The bailout failed. It will come back in the Senate version and might pass later this week. Here is a a good explanation of how we got here, with some prediction of the future. It isn’t reassuring.
Mr. Paulson’s proposal was not intended as a general Wall Street bail-out, although to some extent it would have had that effect. Note that the outstanding overhang of credit default swaps alone is estimated to be between $45 and $60 trillion – three to four times the size of our annual gross domestic product. The requested $700 billion, although the single biggest appropriation request in U.S. history, was minuscule when compared with the toxic waste problem as a whole. Mr. Paulson’s proposed solution was to cost just 1% of the size of the problem and was aimed only at a small part of that problem. (It is unnerving to realize that the U.S. government – the “beast” we have been starving for so long – may now lack the borrowing capacity to solve the problem as a whole. We need to get our financial house in order.)
He largely absolves the CRA and blames teaser rate mortgages, a reasonable theory. What caused the wholesale abandonment of credit criteria in lending on houses ? There, I think CRA had more effect plus Fannie Mae and Freddie Mac led the charge over the cliff. If they had not accepted these mortgages, they would not have been written.
Tags: financial crisis, mortgages
http://abcnews.go.com/print?id=5928089
Not to hyjack your thread, but, I’m curious for your response, Mike.
I think I would go back to my “primer” post. The connection between the loan and the asset that backs it has been lost. Loans that are allegedly backed by collateral have been converted to abstract objects like derivatives that have no intrinsic value. It’s sort of like fiat money but that is backed by the full faith and credit of the US. These weird financial objects are divorced from direct collateral and the vague assurances of US backing were not enough once someone looked behind the curtain and saw that little man operating the levers.
For intellectual relaxation, I’m reading “The House of Morgan.” I read a book about the Panic of 1907 and it stimulated my interest in Morgan. One thing he was was an honest man who would not traffic in the sort of blarney we see now. I’m very pessimistic.
The story was on the AIDS virus jumping species as far back as 1908.
Right now I’m reading Richard Brookheiser’s book on Washington & Leadership. A friend asked me if I was trying to put myself to sleep. Nope, it’s really quite good reading.
>>>>When The Reserve broke a buck, everyone moved their money into Treasuries. Money-market funds dried up. And that was the end of one major source of business working capital.
I’m dwelling on this point. It seems to be a problem if we have these potential avalanches lying around the financial system. It would be better if a gradual increase in bad debts would be coupled with a gradual reduction in credit as a signaling mechanism, instead of a triggered collapse.
In machine design we note the effect of each component’s failure. If the part’s failure might cause a cascade of other failures, then that piece is built especially robust. It appears we need more of this thinking in the financial sector.
I didn’t see that link in your first comment. I read The River, a very long book that had a fallacious premise but was an excellent history of the AIDS virus. His theory was that the virus jumped species during a polio virus study back in the 50s. After the book came out, some old serum was found that proved the virus predated the polio study. He traced it back to 1959 and the serum, frozen in some lab for 50 years took it back further. This study uses genetic drift to estimate the age of the virus in humans but it doesn’t prove the drift didn’t occur in chimps.
The theory about cities is basic epidemiology. Smallpox requires 250,000 “naive” subjects to perpetuate itself because it is so rapidly fatal that people either die or become immune rapidly. It appeared only when such populations became common. That was around the time of Alexander the Great. His expedition to India may have brought back leprosy to Europe although most of the Greeks never returned home. The Romans brought all sorts of diseases back and the Roman roads probably killed off the Empire. The Tatars probably gave smallpox to the Europeans.
Tuberculosis is different because there is an animal reservoir, just like malaria. It stays around and does not require big populations. That’s why both are very ancient. Domestic animals brought TB and birds and standing water maintain malaria. Neither requires humans to stay present. Smallpox does. AIDS was in the chimps.
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