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Old 30.09.2008, 15:16
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How it all started

In case you forgot

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Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
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Old 30.09.2008, 15:46
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Re: How it all started

I've worked in the U.S. consumer finance industry, and this resonates a lot. Thanks for posting.



Reading between the lines, that article does contain quite a few interesting nuggets regarding the Democrat's promotion of "politically correct" lending to minorities ... and the maybe unintended consequences.

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Old 30.09.2008, 15:48
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Re: How it all started

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Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people
Thank you for exposing the real culprit of our economic woes, Mr Shorrick Mk2.
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Old 30.09.2008, 16:04
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Re: How it all started

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Thank you for exposing the real culprit of our economic woes, Mr Shorrick Mk2.
So the fact that Clinton, who had consecutive budget surplus's, decides to allow minorities to get on the property ladder in a boom economy, doesn't foresee the trainwreck called Bush that is coming and somehow that's all Clinton's fault?

If you read the highlighted areas, it makes it pretty clear that the risk was present if the economy encounters a downturn.

Do you think if Gore had won in 2000 the US would be in Iraq now? Or agressively pursued a weak dollar policy for the last 8 years? Or would have given massive, multiple tax cuts?

Bush pretty much created the perfect storm for the current economic meltdown.
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Old 30.09.2008, 16:10
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Re: How it all started

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So the fact that Clinton, who had consecutive budget surplus's, decides to allow minorities to get on the property ladder in a boom economy, doesn't foresee the trainwreck called Bush that is coming and somehow that's all Clinton's fault?

If you read the highlighted areas, it makes it pretty clear that the risk was present if the economy encounters a downturn.
The trainwreck is actually lending money to people who can't afford to pay back even in good times.

There's no such things as "if the economy encounters a downturn" - there's no single economy known to man that isn't cyclical. Be it short term, mid term, Kondratieff, whatever - cycles in economy are as common as day and night.

That people expect to be gotten off the hook not once but twice for living above their means is mind-boggling as far as I'm concerned.
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Old 30.09.2008, 16:22
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Re: How it all started

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The trainwreck is actually lending money to people who can't afford to pay back even in good times.

There's no such things as "if the economy encounters a downturn" - there's no single economy known to man that isn't cyclical. Be it short term, mid term, Kondratieff, whatever - cycles in economy are as common as day and night.

That people expect to be gotten off the hook not once but twice for living above their means is mind-boggling as far as I'm concerned.
Yes, economies are cyclical so there was always risk involved...but as I stated, if Gore had won in 2000 would the US economy have turned from record surplus to record deficits in a few short years? Would oil prices have shot up from $35 a barrel to $100+ a barrel putting an extra strain on low income earners? Would medical insurance costs have skyrocketed? You can go on and on with all the extra stress placed on the economy as a result of the Bush administration. As I said, it was a perfect storm.
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Old 30.09.2008, 18:59
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Re: How it all started

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Thank you for exposing the real culprit of our economic woes, Mr Shorrick Mk2.
Nah. If it had stopped at this, the sub prime problem would have remained a US problem. Painful, but manageable. Shorrick is right, this is the Genesis. But there only two culprits for driving us from Genesis to the brink of Armageddon ...men and testosterone.

It was all forseen in scripture:
Revelation 18:11 "The merchants of the earth also cry...because no-one buys their goods anymore"
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Old 30.09.2008, 19:12
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Re: How it all started

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Nah. If it had stopped at this, the sub prime problem would have remained a US problem. Painful, but manageable. Shorrick is right, this is the Genesis. But there only two culprits for driving us from Genesis to the brink of Armageddon ...men and testosterone.

It was all forseen in scripture:
Revelation 18:11 "The merchants of the earth also cry...because no-one buys their goods anymore"

I'm guessing the last bit is to be taken tongue in cheek?

Seriously though, Clinton may have leaned on the banks to lend to different groups that they might previously have declined but that doesn't make the Clinton Administration responsible for the rank abuses of the system that took place - anyone heard of the "Confessions of a Mortgage Broker"? Interesting insights into how this spiral developed as more and more unscrupulous persons jumped on the bandwagon.

IMHO, the bail out should not take place, let the companies involved fail now or pump in a load of money and watch them fail anyway a bit further down the line. It's no fun for anyone at the moment.
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Old 30.09.2008, 19:50
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Re: How it all started

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Yes, economies are cyclical so there was always risk involved...but as I stated, if Gore had won in 2000 would the US economy have turned from record surplus to record deficits in a few short years? Would oil prices have shot up from $35 a barrel to $100+ a barrel putting an extra strain on low income earners? Would medical insurance costs have skyrocketed? You can go on and on with all the extra stress placed on the economy as a result of the Bush administration. As I said, it was a perfect storm.
Ahhh, most certainly yes. I doubt Gore winning the elections would have done anything for petrol prices.

You can go on and on but they'll only be populist arguments.

The only thing that "placed stress on the economy" was the immense availability of cheap cash, the overreliance on flawed risk management concepts (such as VaR to name but one) etc. People indulged (and were pushed towards) overconsumption of capital-intensive goods (houses, cars, plasma tellies, you name it) without making use of their better judgment, and when push comes to shove, they blame variable costs beyond their control such as oil prices - rather than wonder whether they did a good job to plan the expenses they could control.

You know we've had skyrocketing health insurance and oil prices in Switzerland as well?
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Old 30.09.2008, 20:04
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Re: How it all started

Shorrick - if you lived any closer, this would be a great conversation to continue over Bier.
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Old 30.09.2008, 20:32
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Re: How it all started

I suppose it boils down to the fact that I actually think the ideal of allowing low income earners to (responsibly) get access to home loans is a good thing.

You are right though, Shorrick Mk2, that people definitely did get in over their heads and were reckless. However, blame lies on both sides.

It just annoyed me that the whole article got whittled down by one poster into "it's all Clinton's fault" because Bush has been nothing short of catastrophic to the economy.

Anyway, I thought this article from back in March 2007 in the Boston Globe was also interesting in bringing out some of the same points but also showing how reckless deregulation championed by Paulson was pushing the industry ever closer to the abyss. Somewhat prophetic.

http://www.boston.com/news/globe/edi..._deregulation/
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Old 30.09.2008, 20:52
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Re: How it all started

IMHO, the bail out should not take place, let the companies involved fail now or pump in a load of money and watch them fail anyway a bit further down the line. It's no fun for anyone at the moment.[/quote]

I fully agree but the problem is that I'm afraid that my job might be on the line ... as well as a lot of other peoples.
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Old 30.09.2008, 21:35
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Re: How it all started

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I suppose it boils down to the fact that I actually think the ideal of allowing low income earners to (responsibly) get access to home loans is a good thing.
Home ownership is a positive thing. It vests the homeowner into the well-being of society and take positive economic actions. Kudos to Clinton for moving in that direction. That was the original intent of the lending practice. What is so bad about that? That is a deep-rooted American value.

As more and more people bought homes, the prices skyrocketed. And whenever there were any signs of a slow-down in any sector of the economy, the feds focused on boosting consumer spending. Homeowners were offered free cash to spend based on inflated prices of their homes. And everyone thought they had cheated fate and beat the system. So this is the real culprit and the hubris before the fall.

Most of the fed policies under Bush was based on boosting consumer spending. At times, it seemed it was their only metric for how the economy was working. Somehow or another, the virtue of saving was exchanged for the virtue of doing your part to spin the economy with your spending. People honestly believed this.

Although home ownership allowed for second and third mortgages to provide spending money, home ownership was not the problem. The problem was the imprudence and hubris of americans.

I don't think anyone should be bailed out of this. They should live and learn, and learn to live responsibly. It's all good! It's the nature of economy and the capitalism.
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Old 30.09.2008, 21:53
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Re: How it all started

For some further reading on the bailout and the history and background behind it, the folks at lewrockwell.com have assembled a collection of webbed content listed at their "Recession Reader" — including Ron Paul's 2003 warning to the House Financial Services Committee of the US Congress about the long-term effects of Fannie and Freddie.
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Old 30.09.2008, 23:18
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Re: How it all started

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I don't think anyone should be bailed out of this. They should live and learn, and learn to live responsibly. It's all good! It's the nature of economy and the capitalism.
Phos, can you explain to me who has been "bailed out". Seems to me the banks which took on stupid risks are being punished by being put out of business, forced to sell themselves at knock down prices or suffer a massive destruction of shareholder value. Those banks that are still left standing have had to make huge write downs, raise capital to stay afloat. Seems to me that Capitalism is alive and working. Market forces and consolidation (or survival of the fittest) is a reality. What we don't have is "free" economy in terms of credit/liquidity markets. The crisis facing the banks right now is a liquidity squeeze caused by a crisis in confidence. I hear voices baying for more blood - that we should let banks which otherwise might pull through this fail. What additional purpose would that serve? You can argue shareholders deserve the punishment. They benefitted on the upside. But switching off the life support of a bank which might survive, after the shareholder value has been destroyed, hurts only employees and depositors who, for the most part, did not benefit in the upside. Don't forget that for every Lehman "high rolling" trader there are 100 ordinary people who did ordinary jobs for ordinary pay...that's the army of IT guys, operations clerks, bookeepers, admin staff etc etc. These are the people, along with depositors, who really wind up getting hurt in a failure. "Bail" or "Fail" is a ridiculous concept made up by the media and politicians.
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Old 01.10.2008, 00:34
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Re: How it all started

I realize Nev's comments were directed to Phos, and I don't presume to be answering for Phos, but FWIW I'd like to offer the following response anyway...
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Seems to me the banks which took on stupid risks are being punished by being put out of business...
If they're being 'punished' it is by the consequences of their own folly, not by anybody else's mean-spirited vindictiveness. That's how free markets are supposed to work: the enterprises that go out of business are the ones that take stupid risks (just as one example).

Would you rather 'punish' future generations of people who did not take those stupid risks, by saddling them with the tax burden and additional national debt at the barrel of a government gun so the stupid risk takers don't have to face the consequences of their actions?

BTW, these aren't just 'banks' — they're investment institutions that garnered vast amounts of wealth for their owners by being among the first to touch credit-based fiat money fed into the system by the Treasury Department's printing presses. That 'money' has depreciated in value with every change of hands ever since it left theirs. That's inflation — a product of government manipulation.

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...I hear voices baying for more blood - that we should let banks which otherwise might pull through this fail...
I don't. The voices I hear are saying let the market do its job. There's nothing 'free market' about 'rescuing' a fool with somebody else's money at the barrel of a government gun.

This whole thing is an inevitable by-product of bad monetary policy (among other things) perpetuated by those who have been controlling the US government for decades—and the Austrian school of economic theory has been predicting this as an inevitability the whole time. If you read the articles cited in the links in my earlier post (also here) you'll understand why. Nobody can borrow indefinitely without ending up with a big debt. You can move it around and hide it for a while, but eventually it gets too big to hide, and the music will stop. That is what has happened.

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...switching off the life support of a bank which might survive, after the shareholder value has been destroyed, hurts only employees and depositors who, for the most part, did not benefit in the upside...
If by 'life support' you mean taxpayer funded (at the barrel of government's gun) corporate socialism, why exactly should the public be so compelled to provide such 'life support'? How much should they be forced to pay? For how long? On the basis of what moral principle can you compel them to give up their property to provide this 'life support' without violating their liberty and essentially robbing bystander Peter to keep the idiot Paul's failed business alive?

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...Don't forget that for every Lehman "high rolling" trader there are 100 ordinary people who did ordinary jobs for ordinary pay...that's the army of IT guys, operations clerks, bookeepers, admin staff etc etc. These are the people, along with depositors, who really wind up getting hurt in a failure...
Yep. The exact same thing happened in the early 30s (except perhaps for the 'IT guys'). It's not pretty, but it's what happens when fools are allowed to steer whole companies into dangerous waters with the presumption that some special impunity earns them an impromptu taxpayer-funded safety net if anything goes wrong. People do get hurt by foolish managers. I'm not trying to sound cold-hearted, but there's no wisdom in 'saving' a company ruined by fools, just because they've wrapped themselves in a cloak that screams 'Oh the humanity!' at the last minute.

I work in IT with a woman who lost well over a half million in Enron stock options. She didn't expect me, or the rest of the public, to give her a job (let alone replenish the wealth she lost) when that ship went down. She knew that individual welfare was no more morally justified than corporate welfare, and she's a whole lot more careful about who she'll work for and what she'll accept as payment.

You ask "who has been 'bailed out'?" The answer—so far—is nobody. But eventually the thing will almost inevitably get pushed through one way or another. What's fundamentally wrong with it is that it is more of the exact same policy that brought the crisis on in the first place: Using out-of-thin-air debt to cover existing debt. We're better off taking our licks now and starting the recovery process free-market-fashion than postponing the inevitable while simultaneously making it $700+ billion worse — and letting the clowns at the helm off the hook.
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Old 01.10.2008, 01:09
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Re: How it all started

I just listened to an excellent (and dumbed down) explanation of the financial crisis from NPR and "This American Life". It's an hour long, but I think you can also access a transcript through this website: http://www.thislife.org/Radio_Episode.aspx?sched=1242
Anyways, now that I've listened to that, I'm finally understanding what a mess we're in (and what everyone else in this thread is talking about).

My question is, although the problem started with housing, can the US government really do anything about bad mortgages to fix this? It seems like the current problems are more about liquidity in the global financial market, not individuals defaulting on their mortgages.
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Old 01.10.2008, 01:44
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Re: How it all started

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I realize Nev's comments were directed to Phos, and I don't presume to be answering for Phos, but FWIW I'd like to offer the following response anyway...

If they're being 'punished' it is by the consequences of their own folly, not by anybody else's mean-spirited vindictiveness. That's how free markets are supposed to work: the enterprises that go out of business are the ones that take stupid risks (just as one example).
Yeah. And one other important chapter of free markets is helping low earners to consumption beyond their own means by means of debt write-off.

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That 'money' has depreciated in value with every change of hands ever since it left theirs. That's inflation — a product of government manipulation.
To quote a FAA accident investigator friend of mine - show me the data. Any hard data you got lying around on inflation linked to "guv'ment manipulation"?

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You ask "who has been 'bailed out'?" The answer—so far—is nobody.
I wouldn't make this bold statement come next Monday.
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Old 01.10.2008, 02:46
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Re: How it all started

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...And one other important chapter of free markets is helping low earners to consumption beyond their own means by means of debt write-off...
That's not an aspect of a free market—by definition—by any stretch of the imagination. What is 'free' about a truly free market is that the participants are free to act without coercion by outside agents or governments. It has nothing to do with specific categories of participants (e.g., 'low earners') or specific practices (e.g., 'debt writeoff').

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To quote a FAA accident investigator friend of mine - show me the data. Any hard data you got lying around on inflation linked to "guv'ment manipulation"?
It's not 'data' that defines inflation, it's—once again—the dictionary. (I suggest picking one up occasionally, Shorrick. )

Inflation, by definition, is a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency. In monetary systems where governments, through their central banks, control the money supply, only the government can create a persistent, substantial increase in the volume of money, and it does so by producing and introducing into the system ever more fiat 'money.' Anybody else trying that would be charged (by the government, of course) with the crime of counterfeiting.

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You ask "who has been 'bailed out'?" The answer—so far—is nobody.
I wouldn't make this bold statement come next Monday.
I have no current plans to make any particular statements (bold or otherwise) come next Monday. The cited statement was merely a declaration of fact at the time it was made.
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Old 01.10.2008, 03:06
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Re: How it all started

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I just listened to an excellent (and dumbed down) explanation of the financial crisis from NPR and "This American Life". It's an hour long, but I think you can also access a transcript through this website: http://www.thislife.org/Radio_Episode.aspx?sched=1242
Anyways, now that I've listened to that, I'm finally understanding what a mess we're in (and what everyone else in this thread is talking about).

My question is, although the problem started with housing, can the US government really do anything about bad mortgages to fix this? It seems like the current problems are more about liquidity in the global financial market, not individuals defaulting on their mortgages.
With all due respect, if you really believe that 'the problem started with housing' then you don't understand what a mess we're in. The roots of the crisis extend far beyond housing and bad mortgage debt alone, into the very essence of the monetary system and central banking structure of the US government.

At the risk of sounding like a broken record, the several articles cited here will go a long way towards explaining the breadth of the problem, including why advocates of the Austrian school of economic theory have been rightly predicting this present outcome for many decades.

And no, the government really can't do anything to fix this — the government played a large role in bringing it about. The 'bailout' being pushed on the public via Congress is not a 'fix' but a perpetuation of the same policies that caused the mess in the first place: covering massive debt by creating more debt to give the appearance of somehow paying it off.

Government doesn't create value or wealth, it only takes it. The illusion of creating wealth by 'creating' money is really nothing more than legalized counterfeiting, in which credit is created out of thin air as the 'backing' of a new batch of freshly printed notes, which are promptly circulated into the economy, invariably devaluing all existing currency. This is no less true of the proposed 'bailout' in which an eventual sum of well over the suggested $700 billion would materialize in exactly the way I just described, leading to inflation as not seen in the US since the 1930s. The ones who 'pay' for the debt thus created are invariably the public, unless and until they refuse to let their government continue such practices.

The only reality-based 'fix' is to face the music, brace for the hardship, and let the market — not the government — sort out the details. There is no 'magic bullet' that will enable us to avoid hard times, and while the 'bailout' may postpone them, it will only make them harder when they do come.
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Last edited by Texaner; 01.10.2008 at 15:53.
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