The Financial Crisis

[JP226]

JP...wanna ask u something

the other day my prof was talking about the current head of feds, saying he was an expert on the Great Depression before he went to work for the fed. And prof said he bases his decisions a lot of times on what he sees as lessons from the Great Depression.

so his moves to bail out and save some of the key financial institutions (like AIG just hours ago) are just like that...perhaps he fears a similiar chain reaction of massive collapse in then financial sector like the one happened in the 30s....

It's possible. I'm not saying financial markets aren't a mess. What do financial markets do? They facilitate and maximize allocations of raw materials that in turn boost production and real wealth for the economy as a whole. With messy financial markets you have uncertainity and misallocation and demand/ supply gluts that in turn cause economic slow downs.

However, if you have misallocations and mismatches that are caused by messy financial markets but at the sametime you have an abundance of capital and commodities, the messy financial markets will fix themselves. There is a light at the end of the tunnel because people can adapt.

When you have messy markets AND a lack of production capability, then you have a serious problem that will cause large economic downturns in the short and long runs and that can't be fixed until you fix or find away around the shortages. The financial marlets themselves hardly play the animal spirits role that is generally believed by those not so much in the know.

One thing I am curious about.

Why does a bank write off a bad debt? Unless the people at the bottom of the food chain financially can no longer pay their bills then all the mortgages are still worth the same, surely these securities are valid so long as the people they are based upon are still willing to pay. How does the lack of new money for new mortgages cause such a crisis?

banks write it off because it's not stable. They'd rather take the loans coming in, wrap it in a bond and sell it to a hedge fund so they know exactly how much cash they are getting. banks are risk averse. These big funds on the other hand collect enough of these bonds and they can through averages insure they get enough back to make a profit.

But when you look at things right now, cheap cash facilitates lots of loans and it also facilitates more demand than usual in say the housing market which then creates a bubble that will and has popped. So these hedge funds who are buying these bonds and operating on say a 95% probability of return are all of a sudden looking at a less than 95% probability of return over extend themselves and collapse.

[Denny Crane!]

It's possible. I'm not saying financial markets aren't a mess. What do financial markets do? They facilitate and maximize allocations of raw materials that in turn boost production and real wealth for the economy as a whole. With messy financial markets you have uncertainity and misallocation and demand/ supply gluts that in turn cause economic slow downs.

However, if you have misallocations and mismatches that are caused by messy financial markets but at the sametime you have an abundance of capital and commodities, the messy financial markets will fix themselves. There is a light at the end of the tunnel because people can adapt.

When you have messy markets AND a lack of production capability, then you have a serious problem that will cause large economic downturns in the short and long runs and that can't be fixed until you fix or find away around the shortages. The financial marlets themselves hardly play the animal spirits role that is generally believed by those not so much in the know.



banks write it off because it's not stable. They'd rather take the loans coming in, wrap it in a bond and sell it to a hedge fund so they know exactly how much cash they are getting. banks are risk averse. These big funds on the other hand collect enough of these bonds and they can through averages insure they get enough back to make a profit.

But when you look at things right now, cheap cash facilitates lots of loans and it also facilitates more demand than usual in say the housing market which then creates a bubble that will and has popped. So these hedge funds who are buying these bonds and operating on say a 95% probability of return are all of a sudden looking at a less than 95% probability of return over extend themselves and collapse.

Similar to what this guy said actually that I remembered after I'd asked it.




"They're diverting from the safe lending 363, borrow at 3% lend at 6% go for golf at 3pm "

Beware anarchism blaming stuff on government, don't watch if you don't want to, certainly don't badger me with the criticisms. One thing this thread has taught me is I don't know enough economics to really argue it though I'm not in the least convinced by anything the progovernment intervention people have said I'm no economic students all I've got is current events, recent history in the UK and logic to go off.

[JP226]

logic to go off

that's 90% of it

[Viking Prince]

Hey guys -- oil like any commodity over shoots and under shoots equilibrium. You cannot look at day to day changes and get any more than noise since the data points are way too few. At a minimum, you cannot get a feel for commodity values less than quarterly and even then it is still hard to tell bubbles and craters.Too many factors in both demand and supply sides.

For the question regarding banks writing off loans. They do not in general write off a specific loan or portion of a specific loan unless legal bankruptcy extinguishes the debt. The charge off is against the pool of loans and adjusts for the expected rate of recovery. A complete write off will occur when selling the loan to another lender/collection agency. If they only grant the right of collection for a split of the proceeds, it would be accounted for accordingly.

[JP226]

Hey guys -- oil like any commodity over shoots and under shoots equilibrium. You cannot look at day to day changes and get any more than noise since the data points are way too few. At a minimum, you cannot get a feel for commodity values less than quarterly and even then it is still hard to tell bubbles and craters.Too many factors in both demand and supply sides.

you should see the stuff they are doing with oil futures. They used to, and still do largely, run time series models using auto regressive and moving average process to map the effect of speculation and the events of the past on the prediction plus oil inventories, past present and future, and whatever the hell else variables they wanted to throw in. Basically you six inputs, that crank through a function and produce a price.

Today they are using a model called the artificial neural network that implements probabilities on the inputs taking place before cranking them through a function and producing an output or price of oil. So you have your X1 and X2 that then have a probability attached to it (like utility theory and insurance, If i have 50% chance of geting five bucks, it's worth 2.50) then cranked though a function to produce a price. That's the idea in a nut shell but really boosts the predictive power that you just can't get from these linear and nonlinear time series models. Or so I've read.

the government

and what's your beef with the government bailing out the companies?

[Panzerbear]

and what's your beef with the government bailing out the companies?

I assume just like mine. govt has no business in bailing out private enterprises with our taxpayer's money. especially if it cant balance its own budget for anyway.

[Erik]

I assume just like mine. govt has no business in bailing out private enterprises with our taxpayer's money. especially if it cant balance the budget for anyway.

The American taxpayer would be in a lot more trouble if their government didn't buy those companies.
So what the government did this week was in the best interest of everyone, and you can't blame them for that.

But you can blame the government for allowing those companies to get into this position in the first place.
The government should have realized in advance that if those companies lost their money gamble game, the government would end up paying for it.
So, IMO it's very reasonable for the same government to make demands on the industry to avoid this situation.
But that smells like socialism, so nobody in America would support it.

By contract: in my country the government would never have to buy out any banks, because the banks themselves are forced to pay into a protection fund designed to buy out failing banks.
But then we are a bunch of evil commies.

[Panzerbear]

The American taxpayer would be in a lot more trouble if their government didn't buy those companies.
So what the government did this week was in the best interest of everyone, and you can't blame them for that.

But you can blame the government for allowing those companies to get into this position in the first place.
The government should have realized in advance that if those companies lost their money gamble game, the government would end up paying for it.
So, IMO it's very reasonable for the same government to make demands on the industry to avoid this situation.
But that smells like socialism, so nobody in America would support it.

you see, you are under impression that the big nanny state is more efficient at regulating markets than the free markets themselves. well, I am sorry, but you are wrong.

this is the whole idea about capitalism. idiots who make bad decisions should be allowed to either fail or be bought off by their competitors. govt should stay the away from this and concentrate on its own budgets. where the hell do you think did US govt take those $80 billion to give away to AIG? thee times can you guess.

[Erik]

you see, you are under impression that the big nanny state is more efficient at regulating markets than the free markets themselves.

Indeed.

well, I am sorry, but you are wrong.

this is the whole idea about capitalism. idiots who make bad decisions should be allowed to either fail or be bought off by their competitors. govt should stay the away from this and concentrate on its own budgets. where the hell do you think did US govt take those $80 billion to give away to AIG? thee times can you guess.

That's the theory.
And it works....in theory.
Just like communism works...in theory.

But when you live in the real world, where economic systems will always be some sort of mix of different ideas, then it's better to go semi socialist than to try to apply pure capitalism.
If your system only works when it's 100% pure, and not when it's 99.999% pure, then it will fail ALWAYS.

[Viking Prince]

you should see the stuff they are doing with oil futures. They used to, and still do largely, run time series models using auto regressive and moving average process to map the effect of speculation and the events of the past on the prediction plus oil inventories, past present and future, and whatever the hell else variables they wanted to throw in. Basically you six inputs, that crank through a function and produce a price.

Today they are using a model called the artificial neural network that implements probabilities on the inputs taking place before cranking them through a function and producing an output or price of oil. So you have your X1 and X2 that then have a probability attached to it (like utility theory and insurance, If i have 50% chance of geting five bucks, it's worth 2.50) then cranked though a function to produce a price. That's the idea in a nut shell but really boosts the predictive power that you just can't get from these linear and nonlinear time series models. Or so I've read.



and what's your beef with the government bailing out the companies?

Been there and done that. This is more of a means to place bets or hedge against bad outcomes than an analysis of what is driving the market and when there is a bubble or crater. It is good stuff though. I did the same many years ago to keep overseas investments in Yen and Pound Sterling stable for a US based company. You do not want to make money and then lose it in currency translation. Currencies are commodities also.

My real point is not what to bet on today regarding oil, but that we do not really know if we are on the middle of an artifical spike or a real adjustment due to a broader base of consumption. We can still make a proper bet on the middle of an upward spike and be right in the short run. This is important for businesses. We also do not know what tech will provide the next day. New developments may make other resurces competitive or reduce energy needs per unit of output. Btw - another reason that we will never run out of oil.

Many factors and all the politicians can chant is "Get Big Oil" and hope that they harvest the votes in a few days. What happens in December or in 2020 is neither a concern for the politician nor the voter. Yet, the truth is, they do not know.

[Gelgoog]

If you havent been already, I strongly urge you to start buying up silver coins, guns, ammo, survival supplies..etc. stuff that can be used in an emergency or collapse and has actually value besides the paper it is printed on( which is worth less and less each month).

[bushbush]

If you havent been already, I strongly urge you to start buying up silver coins, guns, ammo, survival supplies..etc. stuff that can be used in an emergency or collapse and has actually value besides the paper it is printed on( which is worth less and less each month).

oh lord, not the same old redneck-economic proposal of going back to the gold standard again...

[Gelgoog]

oh lord, not the same old redneck-economic proposal of going back to the gold standard again...

nope not gold standard. Im just talking about a more fiscally sound investment then getting a peice of paper on week worth $80 a share and sold off as $.05 the next. those commodities that I listed has consistenly gone up in value and are items that always hold value even when money doesnt. Or you can leave your money in banks while you value of the dollar drops then again asking eurasians about these matters is like pooping in one hand and wishing in the other....see which one comes true first.

[Panzerbear]

If you havent been already, I strongly urge you to start buying up silver coins, guns, ammo, survival supplies..etc. stuff that can be used in an emergency or collapse and has actually value besides the paper it is printed on( which is worth less and less each month).

dont forget to mention living in an underground bunker 50 feet below sea level.

[paokmam]

Financial Crisis is artificial for some guys to make more money!

[Panzerbear]

socialism is horribly inefficient (surely as hell for economy). even "semi-socialism" as you decided to call it.

no matter what the hell government does with your tax money, they will always take more from your pocket than you will ever get back in equivalent of services.

[Erik]

socialism is inefficient (surely as hell for economy). even "semi-socialism" as you decided to call it.

That's not true.

[Perkele]

I hate the government. The poor will revolt if they suffer too much. And if they suffer too much it means it ain't their fault...but if they only suffer lack of luxuries, it is their own fault. Then the poor are simply lazy.

[Perkele]

Completely true, capitalism is the best form. Socialism just suckers you out of your well earned monies and gives them to people who didn't bother to earn money.

[Erik]

Completely true, capitalism is the best form. Socialism just suckers you out of your well earned monies and gives them to people who didn't bother to earn money.

Maybe it's unfair, but it's better for the economy as a whole.
And most of what you pay in taxes you get back in government services anyways.