Why is it I just cannot believe the entire world economy is crashing because of 'sub-prime' loan

[Purveyor]

defaults.

Something just doesn't add up here and stinks to 'high heaven'...

[HeresyLives]

1. It's not.

It's a combination of things, globalization, 2 expensive wars, bases around the world, a ten trillion dollar debt, 'Imperial Overstretch' and so on.

Sub-prime was just the last straw. The final wobbly card on top of a house of cards.

So now it all comes crashing down.

[DJ13]

7. Add 'a too long period of time where wages failed to keep pace with inflation'

None of this would have happened if the workers had seen their pay rise at a level above the real inflation (not the rigged CPI, which is a farce).

[HeresyLives]

15. Well, that's just local stuff.

And has nothing to do with the forces affecting the economic system of the world.

[JackRiddler]

42. Yes, that's the key underlying cause.

The US banks made up for declining median incomes by extending a boatload of easy credit to the consumers.

But the presnent tsunami is not due only to subprime, which might have been manageable, but what FIRE did with subprime - leverage it into further hidden and unregulated off-market derivatives and swaps, which have exploded in ostensible total value to something like three to five times the world GDP, depending on which estimate you want to believe. Nobody knows yet. In the end, this mass of bets is going to come out close to zero. No one's going to redeem most of these derivatives, the government is just pretending that it can ensure these instruments retain value.

[KeepItReal]

17. In the UK, they called them "Stated Income" Loans.

On the BBC they said banks there gave loans to people with no proof of income at all.

[rwenos]

2. Caution: It's All Hooked Together

The world financial system was wired together in the late 1990s. The Chinese own hundreds of billions of American dollars. The Saudis and OPEC are getting hundreds of billions more American dollars every day, week, month, year. The American banking system, the world's largest and rowdiest, has been completely unregulated since AT LEAST Big Bill Clinton signed the repeal of Glass-Steagall in 1999.

Remember when the very first reports came out of Chernobyl, that 1000 tons of graphite shielding near the reactor core were BURNING at 2000 degrees, spewing radioactive metallic ash into the air?

This is like that.

[Riverman]

3. It is about US WAR DEBT, TAX Cuts to the Top 1% and Consumers

are not paid a living wage to be able to buy products that manufacturing depends upon.

[texastoast]

4. I was on a town hall telephone conference with my rep tonight

One guy called in and had added up the real figures and listed them all like bullet points. It came to $1.4 trillion, I believe. And my rep just had to hemhaw around and act sympathetic and say "there's plenty of blame to go around," never mentioning the Commodity Futures Modernization Act of 2000 slipped in by Phil Gramm in the omnibus funding package that year.

I knew I would never be reached in the queue, but I wanted to bring up that the additional FDIC insurance to $250,000 ends in 2009. September, I think. THAT surely hasn't made its way to MSM that I've seen.

[snot]

18. Seriously? Link?

[texastoast]

60. I couldn't find a link for the 2009 expiration

That's how quiet it is being kept. I went to a town hall meeting with our financial advisors yesterday and one of the officers brought that up. He said that the expiration was one of the provisions in the bailout "to prevent people from running on the banks," the theory being that this panic will quiet down and the banks won't be at so much risk in a year so the $100,000 limit will come back.

See post 59 re the totals.

[Hannah Bell]

29. "It came to $1.4 trillion, I believe." you mean the subprime debt, yes?

[texastoast]

59. No, the total of the monies that have been handed out so far

Counting Bear Stearns, Lehmann, AIG, and the others that received money before the $850 billion that is in the most recent bailout. The $850B doesn't include what went before.

[OhioChick]

5. In my neck of the woods,

It's not so much the sub-prime loans, but foreclosures due to job loss....plain and simple. People don't have jobs, so they don't pay for their mortgages, credit cards, cars, etc.

This won't resolve itself. People need jobs now, not tomorrow or next year.

[Skink]

6. Carnival Cruise line when I worked there hadn't sailed with less thean 100 %..

for 25 years and they readily admitted that only 7 percent of american, let alone world travelers, had taken a cruise. The world can function on 7 percent.

[RoyGBiv]

8. Perhaps ...

... because the entire world economy isn't crashing because of "sub-prime" loans?

That's only the tip of this particular iceberg.

[ORDagnabbit]

9. 47 minute easy to understand vid will help ya out..

www.moneyasdebt.net

[The Magistrate]

10. Strictly Speaking, Sir, That is Not What Is 'Crashing' Things

What is crashing is the paper edifice set up as 'insurance' against default, meant to insulate the issuer against risk, and which then was turned into a profit center for larger institutions. Somebody owes somebody for every default; and that somebody is then owed by somebody, and so forth and so on down the line. The market in these things is opaque: no one knows who has what potential liabilities; in a number of cases, even the chiefs of firms involved probably do know the real exposure of their own companies. No one knows what someone might be called upon to settle up immediately; no one knows what financial firm can be relied on to make a payment tomorrow, or next Monday. The sum total of these various paper obligations is several times the total amount of real money on earth: the truth is that they cannot really be liquidated, certainly not all at once, which means that their purported value is merely an elegantly engraved fiction. When the market in them functions they are not usually liquidated, they are simply matched against one other and cancel one another out. But doing so requires their being taken at face value, or a regularized rate of discount, and maintaining them in this state requires ready access to credit for those holding them.

[snot]

19. Well said.

[dweller]

28. yes, well said, especially when

taken in to account 'insurance' in general.

that, and having the Tao as a sigline makes one contemplate the message at the moment... and so,
well said Magistrate overall.

dp

[lonestarnot]

57. And the size of it alone means that it is beyond repair without an all in despite objections.

Based on the objections, we need to see justice with some prosecution of those benefitting most from the scam. This may restore some confidence if nothing else.

[Journeyman]

11. Yeah, my grandfather never understood how he lost his farm to "margin buying" . . .

when he never met a broker in his lifetime. But coupled with the Great Flood of '27, the Dust Bowl of the '30s, regressive tariffs and unregulated banks, and a host of other reasons and causes he never fully understood, he ended up with his family in an old car, wending his way across an unknown desert to a hoped-for promise land in a place called California.

I wish at times he hadn't come so far, as I'm now hard against the sea and there doesn't seem to be anywhere else to go . . .

Maybe I can boomerang back to the hinterland . . .

[2speak]

12. It's not

Look up derivatives. You will find your answer there.

[leftofthedial]

13. it's not

it's "crashing" because a few people have stolen trillions upon trillions of dollars

and they want to squeeze out the last drops so they can be deities when the global warming shit hits the fan

[anigbrowl]

14. They have housing markets in other countries, and have made some similar mistakes

It's not a problem we created here and exported to an unsuspecting world, the same kind of behavior in both the housing and banking markets has been taking place in a number of countries.

[Miss Chybil]

16. It's all about "Credit Default Swaps"

They had a big piece about it on 60 Minutes last Sunday. Companies like AIG sold bogus "investor's insurance" to convince large investors to invest in risky mortgage packages by telling them, if the investment failed, they would pay them off. They called this "insurance" a "swap" so it wouldn't be regulated. See, if they called it insurance, they would have had to have the money to back it up. There was no money. They sold worthless paper to millions of investors. Normal people would be imprisoned for pulling off such a con. All of the companies that have gone under so far, sold the swaps.

Credit Default Swaps: The Next Crisis?
http://www.time.com/time/business/article/0,8599,1723152,00.html

Credit Default Swap Virtual Pit
http://www.forbes.com/home/2008/10/07/cme-pimco-treasury-pf-ii-in_pr_1007dividend_inl.html

SEC head asks for reins on credit default swaps
http://www.businessweek.com/ap/financialnews/D93MCI5O3.htm

The government's top securities regulator on Wednesday pressed Congress anew to quickly rein in the market for credit default swaps, complex investments partly blamed for the widening financial crisis.

The roughly $60 trillion market for credit default swaps lacks transparency, is unregulated and creates an environment for market manipulation, Securities and Exchange Commission Chairman Christopher Cox said. The market's size exceeds the gross domestic product of every country in the world combined, he noted.

"It's so important for Congress to act now," Cox said at an SEC conference on disclosure for investors. "There is no longer any excuse for failing to act."

Cox last month urged Congress to enact legislation to regulate the market for credit default swaps, which are complex insurance and derivatives contracts. The legislation should empower the SEC and the Commodity Futures Trading Commission to implement new rules designed to combat fraud in that market, he said.

more...

[MadMaddie]

20. The US economy has a major problem in not manufacturing

goods anymore...stupid Republican strategy outsource everything and the Finance and IT industry will hold up the economy. Well looks like they were wrong.

[OhioChick]

23. You didn't get the memo...

The IT industry is in India.

[MadMaddie]

61. Oh damn you are right! Strike that from the list of things

America actually produces. Sigh...

[On the Road]

21. Unlike the Solid Conservative Image They Try to Portray,

Banks are inherently very risky institutions. They have many times the amount due in loans as they do in deposits. Banks count on a relatively predictable percentage of foreclosures resulting in manageable losses which are factored into their business model.

The boom in housing prices and the resulting overconfidence, combined with irresponsible screening and lack of regulation created the potential for ruinous losses with only a small change in averages.

The spread of institutions buying huge bundles of mortgages as investments as well as using default insurance as a speculative tool put brokers, insurers, and other large companies at risk, too.

All this might have been contained if it hadn't affected the credit markets. Once credit dries up, the entire economy goes down in a descending spiral. At the point we've reached, panic is a reasonable response and extreme measures are worth considering.

The economy is always a high wire act. It requires great expertise by the Fed Chairman to read the tea leaves and strike a balance between overheating and recession. Whatever you think about Bernanke, his predecessor seems to have let things get out of hand. But a lot has been learned over the last 80 years, and eventually it will get better.

[TexasObserver]

22. It's not. It's crashing because excessive leverage in risk securities have led to a crisis.

Losses cannot be paid, and that threatens the integrity of the whole financial system worldwide. It's a house of cards, and the foundation level is shaky.

It's a far bigger problem than subprime loans, which are the scapegoat, but just one contributor.

[phaseolus]

24. I'm not terribly surprised at what happened, after following the financial press

Remember a while back when they lionized the bigshot CEOs, men like Lay and Ebbers? They were built up to be heroes. Everyone wanted to talk to them, to be like them. They were celebrities, on all the right magazine covers... before they did the perp walk.

After they went to prison the business reporting was all about the hedge funds. The Most Sophisticated Mathematical Minds on the Planet invented complicated financial thingies that allowed a lot of people made a lot of money by a.) having a bundle of cash to gamble with and b.) tapping a few keystrokes.

Now I'm not a finance guy, just an engineer. To an engineer's mind this whole enterprise didn't make sense. I couldn't wrap my mind around something so abstract. An "old" economy is straightforward - grow something or dig something out of the ground, turn that stuff into something else that someone else wants to pay money for, send it to market. Work hard, reap the benefits. Easy enough.

But all the vast fortunes being made in the financial markets? Trillions of dollars, out of thin air. It seemed so unreal, all that money that's apparently not connected to any worthwhile economic activity other than shuffling capital from place to place.

So, I'm not so surprised at all the chaos, when the financial sector was living in such an abstract parallel weirdo universe for so long.

...and for the rest of my life, whenever I hear the financial press report on the Next Big Thing or This Year's Money God, I'm going to think it's a leading indicator of some kind of disaster that's going to happen five years down the road.

[tech3149]

31. I'm with you

I might like Dire Straits, but I'm smart enough to know that you can't get "money for nothing". Every scheme that tries to profit on that concept is bound to fail and screw someone in the process.

[Blue Diadem]

25. Here's a link someone here posted a while ago that explains it.

http://www.opednews.com/articles/IT-S-THE-DERIVATIVES-STUP-by-Ellen-Brown-080918-354.html

[nadinbrzezinski]

33. And why we are seeing the partial nationalization of the banks

yep we are following the UK on this

These things are so complex and toxic that we need to get a peek in books to manage to unravel them, perhaps

[Irish Girl]

56. that is an excellent link.

:kick:

[Warpy]

26. Because it's not

Sub prime loans did what prime loans had done for the last ten years or so, they were snipped apart and turned into derivatives. The subprime loans took a lot of derivatives with them when they went and now the prime loans are starting to look shaky.

The problem all along has been the derivatives market, something real economists (as opposed to Chicago School bozos) have been warning about since the 80s.

With a good portion of those derivatives vanished, institutions are realizing just how much of their balance sheets are infected with the damned things, none of which have any intrinsic value but which did have the potential of generating income while the whole scam was working.

Derivatives are what allowed billionaires to exist. They're also what's going to make most of those billions evaporate in the next few months. Unfortunately, all insitutional investors have been snapping them up as a way of generating income and all institutional investors are now at risk. I'm not talking about banks and brokerages, alone. I'm talking about corporate pension funds and even governments.

Buffett has called derivatives the WMDs of the financial market. When they go, they're going to take most of the world's paper wealth with them.

And they're going.

[Gregorian]

27. Forgive me for sounding like a broken record.

I have a big picture view. And I'll admit that it may very well be wrong.

Economics is tied to nature. Natural resources. Material goods, energy production, food, land, water, etc. Their volume is fixed. We increased our population to the point where the acceleration of growth has changed from relatively constant, to rapidly changing in a positive direction. Add to that the increase in numbers of people living the "modern" lifestyle. And now we are in a situation where this has stretched the planet as far as it can go.

I believe this is why we are where we are right now.

Just take one example. When I first started dreaming about living in the country, there was plenty of country land. By the time I was able to afford my dream, it was gone. Now there is no country. It's houses on every square inch, figuratively. But not far from the truth. Look at old movies. Very few cars on the roads. Open spaces. The details are not important. What is important is the general sense of the situation. Where there were forests and open space there is now clearcuts and real estate. There is no denying it changed in a huge way. That is just one example. The polar caps melting is another little detail that is only an indicator of what we've done. Species extinct. Petroleum on the decline.

One could use the word scarcity. But the reality really is depletion.

And even though no one wants to talk about it, it now surrounds us. Like a bunch of campers singing around a campfire, not wanting to mention the wolves encircling from behind. Deny, but there it is.

This is the beginning. Only the beginning.

There may be better days. Carbon emission reversal. Maybe even carbon reduction through inventive means. That would take care of global warming. But food? The population is still screaming. What is it, a quarter million new people every day? I don't recall. But let's say we stabilize population. We still have energy production limitations facing us. It doesn't have to be doom. But it sure looks inevitable right now. Especially if the braindead remain in office. Even under the best administration, some things are taboo. I'm not optimistic. But here we are. It's going to be tight. And we have to make the best of it. There is no alternative. And the world economy is speaking what we dare not. That is what we're seeing.

[Hannah Bell]

30. "Now there is no country" incorrect.

[Gregorian]

35. You missed the forest for the tree.

Relatively speaking what I am saying is true. No, there is tons of open space in New Mexico, Arizona, and everywhere else for that matter. Federal lands, State forests and parks.

My experience with buying and selling land has proven that what was once easily available, is no longer. I've been participating very keenly in real estate for twenty years now. And it's not just my small part of the world. It's everywhere.

Just one example. In the mid 80's one could drive up to any real estate office in no. California and simply ask for land. Four digit acreage. There were thousand acre pieces all over the place. You can't find a single 100 acre piece of land these days up there. I just bought the last one in Mendocino county. Good luck if you want another one. It doesn't exist. That's what I'm talking about. Yes, there's lots of open land. No, there is no real estate left. It's spoken for. It's more the sentiment than the absolute. Humans have spoken for the resources. That's my point. And we're seeing the resulting crash that ultimately results when the limit is hit.

[Hannah Bell]

36. there's hundred-acre parcels here. people own them. people have always owned "all" the land on the

market, here, back to the 1900s. That people own it doesn't mean it doesn't exist. You're saying in 25 years suddenly "all" the open land was subdivided or something?

"limit is hit" - of what?

i don't buy what you're selling, but it's convenient for some that people believe it.

[Gregorian]

38. That's right. It still exists.

I've had that discussion a number of times. The land is still there. Prohibitively expensive, but there. It's the expensive part that is important. But, those hundred acres were not there too many years back. They were part of bigger pieces. There isn't much else to say. You don't need to buy anything. The truth simply is.

[Hannah Bell]

40. how old are you?

[napoleon_in_rags]

32. Thanks, really.

Yes, that's what its about. That's exactly what its about. Resources. Its not that we are doomed, or about to be consumed by wolves, its just that we can no longer support our decadent wildly inefficient way of life on the current resources. Until we look at that, we are going nowhere.

But I'll tell you what I'm sick of, I'm sick of the culture of Jenkem huffing that tells us that if we speak ill of the market, it will hurt the market, which is a meme that's been out there WAY to long. This kind of faith based stuff is what made people believe in mathematically infeasible constructs which lie behind this whole mess. "Have faith brother, these loans will not default if we BELIEVE!"

We need a market that's not so pathetically fragile that it runs on investor faith alone, one that's so rooted in fundamentals we can trust, like a system of sustainable resource utilization.

[Gregorian]

37. I had not thought of that aspect before.

Now that you mention it, I can really see that. Like we were trained to deceive ourselves. Of course we were. One would have to have the truth obscured in order to live this lifestyle. I've been in a state of dismay for nearly forty years. I simply cannot take much more. Having watched this with the eyes of an engineer, I found it impossible to believe that people could be so stupid. But it's not about stupidity as it is about comfort. Hell, a gallon of gasoline is worth hundreds of dollars. If used efficiently a gallon of gas can do the work of a man's entire day's labor. And yet on the other hand, it's pretty amazing what we can achieve without it. After all, the pyramids were built without it. And no permits, either. Haha. I always like that thought.

If it weren't for population, we'd slowly back down from this high lifestyle we're on. But I fear for a much more severe recovery.

I've said so many times, I really want to be wrong. I've tried for so many years to discuss this, and look at it from different views. But I just can't find a way to look at it that gives me a smile. It looks bad from every vantage point. As an aside, Palin exemplifies everything that exacerbates this problem. That is primarily why my blood boils when I even see her.

Alright. My day is over. Too much bike riding this week. My butt hurts. My legs are sore. I love it.

[2speak]

39. How do you explain why we had a Depression in 1929 then?

Did resources magically reappear? Did minerals procreate in the ground? I don't think we have hit that one yet. It probably will happen in the next 100 yrs though.

[earth mom]

45. I agree with your post. This country and planet is overpopulated.

People refuse to admit it, but it's the cold hard truth.

[rucky]

53. That's the heart of it, right there.

[Gregorian]

34. Rec.

[girl gone mad]

41. Short answer: leverage. n/t

[JCMach1]

43. It's not, it's DERIVATIVES

i.e. economic products with no responsibility...

But also, a significant portion of these contained the loans and other real estate investments...

[dysfunctional press]

48. the word "derivative' needs to be permanently stricken from the economic lexicon...

as does the phrase "too big to fail".

[earth mom]

44. Because the entire thing is Enron on steroids. Wall St companies cooked the books

and now it's gonna bite us all in the ass. :grr:

[nichomachus]

46. You're absolutely right

The subprime loans are in the mix, but aren't the cause of anything.

The problem was not the idea of the loan, but the system in which loans, instead of being held by banks, were turned into marketable securities. That encouraged banks and mortgage companies, which had no assets of their own, to make subprime loans. They got paid for merely originating the loan and then selling it off. There was no downside to them in making the subprime loans.

When I took out my first mortgage -- back when we rode dinosaurs to church -- the bank was very careful to vet me, even calling my employer and sending an officer of the bank out to look at my house. The bank lent me money out of it's own vault, serviced my loan for its entire life, and held my mortgage until it was paid off. They had a direct interest in making sure the house was worth what I paid for it and that I had a reasonable chance of paying it off.

Once that idea went out the window, all bets were off.

So, subprime mortgages weren't the cause as much as one of the byproducts of a system gone wild.

[deaniac21]

47. Wall street makes money going up or down. They fan the

terror or enthusiasm of the public and make a killing.

Bears make money
Bulls make money
Pigs get slaughtered

[Marie26]

49. Isn't it more about the

"credit default swaps" banks bet on those sub-prime loans? The subprime loans are a few billion, but the CDS are like 300 trillion.

[MadrasT]

58. Yes. And the fact that people were buying CDS on securities

they didn't even own. Just straight-up making bets on whether or not those securities would fail.

Wall Street turned into Las Vegas on steroids.

[Stuart G]

50. It is not only "sub prime loans"..it is all things coming together..

...Increased unemployment..
...Lack of liquidity in world markets..
...Housing Market failure..
...lack of regulation
...Failure of Banks.
...etc.
...etc.

[screembloodymurder]

51. I've been thinking the same thing.

What strikes me is how the Bush administration contributed to the panic. We were presented with an ultimatum, 700 billion or an unimaginable consequence. No one has ever stated what that consequence was or why the threat was immediate. I believe the US received it's own ultimatum, but from whom and what?

[Stuart G]

52. Agreed...

Failure of Bush leadership is a major factor. Like invading Iraq, he has made all the wrong decisions to create this financial disaster around the world....

[Stuart G]

54. This thread in this forum shows the connections.......

It is on food shipments around the world..

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4200077

[Javaman]

55. Check this out, it explains everything...

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4199991&mesg_id=4199991