stable and Afghanistan is still a very low intensity conflict the folks have lost interest in the world... they hate us anyway right? The economy is by far the most important issue this election cycle and Iraq isn't even #2. This is a bit of a testament to the success of McCain's surge idea but it still hurts his chances to win in the fall.
Because Obama narrowly won the part of the debate that focused on the economy he won the debate as a whole despite losing narrowly on foreign policy.
Saturday, September 27, 2008
Friday, September 26, 2008
The Debate
My first gut reaction was that this debate was very close. I'll write up my opinion tomorrow once I have had a chance to think about it a bit. But I wanted to know: what do you think?
Who won and why?
Did either guy have a moment that will end up being replayed over and over on the news?
Who won and why?
Did either guy have a moment that will end up being replayed over and over on the news?
Deal or no deal
No deal. Not yet at least.
Why?
The debate about the debate
Well nobody's sure what exactly happened at the White House meeting yesterday. There are so many reports that are directly contradicting each other that it's safe to say that somebody is telling bald-faced lies... it's just impossible to tell who. So, analyzing the debate about the negotiations and who was right or wrong on the politics is pretty damned near impossible due to a lack of reliable information. So, like the USC Trojans last night, I'm going to punt this one and just assume that everybody's lying.
Policy Disagreements
We can say that there is a real disagreement born out of party ideology on the bail-out package.
The Republicans are fundamentally opposed to regulation and spending. So there is real unease among Republican house members. They have balked at the idea of spending 700billion dollars just because it's too big. They want to have a market-based solution along with the bail out. That's probably a good idea... ideally. However, in a crisis it's important to do something rather than nothing. It is often better to get even a bad plan going than to do nothing at all. This is where the Republicans are wrong, their concerns are real and probably good, but we've got to address the fundamental problem in some way before it spirals out of control and we lose the chance to fix it at all.
The Democrats are also guilty. They have taken the bail-out package as an opportunity to insert all sorts of ideologically driven policies that are unrelated to the topic at hand. The Democrats want to provide help for folks who cannot pay their mortgages. That might be a good thing to do, but it's irrelevant to the bail out of the financial sector. The Democrats have added an idea about limiting CEO pay. Again, this is not particularly relevant to the bailing out the financial sector. Both of these things are contentious and the idea of bailing out individuals who can't pay their mortgages will make the already extremely expensive package even more expensive... thus causing even stiffer Republican opposition. By injecting these other issues into the bail out the Democrats have held the financial safety of the country hostage to social spending that they'd like to have but isn't directly relevant to the purpose of the package. Like the Republicans the Democrats need to moderate or drop these demands because they're standing in the way of any package being passed. And doing nothing is the worst possible outcome.
So... Obama and McCain were both right when they called for bipartisanship to dominate so that we can come to an agreement quickly. So far neither has been able to provide the leadership needed to heal the congress and get something done.
Why?
The debate about the debate
Well nobody's sure what exactly happened at the White House meeting yesterday. There are so many reports that are directly contradicting each other that it's safe to say that somebody is telling bald-faced lies... it's just impossible to tell who. So, analyzing the debate about the negotiations and who was right or wrong on the politics is pretty damned near impossible due to a lack of reliable information. So, like the USC Trojans last night, I'm going to punt this one and just assume that everybody's lying.
Policy Disagreements
We can say that there is a real disagreement born out of party ideology on the bail-out package.
The Republicans are fundamentally opposed to regulation and spending. So there is real unease among Republican house members. They have balked at the idea of spending 700billion dollars just because it's too big. They want to have a market-based solution along with the bail out. That's probably a good idea... ideally. However, in a crisis it's important to do something rather than nothing. It is often better to get even a bad plan going than to do nothing at all. This is where the Republicans are wrong, their concerns are real and probably good, but we've got to address the fundamental problem in some way before it spirals out of control and we lose the chance to fix it at all.
The Democrats are also guilty. They have taken the bail-out package as an opportunity to insert all sorts of ideologically driven policies that are unrelated to the topic at hand. The Democrats want to provide help for folks who cannot pay their mortgages. That might be a good thing to do, but it's irrelevant to the bail out of the financial sector. The Democrats have added an idea about limiting CEO pay. Again, this is not particularly relevant to the bailing out the financial sector. Both of these things are contentious and the idea of bailing out individuals who can't pay their mortgages will make the already extremely expensive package even more expensive... thus causing even stiffer Republican opposition. By injecting these other issues into the bail out the Democrats have held the financial safety of the country hostage to social spending that they'd like to have but isn't directly relevant to the purpose of the package. Like the Republicans the Democrats need to moderate or drop these demands because they're standing in the way of any package being passed. And doing nothing is the worst possible outcome.
So... Obama and McCain were both right when they called for bipartisanship to dominate so that we can come to an agreement quickly. So far neither has been able to provide the leadership needed to heal the congress and get something done.
Wednesday, September 24, 2008
Financial Crisis #3: Presidential politics
Sorry this has come out so late. Today was so busy on this topic that I didn't feel prepared to write this post until now.
Obama
Mostly, the financial crisis will help Obama. He's a member of the Democratic (:-P) party and the president is a Republican. On the face of it anything that goes bad on the other guy's watch helps. So this is bad, it'll likely help Obama. Add to this the polling data that suggests on these sorts of issues the American people tend to trust Democrats more than Republicans and tend to believe that they'd be better stewards of the economy as it benefits every day folks.
All of this has led to Obama erasing McCain's narrow lead and even pulling out to a little one himself. It's still probably within the margins, but when every poll agrees those margins of error are more narrow. Sorry, I'll do a post about polling someday... I swear.
This is still sensitive. This is not a down swing that is unfortunate but doesn't really require any policy to correct. That happened in 1990-2 and again in 2000-3. In both of those cases the fundamental system was not particularly at risk, rather it was just a hiccup on a generally upward trend. Also, both of these slowdowns were just that... slow downs. The economy kept growing, just at a reduced pace. The current financial crisis is more like the 1987 or 1929 episodes, thus there is a requirement for leadership to actually implement policies that reassure the markets and fix the problem before it gets worse. Obama has done this... some, but here McCain has an opportunity.
McCain
After spending a week flailing from one bold and brash policy pronouncement to an opposite bold and brash policy pronouncement John McCain, today, attempted to take the bull by the horns. By going on TV, using the bully pulpit and involving things beyond politics into actually governance he's taken quite a risk. Suddenly, if things really do go bad he has to take the blame. However, he's also demonstrated some things that Obama has not. He's managed to work himself into a position of providing decisive leadership. Often times in crises any answer, right or wrong, is better than no answer at all. McCain has at least gotten off the fence, and I believe he might benefit from it.
McCain is now tied to the successful passage of a bailout plan by Monday. If it works, he'll be lauded, if it doesn't he mine as well pack up and go home on Tuesday.
Leadership
I was disturbed today by Obama's press conference. He deferred to Harry Reid and Pelosi and Paulson and anybody that he could when asked what he thought was the best policy. I'm not sure he realizes that Barack Obama is now the leader of the Democratic party. He's the one who is responsible for advancing an agenda and he would be irresponsible to pass that buck onto someone else's shoulders. It struck me as a particular lack of executive flair that is needed to be successful as a president. If present in too great a quantity it can be a bad quality. Many would point to GW Bush as an example. However, most effective presidents (Washington, Madison, Jackson, Lincoln, Roosevelt, Wilson, Roosevelt, Truman, Reagan are examples) lead from the front and bent the body politic to his way of thinking... I just didn't see that spirit in Obama today and found it disconcerting. It's true that there are examples such as Nixon and Clinton of presidents who were effective without being a particularly good leader, however, Obama's campaign has defined him as an advocate for change if he doesn't have a backbone he'll be another Carter not a Kennedy.
Conclusion
So on balance I think that this entire episode helps Obama. It's mostly structural, he's done nothing particularly to deserve the bounce in the polls but he hasn't done anything to sabotage himself either. He's doing a good job of just keeping the news on an issue that he's naturally at an advantage. If McCain could push the election back onto foreign policy you'd see the same behavior from him. McCain has thrown a bit of a hail marry to try to steal some of Obama's thunder... it might work. We'll just have to see.
Obama
Mostly, the financial crisis will help Obama. He's a member of the Democratic (:-P) party and the president is a Republican. On the face of it anything that goes bad on the other guy's watch helps. So this is bad, it'll likely help Obama. Add to this the polling data that suggests on these sorts of issues the American people tend to trust Democrats more than Republicans and tend to believe that they'd be better stewards of the economy as it benefits every day folks.
All of this has led to Obama erasing McCain's narrow lead and even pulling out to a little one himself. It's still probably within the margins, but when every poll agrees those margins of error are more narrow. Sorry, I'll do a post about polling someday... I swear.
This is still sensitive. This is not a down swing that is unfortunate but doesn't really require any policy to correct. That happened in 1990-2 and again in 2000-3. In both of those cases the fundamental system was not particularly at risk, rather it was just a hiccup on a generally upward trend. Also, both of these slowdowns were just that... slow downs. The economy kept growing, just at a reduced pace. The current financial crisis is more like the 1987 or 1929 episodes, thus there is a requirement for leadership to actually implement policies that reassure the markets and fix the problem before it gets worse. Obama has done this... some, but here McCain has an opportunity.
McCain
After spending a week flailing from one bold and brash policy pronouncement to an opposite bold and brash policy pronouncement John McCain, today, attempted to take the bull by the horns. By going on TV, using the bully pulpit and involving things beyond politics into actually governance he's taken quite a risk. Suddenly, if things really do go bad he has to take the blame. However, he's also demonstrated some things that Obama has not. He's managed to work himself into a position of providing decisive leadership. Often times in crises any answer, right or wrong, is better than no answer at all. McCain has at least gotten off the fence, and I believe he might benefit from it.
McCain is now tied to the successful passage of a bailout plan by Monday. If it works, he'll be lauded, if it doesn't he mine as well pack up and go home on Tuesday.
Leadership
I was disturbed today by Obama's press conference. He deferred to Harry Reid and Pelosi and Paulson and anybody that he could when asked what he thought was the best policy. I'm not sure he realizes that Barack Obama is now the leader of the Democratic party. He's the one who is responsible for advancing an agenda and he would be irresponsible to pass that buck onto someone else's shoulders. It struck me as a particular lack of executive flair that is needed to be successful as a president. If present in too great a quantity it can be a bad quality. Many would point to GW Bush as an example. However, most effective presidents (Washington, Madison, Jackson, Lincoln, Roosevelt, Wilson, Roosevelt, Truman, Reagan are examples) lead from the front and bent the body politic to his way of thinking... I just didn't see that spirit in Obama today and found it disconcerting. It's true that there are examples such as Nixon and Clinton of presidents who were effective without being a particularly good leader, however, Obama's campaign has defined him as an advocate for change if he doesn't have a backbone he'll be another Carter not a Kennedy.
Conclusion
So on balance I think that this entire episode helps Obama. It's mostly structural, he's done nothing particularly to deserve the bounce in the polls but he hasn't done anything to sabotage himself either. He's doing a good job of just keeping the news on an issue that he's naturally at an advantage. If McCain could push the election back onto foreign policy you'd see the same behavior from him. McCain has thrown a bit of a hail marry to try to steal some of Obama's thunder... it might work. We'll just have to see.
Tuesday, September 23, 2008
Financial Crisis #2: What the government can do about it.
Government
We left off noting that there is a mass of illiquid assets on the books of various banks and mortgage institutions. These assets are not worthless, but they are not tradable. This leaves these banks and mortgage companies without enough capital to invest and make a profit. If the banks could sell these securities even for a significant loss, they would be able to write it off and remain solvent. As it is, those banks that were most exposed find themselves dragged down by this mass of immovable assets on their books.
The Bailout
This is where the government can step in. The problem is a lack of buyers for these securities. The government provides that buyer. The bailout package proposes to spend 700b to 1t dollars to purchase these securities from the banks. The banks would take a loss on this transaction but it would free up a portion of that illiquid capital to be reinvested. This should allow the financial organs that were most exposed to persist.
Effectively the treasury would then become the owner of about $1t worth of home mortgages. It should be noted that the government isn't exactly "spending" money to bail out the banks. Hypothetically some of these mortgages will be paid so the securities that were created on top of the "bad loans" should retain some value. It's not impossible to think that a decent chunk of the money that the government might make available might make its way back to the treasury eventually. As such we have no idea how much a bail out would actually cost in the long term. Suffice to say a lot, but it should be significantly less than $1 trillion.
Why would the government assume the risk on these illiquid securities? Because the consolidation of mortgage companies and banks have made them too big to allow to fail. This is the government's own doing. The subsidies and preference given to lenders giving cheap loans to buy houses by both parties made it easier for someone to buy a home, but also made the home mortgage business so big that if it were to fail the loss of capital would cause a panic that would have drastic consequences on the entire economy.
So this week we're likely to see some sort of bailout come out of the congress that authorizes the treasury to buy the illiquid securities and administer them until they hopefully can be liquidated later. The details of this plan are being worked out in congress now. Until there is an announcement of exactly what congress will do the markets will be racked with uncertainty and will likely continue their retreat. Until stocks are secure, investors who do have capital are going to hold it in commodities as a guard against both dropping stock prices and inflation.
Problems
The problem with this bailout is government debt and inflation. The only way for the government to raise the $1t of capital required for this is to borrow it or print it. No doubt they'll do both. This is particularly bad timing for the US economy because the inflationary pressures of having 2% or lower interest rates for almost a decade is starting to be seen. While the treasury is reporting inflation at a rate of around 5% most independent organs place it somewhere nearer 10%. This bailout is gong to make that even worse.
Inflation is a real killer of wealth. We're dealing with a circumstance where people's savings are in jeopardy and businesses will be unable to make new investments because the previous revenues no longer cover the new costs at the new prices. I'm not rightly sure there's anything that can be done about this in the short term. The investment sector really is too big to fail. However, the economic policy going forward is going to be very touchy. I've not yet thought, read or learned about it enough to prescribe anything yet... but I'm confident in saying that we're going to have to raise interest rates, and soon. Or risk a real inflation trap.
More tomorrow on how this effects the presidential race.
We left off noting that there is a mass of illiquid assets on the books of various banks and mortgage institutions. These assets are not worthless, but they are not tradable. This leaves these banks and mortgage companies without enough capital to invest and make a profit. If the banks could sell these securities even for a significant loss, they would be able to write it off and remain solvent. As it is, those banks that were most exposed find themselves dragged down by this mass of immovable assets on their books.
The Bailout
This is where the government can step in. The problem is a lack of buyers for these securities. The government provides that buyer. The bailout package proposes to spend 700b to 1t dollars to purchase these securities from the banks. The banks would take a loss on this transaction but it would free up a portion of that illiquid capital to be reinvested. This should allow the financial organs that were most exposed to persist.
Effectively the treasury would then become the owner of about $1t worth of home mortgages. It should be noted that the government isn't exactly "spending" money to bail out the banks. Hypothetically some of these mortgages will be paid so the securities that were created on top of the "bad loans" should retain some value. It's not impossible to think that a decent chunk of the money that the government might make available might make its way back to the treasury eventually. As such we have no idea how much a bail out would actually cost in the long term. Suffice to say a lot, but it should be significantly less than $1 trillion.
Why would the government assume the risk on these illiquid securities? Because the consolidation of mortgage companies and banks have made them too big to allow to fail. This is the government's own doing. The subsidies and preference given to lenders giving cheap loans to buy houses by both parties made it easier for someone to buy a home, but also made the home mortgage business so big that if it were to fail the loss of capital would cause a panic that would have drastic consequences on the entire economy.
So this week we're likely to see some sort of bailout come out of the congress that authorizes the treasury to buy the illiquid securities and administer them until they hopefully can be liquidated later. The details of this plan are being worked out in congress now. Until there is an announcement of exactly what congress will do the markets will be racked with uncertainty and will likely continue their retreat. Until stocks are secure, investors who do have capital are going to hold it in commodities as a guard against both dropping stock prices and inflation.
Problems
The problem with this bailout is government debt and inflation. The only way for the government to raise the $1t of capital required for this is to borrow it or print it. No doubt they'll do both. This is particularly bad timing for the US economy because the inflationary pressures of having 2% or lower interest rates for almost a decade is starting to be seen. While the treasury is reporting inflation at a rate of around 5% most independent organs place it somewhere nearer 10%. This bailout is gong to make that even worse.
Inflation is a real killer of wealth. We're dealing with a circumstance where people's savings are in jeopardy and businesses will be unable to make new investments because the previous revenues no longer cover the new costs at the new prices. I'm not rightly sure there's anything that can be done about this in the short term. The investment sector really is too big to fail. However, the economic policy going forward is going to be very touchy. I've not yet thought, read or learned about it enough to prescribe anything yet... but I'm confident in saying that we're going to have to raise interest rates, and soon. Or risk a real inflation trap.
More tomorrow on how this effects the presidential race.
Monday, September 22, 2008
Financial Crisis #1: What happened.
What happened.
Disclaimer:
If any of you econ, finance or otherwise smarter than me folks want to point out where I'm going wrong here... please do. I'm mostly repeating what I saw on a financial show on CNN over the weekend.
So what did happen?
Step 1: Loan
Retail bank or mortgage company makes a (often government subsidized) loan to buy a home. This loan has a below-the-market interest rate and, more importantly, can be made to a very risky borrower because the bank has no intention of administering the loan itself.
Step 2: Convert
The retail bank or mortgage company transfers these loans to the investment portion of their business which packages thousands of these mortgages into securities. These securities are sold like stock to other investors and the general public.
Step 3: Profit
a) The sale of these securities create a market that allows for the price of the security to go up by being traded despite it's actual value being based on "bad" loans. This is the same trading phenomena that allows google stock to be worth 600% more than simple earnings would seem to justify.
b) Most of these securities were sold as "bonds" that matured and were redeemed by the investment bank. These bonds allowed the banks to take capital out of the general public to which it wouldn't otherwise have access. This new capital is invested in stocks, money markets, commodities etc. All of which make profits totally separate from the housing market. This worked particularly well because these mortgage securities paid dividends, were seen as low risk and usually grew about 10% over a two year period. This is all a function of the securities market that functions well above the actual loans that the retail bank originally gave to homeowners.
c) Because mortgages were so much easier to get it drove demand for homes. This demand for homes drove home prices up, and not just for new homes. Everybody's home increased in equity because there was suddenly a way for previously risky borrowers to get a loan. This has the effect of buoying the entire market. Real wealth was created by the increase in home prices that came along with an increase in demand. So when a borrower could not repay their original mortgage she could refinance by taking advantage of the equity built up in their home and get into a second bad mortgage... which they then could not repay... thus requiring another refinance. The investment banks that administered the "bad" loans managed to mitigate their losses based on this increase in home prices as well. Even when they had to foreclose on bad mortgages, the bank could make up some of their losses because the house had increased in value and could be resold for more than the original loan. And, because the bank was willing to write another bad loan there were no shortage of buyers.
Step 4: Saturation
So this magical method of making money worked! As long as home prices increased fast enough the "bad" loans could be packaged and sold as securities without much worry about foreclosure. The problem happened when the market became saturated. Home-ownership was at an all-time high in 2006-7 and frankly the building industry built too many houses for people who weren't moving into them. This over-supply slowed the growth of housing prices thus making foreclosures much more expensive for banks thus making these risky loans far more likely to actually destroy wealth if they were defaulted upon.
Step 5: The Unknown
So the securities upon which these loans were based started to lose their value. Then, worse, they ceased to have a sure value. These securities became so stigmatized in the market that it was impossible to sell these mortgages at all despite the fact that they did have value as represented by the houses they bought. The inability to sell these securities at all made all of the investment previously made in them illiquid. It's not that it was "lost" it was just impossible to free-up and use somewhere else. So, for example, when Citi Group announced a $5,000,000,000 loss it wasn't quite what it appeared. What they were reporting is that they have $5b that they can't liquidate. When securities can't be sold they're counted as being worth zero on the books.
So:
All of this money isn't gone, it's just stuck. Ironically, it was the ability to trade "bad" mortgages that allowed these banks to make them in the first place, now its their inability to trade these mortgages that is keeping them from even liquidating them for a loss! Morgan Stanly recently was able to sell its portfolio to Bank of America... except they had to take 22 cents on the dollar, almost certainly far less than the simple houses those securities represent are worth. Now we've got a huge amount of capital that is tied up in these untouchable securities. It's actually enough money to affect the supply of capital. It's as if all of that money has simply stopped circulating. Thus it cannot be gathered and reinvested. So credit rates go through the roof, there's not as much money to invest in new business or stocks and the economy suffers.
Come back tomorrow for "What the government can do about it."
Disclaimer:
If any of you econ, finance or otherwise smarter than me folks want to point out where I'm going wrong here... please do. I'm mostly repeating what I saw on a financial show on CNN over the weekend.
So what did happen?
Step 1: Loan
Retail bank or mortgage company makes a (often government subsidized) loan to buy a home. This loan has a below-the-market interest rate and, more importantly, can be made to a very risky borrower because the bank has no intention of administering the loan itself.
Step 2: Convert
The retail bank or mortgage company transfers these loans to the investment portion of their business which packages thousands of these mortgages into securities. These securities are sold like stock to other investors and the general public.
Step 3: Profit
a) The sale of these securities create a market that allows for the price of the security to go up by being traded despite it's actual value being based on "bad" loans. This is the same trading phenomena that allows google stock to be worth 600% more than simple earnings would seem to justify.
b) Most of these securities were sold as "bonds" that matured and were redeemed by the investment bank. These bonds allowed the banks to take capital out of the general public to which it wouldn't otherwise have access. This new capital is invested in stocks, money markets, commodities etc. All of which make profits totally separate from the housing market. This worked particularly well because these mortgage securities paid dividends, were seen as low risk and usually grew about 10% over a two year period. This is all a function of the securities market that functions well above the actual loans that the retail bank originally gave to homeowners.
c) Because mortgages were so much easier to get it drove demand for homes. This demand for homes drove home prices up, and not just for new homes. Everybody's home increased in equity because there was suddenly a way for previously risky borrowers to get a loan. This has the effect of buoying the entire market. Real wealth was created by the increase in home prices that came along with an increase in demand. So when a borrower could not repay their original mortgage she could refinance by taking advantage of the equity built up in their home and get into a second bad mortgage... which they then could not repay... thus requiring another refinance. The investment banks that administered the "bad" loans managed to mitigate their losses based on this increase in home prices as well. Even when they had to foreclose on bad mortgages, the bank could make up some of their losses because the house had increased in value and could be resold for more than the original loan. And, because the bank was willing to write another bad loan there were no shortage of buyers.
Step 4: Saturation
So this magical method of making money worked! As long as home prices increased fast enough the "bad" loans could be packaged and sold as securities without much worry about foreclosure. The problem happened when the market became saturated. Home-ownership was at an all-time high in 2006-7 and frankly the building industry built too many houses for people who weren't moving into them. This over-supply slowed the growth of housing prices thus making foreclosures much more expensive for banks thus making these risky loans far more likely to actually destroy wealth if they were defaulted upon.
Step 5: The Unknown
So the securities upon which these loans were based started to lose their value. Then, worse, they ceased to have a sure value. These securities became so stigmatized in the market that it was impossible to sell these mortgages at all despite the fact that they did have value as represented by the houses they bought. The inability to sell these securities at all made all of the investment previously made in them illiquid. It's not that it was "lost" it was just impossible to free-up and use somewhere else. So, for example, when Citi Group announced a $5,000,000,000 loss it wasn't quite what it appeared. What they were reporting is that they have $5b that they can't liquidate. When securities can't be sold they're counted as being worth zero on the books.
So:
All of this money isn't gone, it's just stuck. Ironically, it was the ability to trade "bad" mortgages that allowed these banks to make them in the first place, now its their inability to trade these mortgages that is keeping them from even liquidating them for a loss! Morgan Stanly recently was able to sell its portfolio to Bank of America... except they had to take 22 cents on the dollar, almost certainly far less than the simple houses those securities represent are worth. Now we've got a huge amount of capital that is tied up in these untouchable securities. It's actually enough money to affect the supply of capital. It's as if all of that money has simply stopped circulating. Thus it cannot be gathered and reinvested. So credit rates go through the roof, there's not as much money to invest in new business or stocks and the economy suffers.
Come back tomorrow for "What the government can do about it."
The Financial Crisis
Sorry for being AWOL last week, life intervened in my normal blogging duties.
Last week also was a very strange one for the financial sector of the US economy. The going down 400 points the market went up 400 points, then back down and back up. Net, the market lost 40 points over 5 days.
As per request from a reader I'm going to start a 3 part series on this financial crisis as I understand it.
1: What happened in the market
2: What the government can do about it
3: How this affects the race for president
Last week also was a very strange one for the financial sector of the US economy. The going down 400 points the market went up 400 points, then back down and back up. Net, the market lost 40 points over 5 days.
As per request from a reader I'm going to start a 3 part series on this financial crisis as I understand it.
1: What happened in the market
2: What the government can do about it
3: How this affects the race for president
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