Tuesday, September 30, 2008

Our Toxic Money Pit

My friend Alix (we survived the doldrums of High School together) asked me what I thought about this whole credit implosion. I responded with a bit of my interpretation of "How We Got Here," and my unabashed opinions on what we should do:
  • I never liked Fannie or Freddie and always wanted them reformed. When the GOP tried to rein them in, the Dems said the GOP were being racists who didn't want minorities to "share the American dream of owning a home."

  • The reality of the matter was that 20 years ago, the banks and investors had more money than anyone wanted to borrow. So they bought some politicians and fabricated a scam based upon difficult-to-understand mortgages, with the ultimate goal of getting people to borrow way more money than they normally could .

  • Even more clever, the banks didn’t actually care so much about lending their money to low income consumers who would never pay it back. They sourced the loans, bundled them together into packages, and sold those packages to other people and institutions at a fictional rate. So a bank might provide the cash for a bunch of sub-prime loans, but then get it back, plus a huge commission, when those loans were packaged and sold to someone else.

  • In the meanwhile, all this credit is flooding into the "market," and there are more cash-laden Home Buyers (ie: suckers) than there are Home Sellers (ie: future suckers), the laws of Supply & Demand kick in, and there is a rapid inflating of housing prices as the Recent Sellers had to buy new homes. With their unexpected profit, these New Buyers take out bigger loans (which they normally couldn't afford) for bigger houses (which they normally couldn't afford,) and the banks make bigger profits.

  • Repeat the process for a decade. Except the banks have grown addicted to their new found fortunes. And in order to perpetuate the Ponzi scheme, they brew a cauldron of investment poison Jim Kunstler describes as: so complex that they could only be created with the aid of computers. The result is that hardly anyone -- perhaps even nobody in or out of Wall Street -- really understands what they represent. In fact, this alphabet soup of engineered securities -- CDOs, CDSs, MBSs, SIVs, etc -- was cooked up from a recipe of Ponzi algorithms. They were designed to be mathematically indecipherable, except by computers, in an alternative universe of model-making that bore only a superficial relation to the real world. That was their dirty secret. And the dirty secret of the Great Bail-out is that, in the real world, we will never be able to discover the actual trading value of these things at any number above zero. This is why they are called "toxic."

  • Ultimately, the cycle ground to a halt, and we discover that all these banks made horribly bad investments. They went to the race track, bet on all the wrong horses, and now expect tax payers to pony up the money the bookies are here to collect.

  • I say: let credit restrictions tighten! I have no problem if credit gets much more restrictive and 21yr old busboys can no longer buy a $500K house, a Lincoln towncar, and a 120" plasma TV on $40000/yr. I never bought what I could not afford and have no remorse for those who did. They can move out of the McMansion and rent an apartment and stop crying that their Xbox was repo'ed.

  • Sure,I will lose money on my 401K, but it was an INVESTMENT, I opted in, but at low risk, and I diversified. My loss is real, but not substantial. And I expect it will recover inside of the next 40yrs when I go to cash out.
  • We learned nothing from the S&L scandal of the 80s.We learned nothing from the Internet Bubble of the 90s. And it looks like the villains who created this recent toxic money pit are trying to push the burden of paying for their mistakes onto the tax payer.

I say let them all collapse. Perhaps it will end the cycle of greed and stupidity. But I doubt it.
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